The Smart Retiree’s Guide to Using Gold and TIPS as Inflation Protection
Inflation erodes purchasing power over time as the cost of groceries, health care, housing and more increases. But you can minimize its impact on your portfolio with gold and Treasury Inflation-Protected Securities (TIPS).
These assets can act as hedges against inflation and there’s room for both in your retirement savings.
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How TIPS work for inflation protection
TIPS are government-backed Treasury bonds with a principal that adjusts with inflation. These bonds typically offer lower yields than other types of bonds and you still get regular interest payments.
TIPS are optimal for retirees over the long term, but they can be subject to short-term fluctuations as interest rates change. You get your inflation-adjusted principal back as long as you hold the bond until its maturity. It’s possible to sell a bond early, but then it can either be at a gain or a loss, based on interest rate fluctuations. Holding until maturity ensures a gain while allowing you to receive interest payments along the way.
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How gold can help against inflation
Gold tends to hold value — or even increase in value — when currency purchasing power falls. That’s because gold is used as a store of value and is vital for many industries. Semiconductors, jewelry, surgical products, cosmetics and spacecraft are some of the products that use gold. It’s an essential resource that retains strong demand, which helps it beat inflation.
However, gold doesn’t have the same stability as TIPS. Gold may be subject to sharp corrections from time to time, but can also outperform the stock market during times of stock volatility. Gold can outperform growth stocks during times of high inflation and uncertainty, but it can also produce losses and over the long-term, its growth potential is lower than that of growth stocks. Gold also doesn’t pay cash flow like TIPS.
Gold investors can hold the precious metal without worrying about maturity. It’s a long-term inflation hedge, while TIPS eventually mature and require you to buy another Treasury bond if you want that continued exposure.
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Using gold and TIPs for the first time
Gold and TIPS are both valuable resources for keeping up with inflation, but, like with all investments, you should determine whether they’re a good fit for your portfolio based on your goals, time horizon and risk tolerance. Consider how TIPS offer fixed interest payments and are designed to protect against inflation while gold can be volatile and doesn’t offer interest payments but has historically offered higher long-term returns.
These assets shouldn’t make up your entire portfolio, but for retirees, they can often offer diversification and help reduce risk. Financial advisors tend to recommend keeping your gold allocation to 5-10% of your overall portfolio. Experts at Morningstar say that it's reasonable to allocate 20-40% of a portfolio’s fixed income assets to TIPS.
You can start small with limited exposure to these assets and add more over time as you rebalance your portfolio.
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