What are treasury inflation protected securities (TIPS) and why should someone hold them?

Ralph
00:00:00

Are you worried about inflation eating away at your savings? Does it keep you up at night wondering if your retirement nest egg will maintain its value over the long haul?

Well, today we're tackling a powerful investment tool that could help protect your money from inflation's destructive effects. Stay tuned as we explore treasury inflation protected securities, or tips, and why they might be the missing piece and your investment strategy.

Podcast Announcer
00:00:27

In a world where crushing debt keeps you trapped, where living paycheck to paycheck has become your new normal, and where the dream of retirement seems impossibly out of reach, there's hope. Join financial evangelist Ralph Estep Jr. A man who's walked through the fire of financial failure and emerged stronger on the other side.

Welcome to Ask Ralph, the show where real world experience meets biblical truth. To break the bondage of financial despair.

To get ready to take control of your money, break free from the financial stress and align your resources with God's purpose for your life. This is Ask Ralph with Ralph Estep Jr.

Ralph
00:01:05

I appreciate you joining me today. I'm here to help you achieve financial success while staying true to your Christian values. And let's continue our journey together.

Now, if you missed yesterday's show, I talked all about protecting yourself after your Social Security number has been compromised. We talked about some essential steps to safeguard your identity and maintain your financial security.

So I'm going to encourage you to go back and listen if you missed it. I received this message from Bruce in Atlanta and this is what Bruce wrote.

He said, hey, Ralph, I've been saving diligently for retirement, but with inflation soaring, I'm terrified my savings won't be worth as much when I need them. My parents lost significant purchasing power during their retirement and I don't want to face the same fate.

What can I do to protect my savings from inflation?

Well, Bruce, that is certainly a timely question and I appreciate your concern and I don't want to see you suffer like your parents either, and I may very well have a great option for you today. We are definitely in a very strange place in our economy.

And whereas a lot of people think that inflation is going to be put down a little bit, I actually think we're going to see a time of inflation increasing, especially over the short term. Now, before we dig into today's topic, remember to send in your questions. You can send them just like Bruce did.

Go to just askralph.com because your questions shape the show and I'm here to navigate your financial journey right alongside of you. And don't forget, every Tuesday night I go live at 7pm Eastern time. It's very simple to do it.

You just go to askralphpodcast.com/live and you can join our community where we tackle your questions in real time. It's really a lot of fun. We've been doing it for just about two months now. So I'm going to encourage you to join it.

Just mark your calendar for 7pm every Tuesday night. That's Eastern Standard time. And just go to the website askralphpodcast.com/live.

You know, Bruce, when I really bubble it down to its basic elements, you're really talking about preserving wealth. And that reminds me of a powerful verse from Proverbs, chapter 21, verse 20. And it says, this is very blunt and to the point.

The wise store up choice food in olive oil, but fools gulp theirs down. And if you think about it, Bruce, this verse emphasizes the importance of not just saving. That would be easy to do, but it's saving wisely.

And as you alluded to protecting what we've stored up. Well, let's take a trip back in time. Let's go back to 2008. And I want you to meet James. Now, James was a guy who had taught high school for 30 years.

And James had accumulated $500,000 in his retirement account, which to me seemed like a pretty impressive thing on a teacher's salary. And he had invested it entirely in traditional bonds because he was James was all about seeking safety. Fast forward a couple years and we go to 2018.

And in those 10 years, James lost significant purchasing power because of inflation. And by 2018, his savings couldn't even maintain his intended lifestyle because just like we're seeing now, cost of everything had gone up.

Returns from his investments were just weren't enough. And it is a terrible story. It broke my heart. It truly did.

When he explained what he went through, it killed me because here's a guy who had worked 30 years, had squirreled away this $500,000 nest egg. He had put it into investments he thought would be useful and they just weren't keeping up with inflation.

And the whole problem was it didn't have to be that way. And it really taught me a valuable lesson. And I'm going to share his outcome later in the show.

But I want to talk to you today about the topic at hand. And someone wrote to me, it wasn't James. It was another person that sent in a thing.

And they said, ralph, do you know anything about these things called tips? And I did a little research. First, I'm thinking tips are you Talking about what you give a waiter or waitress at a restaurant.

And they said, no, no, no, no, we're talking about a Treasury. So I did some research and there's things called tips. And basically what it stands for is a Treasury Inflation protected security.

Now that's a lot of words, but here's what they are. They're government bonds that protect purchasing power. They're all about protecting or creating that hedge against inflation.

And the way they work is that the principle of those securities automatically increases when inflation increases. So think about it like this. It's like a financial shield against rising prices, like having a financial guardian angel watching over your savings.

They might say, ralph, this sounds complicated. It's really not that complicated. So let me break down what these tips are and why they might deserve your attention.

And again, I'm going to say right now, I am not a broker. I'm going to encourage you to check with your individual broker.

But I wanted to give you this as an option for how to hedge your investments against inflation.

