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TIPS: mutual fund or bonds

Chris Farrell Nov 11, 2009

Question: I retired early and am over 55. I plan to keep enough money in my 401k to meet my needs until I’m 591/2. To take advantage of things outside of my former employers 401k plan, I’m planning to rollover the rest of the money into an IRA. One of the things I’d like to buy is TIPS (treasury inflation protection securities). When I do this, which is better, buying TIPS via a broker or financial planner where I have the IRA or putting the money into a TIPS mutual fund. So far, I did a quick review of both Vanguard & Fidelity’s TIPS fund. P.E., Brandon, FL

Answer: As you know I am a big fan of TIPS–Treasury Inflation Protected Securities–in a retirement savings plan. TIPS are a savvy and safe way to preserve the value of your savings over time. It’s a hedge against inflation gnawing away at the purchasing power of a dollar.

The low cost mutual funds you mention are extremely convenient to own and manage. Problem is, bond mutual funds don’t have a specific maturity date. The money is always being reinvested in a basket of TIPS. This means that you’ll never be quite sure what the payoff from the investment will be in the future. A TIP mutual fund still provides protection against inflation. But it’s a more volatile option than owning the securities directly.

The advantage of buying the actual bonds is that you get to control the timing of your inflation-protected investment. You can purchase TIPS with different maturity dates: 5-year, 10-year and 20-year. Fluctuations in the market won’t matter so long as you hold them till they mature. It allows for easy financial planning.

However, you can’t buy TIPS directly from the U.S. Treasury in an IRA. (When you buy TIPS from the Treasury there are no commission costs.) You’ll have to pay a brokerage commission or fee. It’s a minimal charge with online and discount brokerage firms.

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