Let’s say you’ve done all the right things when it comes to saving for your retirement. Now, you’ve clocked in for the last time and it should be smooth sailing from here, right?

Not so fast.

Investing later in life is a delicate balance between taking too much risk and not taking any risk at all. If you invest too aggressively for your life expectancy, your portfolio will be subject to the swings of the stock market. But, if you just put all of your savings into a money market, bank account or CD, you won’t earn enough to keep up with the rate of inflation.

Luckily, there are some ways to manage inflation risk. TIPS bonds are one example.

The benefits of treasury inflation-protected securities

TIPS have a low default risk and offer interest payments that increase in tandem with the rate of inflation. They are available in 5-, 10- and 30-year maturities. This can help your nest egg retain purchasing power as the cost of living rises.

TIPS also provide diversification benefits to your portfolio, which is essential as it allows you to offset some investment risk.

The downsides of treasury inflation-protected securities

One downside is that TIPS are more costly than Treasury bonds, and more expensive bonds have lower yields than cheaper bonds. Still, if you think the upward trend in inflation will continue, you may be willing to accept lower yields now for higher interest income down the road.

If the opposite happens and inflation falls, TIPS are subject to deflation risk. This means that the principal and interest payments on TIPS will also decrease.

TIPS are also not risk-free. Just like conventional bonds, they are subject to interest-rate risk. So, when interest rates rise, the prices of TIPS fall.

Are treasury inflation-protected securities taxable?

Yes. Any increase in the amount of principal payments from TIPS is subject to federal income tax in the year in which it happens. The semi-annual interest payments are also taxable. However, when your TIPS holdings mature (or you sell them), you will only pay federal income tax on the last year’s increase in principal payment even though you’ll get a full increase in principal from the date you first purchased the TIPS.

Speak with an advisor to learn more about TIPS

There are other considerations for investing in TIPS beyond what we’ve covered here. But, if you’re looking for a way to ensure that your portfolio keeps up with inflation, TIPS are investigating. Our financial advisors can help you decide if TIPS are right for you. If you’d like to set up a free, no-obligation meeting to discuss TIPS and your portfolio, click here.