So the first thing you need to understand about tips, they are rock solid because they're not just like any other investments, they're backed by the full faith and credit of the United States government, which makes them one of the safest places to put your money. So if that's important to you and you want the full faith and credit of the United States government, these tips are an option for you.

So that's, number one, they have rock solid security. Number two, and this is the whole point of these, they have true inflation defense. Think about it like this.

When prices rise at the grocery store like they're doing now, or the gas pump, I had somebody say to me the other day, rob, you, have you seen gas prices lately? Actually, they've started to come down again, but they certainly haven't gone down at the grocery store.

But if you had these tips, your TIPS investment rises as well. Because what happens is the principal amount adjusts upward as inflation increases.

I'm not going to get into a bunch of examples today, but basically what it does, big picture, it ensures your purchasing power stays intact. And that's especially crucial for retirement planning. Just like James, he had that $500,000 he had set aside and he put it in traditional bonds.

And as inflation went up, that money was locked in and it wasn't earning as much as what it could earn. And that's really important, especially when we retire, since a lot of people are considering Social Security to be their sole investment.

And if you listen to me, you know, I've said that's not enough. So these things can help protect against inflation. Number three thing, it's a steady income stream.

The way it works is you'll receive interest payments twice a year. So whatever your principal that you've invested in these, you're going to get two interest payments a year. So that's a reliable income source.

You can use that to fund your lifestyle. And the regular income, like I said before, can help supplement other retirement sources.

Maybe you've got a 401k plan, maybe you've got a pension plan, maybe you're using that Social Security or just savings. So these can help contribute to your financial independence. Number four, let's talk about the tax advantages. Now here's the deal.

You're going to pay federal tax on this. But a lot of states offer freedom from state and local taxes, which basically helps you keep more of your returns.

If you think about it, if you're only paying federal tax, you're not paying state local income tax, then the amount of your net proceeds from those interest payments is going to be better. But listen, I'm your financial guide, I'm your person that's watching out for you. So I want to share some challenges that you also have to consider.

I did a little research online, I listened to some investment people and everybody's talking about how great these tips are. But here's the things you need to understand. They are good at protecting wealth.

But just like the parable of the talents, sometimes the initial interest returns are lower. And what you have to do is you have to accept that there's going to be modest but steady growth. So you have to understand it from the front end.

Tips typically offer lower interest rates compared to traditional bonds. So if you're comparing bond and TIPS side by side, you're going to see that the TIPS is generally going to be lower.

Well, if you think about it, that makes sense because they're building in that hedge against inflation. But you need to understand that from the jump. Second thing, tax complexity. You're going to owe taxes on the inflation adjustments annually.

So I talked about a few minutes ago, the way this works with a tip is that as inflation increases, the value of that investment increases. So the IRS is going to force that you pay tax on that adjustment. Which might sound like a no brainer, but here's the problem.

You don't actually get the money. So you're paying tax on what I'll call phantom income because you're going to pay that tax even before you get that money.

You get the Money at maturity, but you're paying tax as you go.

So if you've got a big sizable investment portfolio of these, it's going to require some careful planning because you might have to set aside some money for tax payments. So that's number two. It's that tax complexity number three thing. As with any investment, you have to be on the lookout for market value fluctuations.

Again, your principal is protected if you hold it to maturity, but if you have to sell it early, that's where you might run into some market value issues. Let's say, for example, you want to try to sell these because you need to do something. You need to say, make a renovation to your house.

The problem with these tips is the prices can vary on the secondary market. Again, if inflation is not a big deal when you go to sell these, they don't have as much value.

But if inflation is going through the roof like it has the last three years, they probably have more value. And this is why I said at the beginning, you want to discuss this with a professional broker before you make any investing.

Now I thought, hey, why don't I share some statistics about these tips? Because again, like I said, I was not an expert on these, but I wanted to share some performance metrics.

So historically the yield ranges on these are anywhere from a negative 1 and a half to 4 and a half percent. But the break even inflation rate typically is 1 and a half to 2 and a half percent.

So that's what I'm saying there is that is your average return on these tips anywhere from a loss of a point and a half to a gain of 4 1/2 points. But the overall inflation rate typically is 1 1/2 to 2 1/2 percent. And they've got maturity options of 5, 10 and 30 years.

Now let me express some market data. So I looked into this. Total tips market size is $1.8 trillion.

Now they have a lower trading volume than conventional Treasuries, but again, they're not expensive to get into. You can play with these because the minimum purchase amounts a hundred dollars. They might say, Ralph, how have these things performed historically?

And here's the thing, I'm going to tell you, it's a mixed bag because they did protect against your income in high inflation periods when there was really soaring inflation. These things were fantastic. But overall they underperformed nominal bonds during low inflation periods.

And they're generally lower, they have lower volatility than conventional bonds. So let's get back to James's story. So James, he had all this money invested, it wasn't keeping track with inflation.

