A Smart Retirement Guide to Buying Gold and Tips
Inflation erodes purchasing power over time as the cost of groceries, health care, housing and more increases. But you can reduce its impact on your portfolio with gold and Treasury Inflation-Protected Securities (AMATIPS).
These assets can act as a hedge against inflation and there is a place for both in your retirement savings.
How TIPS work in inflation protection
TIPS are government-backed Treasury bonds with inflation-adjusted principal. These bonds usually offer a lower yield than other types of bonds and you still get regular interest payments.
TIPS are good for retirees in the long term, but can be subject to short-term fluctuations as interest rates change. You get inflation-adjusted principal as long as you hold the bond until maturity. It is possible to sell the bond early, but it may be at a profit or loss, based on interest rate fluctuations. Holding to maturity ensures profitability while allowing you to receive interest payments on time.
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How gold can help fight inflation
Gold often holds its value — or even rises in value — when the purchasing power of money declines. This is because gold is used as a store of value and is important in many industries. Semiconductors, jewelry, surgical products, cosmetics and spacecraft are some of the products that use gold. It is an important resource that maintains strong demand, helping to beat inflation.
However, gold does not have the same stability as TIPS. Gold may be subject to sharp corrections at times, but it can also outperform the stock market during periods of stock volatility. Gold can outperform growth stocks in times of 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 does not 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 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 bonds are both valuable tools for keeping up with inflation, but, like all investments, you must decide whether they are 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 is volatile and offers no interest payments but has historically provided higher long-term returns.
These assets should not make up your entire portfolio, but for retirees, they can often provide diversification and help reduce risk. Financial advisors often recommend keeping your gold allocation to 5-10% of your overall portfolio. Experts at Morningstar say it makes sense to allocate 20-40% of a portfolio’s net 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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