Such government-issued bonds , which are exempt from state and local tax, pay out a regular fixed-rate interest payment, but the principal is adjusted to reflect changes in the Consumer Price Index.
Because you’ll owe federal taxes on the interest income, they are best held in tax-sheltered retirement accounts, says Benz of Morningstar.
Despite their low yields, Benz suggests retirees devote anywhere from 10 percent to 30 percent of their fixed income portfolio to TIPS, noting it’s best to dollar-cost average into the position rather than buying it as a lump sum.
“There has been a stampede into Treasurys and, as a result, many people think their yields are just too low,” says Benz. “I agree that that’s a concern, which is why I would urge anyone initiating a sizable investment to do it gradually over time to obtain a variety of different purchase prices and mitigate the risk of buying at a high point.”
Retirees also may wish to incorporate an inflation-adjustment feature to their annuities or long-term care insurance policies .
Such policies cost more, says Benz, but are well worth the investment, since they help to insulate future purchasing power.Page 3 of 7 | Prev Page | Next Page