An inflation-protected security (IPS) is a type of bond that guarantees a real rate of return to its investors. The US federal government is the main issuer of inflation-protected securities, including Treasury inflation-protected securities (TIPS).
What is the role of inflation-protected securities in retirement planning, and do they belong in a retiree’s portfolio? Mitlin Financial founder and wealth advisor Lawrence Sprung joined Robert ‘Bob’ Powell on Decoding Retirement to discuss the latest on inflation and the importance of TIPS for investors.
“I really think it’s important that everybody have a plan, whether you’re retired or a retiree or moving towards retirement,” Sprung explained. “Now it’s going to be important as we start entering potentially a lower interest rate environment to start putting that game plan (together) … whether it be CDs and TIPS and things of that nature, they have to start looking and seeing what’s going to work best for them from this point forward.”
Real rate of return (decoded)
The real rate of return is the actual return on an investment after adjusting for inflation. It shows how much your purchasing power has increased or decreased over time.
Nominal rate of return (decoded)
The nominal rate of return is the simple percentage increase in your investment over a period of time, without considering factors like inflation or taxes. It’s the “face value” of your investment’s growth.
REITs (decoded)
Real estate investment trusts (REITs) offer individuals the opportunity to invest in large-scale, income-generating real estate. A REIT is a company that owns and often manages a variety of real estate assets, such as office buildings, shopping centers, apartments, hotels, resorts, self-storage facilities, warehouses, and even mortgages or loans.
“And I’ll share something that’s happened with families that we worked with. They look at some investments out there, you know, and I’m not picking on REITs. They’re good investments for the right people,” Sprung said. “We’ve had people say to us, ‘Hey, I see this REIT and it’s paying eight, nine, ten percent, and why are we not allocating funds there?’ Now when you look at that 10 percent yield, it looks great, but then when you look at the total return of the investment, if it’s gone negative, that 10 percent may not be what your real return is.”
Retirement planning doesn’t mean locking up your money for a rainy day and forgetting about it. Planning your future means reacting to events today. Decoding Retirement gives you the tools to navigate the years ahead, and take action now!
Yahoo Finance’s Decoding Retirement is hosted by Robert Powell, and produced by Zach Faulds and Alexander Frangeskides.
Find more episodes of Decoding Retirement at https://finance.yahoo.com/videos/series/decoding-retirement.
Thoughts? Questions? Fan mail? Email us at yfpodcasts@yahooinc.com.
Editor’s note: This post was written by Zach Faulds.
Everybody’s situation is, is personal, right?
And everybody has a different risk profile in terms of what their ability to take on different risk assets.
You know, so there’s not really this, you know, unisex, um, you know, army Swiss army knife that you can say this will work for everyone.
I, I really think it’s important that everybody have a plan, whether you’re retired or, you know, a retiree or moving towards retirement.
And it’s important to understand what those goals and objectives are, what your time horizon is and what investment vehicles are going to work best for you.
Now, we had people looking at that not too long ago as interest rates were rising to put that plan together.
Now, it’s going to be important as we start entering potentially a lower interest rate environment to start putting that game plan and being prepared for the that lower rate environment because those who have gotten used to these higher rates on whatever vehicles, whether it be C Ds and tips and things of that nature, they have to start looking and seeing what’s gonna work best for them from this point forward.
Yeah, and I like to tell people and be curious for your reaction that in terms of what they earn on their investments, they should always be looking perhaps to earn a little bit more than, um, the rate of inflation than, than CP I plus whatever taxes, right?
What their after tax rate is minus CPI, 100%.
I mean, it’s not really what the return is, it’s really what do I get to keep when all said and done?
And if your return is, you know, 5% you then have to take off inflation, you then have to take off what you owe in terms of taxes and see what you’re really left with when all said and done.
And if that’s a number that you can live with and that might be an investment that works for you.
If it’s not, you might have to look elsewhere.
Yeah.
So one of the things that you like to do on the show, Larry is to decode things.
And so I think what you’ve just mentioned is the difference between a real rate of return and a nominal rate of return, correct?
And they’re very, very different.
Yeah, I remember people used to say, oh, I used to earn 19 percent of my CD back in the Jimmy Carter years and I’d say, well, yeah, but inflation was 21%.
So you were actually a negative three real return.
Yeah, and I’ll share something, you know, that’s happened with the family you know, families that we worked with, they look at some investments out there, you know, and I’m not picking on reits.
They’re, they’re right and they’re good investments for the right people.
But we’ve had people say to us, hey, I see this reed and it’s paying 89, 10 percent.
And uh you know, why are we not allocating funds there?
Now, when you look at that 10% yield, it looks great.
But then when you look at the total return of the investment, if it’s gone negative, that 10% may not be what your real return is.
And then you factor in those other things, inflation and taxes and you know, you have to evaluate it with all things being considered.