So he sat down with his broker and he restructured his portfolio. And he didn't do it all in tips, but he put some of it into tips. And now he sleeps better knowing his purchasing power is protected.

Kind of reminds me of this. It's like the wise servant in the parable of talents who steward his master's resources.

Well, you think about that one, that he gave him five talents and then when he came back, the master came back, he had doubled it. Well, we're called to protect and grow what God has entrusted to us as well.

And maybe tips is a wise thing for you to look at because you're not just saving for retirement. This is the big picture takeaway here. You're protecting your ability to serve God and others with those resources for years to come.

And that's kind of what James learned the hard way. He had done all the right things.

He had scrimped and saved and put away that half a million dollars and he just didn't have it in an investment which really worked in times of inflation. And I'm going to share with you some action items in just a few moments. But let me ask you this question.

Are you struggling to balance your money and faith? I know that's a pointed question. It's a tough question to answer sometimes. It's probably why you're listening. And listen, I get it.

Sometimes it feels like you're the only one trying to make godly financial decisions in a world. My grandfather said this world going plum crazy. But it is a world that pulls us in different directions.

And that's why I decided to go live every Tuesday night at 7pm Eastern time. Because I want you to know you're not alone in this journey.

And what I have found that makes my heart sing is when I see members, our community having those aha moments during our live shows. I really enjoy those live shows. I enjoy the chat we have. I enjoy the. The camaraderie and the community.

And I love it when someone finally breaks free from debtor or understands how to invest while maintaining their relationship with God. Or maybe it's something as simple as they find peace in their financial decisions because those are the moments that really matter.

And every week in the live show, I hear stories that could be your story. Like this one. Ralph, I was drowned and in debt until I found your show. Oh, that's fantastic. That's an impactful statement. Or this one.

I never thought I could invest and stay true to my faith or this one, your advice helps save my marriage from financial stress. Listen to finances will stress marriages, they'll stress relationships. They cause all kinds of problems. Here's what makes our Tuesday night special.

You're going to get real talk about money and faith. There's no sugar coating if you listen to me. You know, I call it as I see it.

What's even more dramatic in the live chat because I've got questions coming in real time, real situations. And yes, I'm going to answer your questions live. I'm going to help you with your specific situation.

You're going to find a supportive family of believers who get what you're going through because oftentimes they've been through it as well. And we've had people in the chat ask a question and then we've got other people saying, oh, yeah, I went through that.

And so you, you feel that community. And yes, I do give away a $100Amazon gift card every single week. So if that, nothing else, that's a good reason to come.

But you want to know the best part? And this is truth. The real magic happens in the community. Like I said, when you join us, you'll see others facing those exact same challenges.

You'll realize you're not alone. And you'll see people who are winning and their wins, their victories become your inspiration. So here's what I want you to do right now.

I want you to take out your phone and I want you to add askralphpodcast.com/live to your calendar for Tuesday night at 7pm and make this commitment to yourself and your financial future. Don't let another week go by feeling stuck or alone.

Join me and our incredible community this Tuesday evening and together we'll build stronger financial futures while keeping faith at the center. Now, I'm going to be looking for you in the chat. And hey, like I said, you might just walk away with that $100Amazon gift card.

So see you Tuesday, 7pm Eastern Time. Again, that's askralphpodcast.com/live. It's really that simple. Well, now let me share those action items that I told you I would talk about.

And I just gave you three today. Number one thing, consider allocating a portion of your bond portfolio to TIPS as an inflation hedge. Give it a chance.

Talk to your broker and see if it fits into your portfolio, if it fits into your investment ideas. Number two, you can purchase these tips right through treasurydirect.gov that's one of the other cool things about this.

Or you can work with a broker, and I'm not telling you to do it yourself, but let's say you want to dab a little bit. You could actually go right to treasurydirect.gov and you can get these for yourself right through that. Or like I said, I think it's better.

Like I said, number three here is consult with the financial advisor to determine the right allocation for your situation.

I don't want to be that person that tells you to go buy these tips because maybe there's something that you have in your particular circumstance or which I'm not considering. So those are my three takeaways. Considering a portion of it. Look at purchasing them and consult with that financial advisor.

Now, tomorrow we're going to get spiritual again. We're going to talk about an equally important topic, and that's breaking free from classic humanism.

They might be saying, Ralph, what in the world is that?

Well, I'm going to encourage you to check in because tomorrow I'm going to be talking about how to break free from that and to embrace true Christianity. I'm going to talk to you about a way that you can grow your relationship with Christ himself.

And you don't want to miss it because you might be surprised at how embracing this classic humanism might just be holding you back from a deeper relationship with Christ. It was things that I hadn't thought about and I got this listener question and I said, this is perfect for this show. Now remember this.

My passion is to help you achieve financial success. I want to see you live out your dreams and I want to see it grow in your faith.

And I know together we can master your finances from a Christian perspective. So as I always end this show, stay financially savvy and God bless you.

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00:18:33

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