Retirement & Financial Planning Report

Do you think all of the spending that the federal government has done in the past year or two will result in increased inflation? If so, you can invest in Treasury Inflation-Protected Securities (TIPS). These are bonds with a low fixed yield and a variable yield pegged to inflation.

* Currently, you can buy a 10-year Treasury and lock in a 3.2 percent yield for the next 10 years.

* Alternatively, you can buy 10-year TIPS, with a fixed yield around 1.2 percent. The 2 percent difference is the break-even rate for inflation over the next 10 years.

Suppose that inflation averages 1.4 percent a year for the next 10 years. As an investor in TIPS, you would get the 1.2 percent fixed yield plus the 1.4 percent inflation adjustment, for a total return of 2.6 percent a year. As you can see, you would be better off in a 10-year Treasury paying 3.2 percent.

On the other hand, suppose inflation averages 3 percent a year for the next 10 years. You would get a total return of 4.2 percent (1.2 percent plus 3 percent a year), so TIPS would be a winner. With any inflation rate of more than 2 percent, you would benefit by investing in TIPS.

Although the past does not guarantee the future, the inflation rate for the last 10 years (through 2008) was 2.5 percent. If you’re interested, TIPS are available from brokers, through mutual funds, and at www.treasurydirect.gov.