Page 15 - Investment Advisor March 2022

a retiree could buy from their T-bill certainty, the good news is that retirees of the I bond is the ability to defer
investment. While the asset value of can buy inflation-protected investments taxation on interest until you cash it
T-bills is flat, the amount of after-infla- at below-market prices. in. Compared to other taxable bonds,
tion income they can buy with a stable this can be a significant benefit as com-
nominal income jumps up and down CHEAP INFLATION PROTECTION pounded growth is shielded from taxa-
over time. Merton made the point that Jeffrey Levine, chief planning officer at tion — increasing the after-tax return for
inflation risk is no different than risk in Buckingham Wealth Partners, recent- longer holding periods.
nominal investment returns. ly wrote an article Series I Savings I bonds have some downsides that
Many investors and advisors fall vic- Bonds: End-Of-Year Strategies To Take investors need to consider. You can only
tim to the money illusion by focusing Advantage Of The Current High Interest buy $10,000 per year ($20,000 for a
too much on change in assets instead of Rate on Kitces.com that highlights the couple), and you can add up to $5,000
change in spending power. benefits of the oft-forgotten Series I from a tax refund. Although they tech-
Warnings from economists nically have a 30-year matu-
like Merton and Bodie largely Investing in stocks and rity, I bonds can be cashed in
fell on deaf ears, but since after one year. If liquidated
2019, growth in inflation-pro- commodities does involve the before five years, you lose the
tected Treasurys rose by more last three months of interest;
than 50% and the percentage acceptance of investment risk. wait five years, and you’re
of Treasury inflation-protect- For those who want greater home free.
ed securities purchased by Retirees can get an even
investment funds at auction certainty, the good news is better deal on inflation-pro-
rose from 50% in 2016 to 80%. tected income by delayed
The iShares TIPS Bond that retirees can buy inflation- Social Security claiming.
ETF (TIP) returned 6.05% Why? The income bonus a
over the last year, more than protected investments at retiree receives from waiting
7% higher than an investment below-market prices. a year to claim was based
in the Bloomberg Barclays on mortality tables and real
U.S Corporate Bond Index. interest rates from the early
The TIPS fund provided consumers Savings Bond, or I bond. I bonds are sud- 1980s. Higher-income retirees have
with preservation of spending power. denly a hot topic because they provide made remarkable gains in longevity in
But the strong demand for infla- higher returns than TIPS because their recent decades, and real rates of return
tion protection has pushed TIPS yields fixed (pre-inflation) rate is currently 0% on inflation-protected future govern-
below zero, locking investors into a neg- while the yield on 5-year TIPS is cur- ment payments are historically low.
ative real return on savings. Assets that rently -1.2%. Many forget that retirees don’t need to
historically generated a risk premium So investors get a 120 basis-point take Social Security when they retire,
have outpaced inflation. bonus over the market price of inflation- and can build valuable inflation-pro-
A recent CFA Institute blog post by protected Treasurys, and this fixed rate tected income by using IRA savings to
Nicolas Rabener, managing director of never goes down. The most common bridge spending before age 70.
FactorResearch, pointed out that the fixed rate on I bonds over the last 12 While there is disagreement among
historical real rate of return on stocks years has been 0%, so you’re not really financial experts about the permanence
when inflation is between 5% and 10% losing out by buying one today. of recent price increases, the last year
is positive, although it is a modest 4.8%. Any I bond purchased until April has taught us that inflation is a risk that
Among stocks, sectors related to com- 2022 earns 7.12% for the first 6 months can rear its head at any time with serious
modity production did much better, and you own the bond and the principal implications for retirement portfolios.
according to a recent Vanguard report, value rises by the interest applied. So
commodities “stand apart as a vehicle for a $10,000 investment today will have a Michael Finke is a professor and Frank
hedging against unexpected inflation.” principal value of $10,356 in 6 months. M. Engle Chair of Economic Security at
Investing in stocks and commodities In April, the Fed will set a new interest the American College of Financial Services.
does involve the acceptance of invest- rate based on the CPI-U. He can be reached at Michael.Finke@
ment risk. For those who want greater Another underappreciated benefit theamericancollege.edu.

MARCH 2022 INVESTMENT ADVISOR 13