Ken Himmler.com

It’s easy to see how inflation affects your daily life. Gas prices are higher. Electric bills are steeper. Wallets are thinner. But what inflation does to your investments isn’t always as obvious. Let’s say your money is earning 4% and inflation is running between 3% and 4% (its historical average). That means your so-called "real return"–the stated return minus inflation–is only 1% at best. After you subtract any account fees, taxes, and other expenses, you could actually end up with a negative number.

What can you do to keep from losing the race against inflation? One of the easiest ways is to buy investments that are designed to keep pace automatically.

Take stock of TIPS

Since the U.S. Treasury introduced them in 1997, Treasury Inflation-Protected Securities (TIPS) have become the most widely known example of what are generally referred to as "inflation-protected securities." TIPS are especially popular with long-term investors who want to preserve the purchasing power of their money over time. Many investors also like the security of knowing their investment is backed by the U.S. government.

Like other Treasury bonds or notes, TIPS are basically loans to the U.S. government. You receive interest payments every six months based on a fixed interest rate specified in advance. With most bonds, it’s easy to know the exact amount of money you’ll receive each year. You simply multiply the principal–the amount of your initial investment–by the interest rate.

TIPS work a little differently. Instead of guaranteeing how much you’ll be paid in interest, an inflation-protected security guarantees that your real return will keep up with inflation. The interest rate stays fixed; what you won’t know is the exact dollar amount of the payments you’ll receive. If inflation goes up, your return will increase to match it. With TIPS, you’re trading off the certainty of knowing exactly how much you’ll receive for the knowledge that, as long as you hold the bond until it matures, your investment will maintain its buying power.

How do TIPS work?

TIPS pay slightly lower interest rates than equivalent Treasury securities that don’t adjust for inflation. The reason for that reduced rate? Your TIPS principal is automatically adjusted twice a year to match any increases or decreases in the Consumer Price Index (CPI), a widely used measure of inflation. If the CPI increases, the Treasury recalculates your principal to reflect the increase.

For example, let’s say you buy $20,000 worth of TIPS that pay a fixed interest rate of 2.5%. Over the next six months, the CPI rises at an annual rate of 3%. Your $20,000 principal would go up by 1.5% (half of the 3% annual inflation rate) to $20,300.

This adjustment will affect the amount of your semiannual interest payments. Even though the interest rate stays the same, it’s applied to the recalculated amount of your principal. In this example, the 2.5% interest rate would be applied to the new $20,300 figure. The actual dollar amount paid in interest goes up because it’s based on a higher principal; instead of $250, your next semiannual payment would be $253.75. If inflation goes up again, your next payment will be higher still. (The return on a specific bond may be different, of course, since this is only a hypothetical illustration designed to show how the return on a TIPS is calculated.)

If the CPI figure is lower in six months, your principal will be adjusted accordingly when it’s recalculated; that in turn will affect the amount of your next interest payment. If there’s a period of deflation and the CPI is actually a negative number, your principal and interest payment would both drop.

The inflation adjustment feature means that if you hold a TIPS until it matures, your repaid principal will likely be higher than when you bought the bond. Even if the CPI turns negative and the economy experiences deflation, the amount you’ll receive when the bond matures will be the greater of the inflation-adjusted figure or the amount of your original investment.

Things to think about
You can still lose money with a TIPS if you don’t hold it until it matures. Inflation rates rise and fall, and as with any bond, the returns offered by other investments can affect the market value of your TIPS. Also, if inflation turns out to be less over time than you had anticipated when you invested, the total return on a TIPS could actually be less than that of a comparable Treasury security without the inflation-adjustment feature.

Calculating the TIPS Advantage
How do you know whether owning a TIPS makes sense? Subtract the TIPS interest rate from the rate for an equivalent bond without the inflation protection feature. If the inflation rate is higher than the difference between the two rates, the TIPS may have an advantage.

If a TIPS pays… And equivalent non-TIPS yield is… Inflation rate needed for a TIPS advantage is…

• 2.5% 4.5% More than 2%
• 3% 6% More than 3%

If the inflation rate over time isn’t high enough to make up for the difference between the lower interest rate of a TIPS and that of an investment without inflation protection, the TIPS has no advantage. That’s why TIPS may only be appropriate for part of your bond holdings.

There’s another catch. You’ll also need to think about the federal taxes that will be due each year on the interest and any increases in your principal. Even though the Treasury records the changes in your principal every six months, you don’t actually receive that money until the TIPS matures. However, the government still taxes that increase each year as if you’ve received the cash. Many investors prefer to postpone that tax bill by holding TIPS in a tax-deferred account such as an IRA.

How can I buy TIPS?

You can buy TIPS individually, in $100 increments and with maturities of 5, 10, or 20 years (although individual brokers may have higher minimum purchase requirements). You could choose a selection of TIPS that mature at different times. When the shorter-term bonds mature, you could reinvest that principal into either another TIPS or some other type of bond. Known as "laddering," this strategy gives you flexibility as interest rates change. If interest rates are higher than the bond that’s maturing, you can invest at a higher rate; if rates are lower, you might prefer an investment that offers a higher return. Also, if you will need some of your principal for a specific goal, such as college tuition, you can select maturity dates that return your principal at the right time.

Another possibility is a mutual fund, which may invest in TIPS only or mix them with inflation-protected securities from other entities, such as foreign governments. Typically, a fund invests in a variety of debt instruments to balance the higher interest rates usually offered by longer-term bonds with the flexibility of shorter maturities. A TIPS mutual fund pays out not only the interest but also any annual inflation adjustments, which are taxed as short-term capital gains. Some exchange traded funds (ETFs) also invest in an index composed of TIPS with various maturities.

Before investing in a mutual fund, carefully consider its investment objective, risks, fees, and expenses, which are contained in the prospectus available from the fund. Review it carefully before investing. Your financial professional can help you decide which choices may be appropriate as you race to keep up with rising costs.
 

In the light of the present recession, everyone is looking for ways to make safe investments.  Unlike in previous generations, today’s primary resource for conducting the much needed investment research is none other than the Internet.  Unfortunately, there are a lot of dishonest people who have caught on to the fact that everyone is looking for a way to make a easy, safe investments.  These dishonest individuals have set up several elaborate scams to swindle honest, hardworking individuals like you out of their hard earned money.  You will need to equip yourself with the information you need to avoid such scams when doing your own investment research.

One of the most common scams comes in the form of unqualified individuals who claim to be reputable investment advisors.  These are sometimes easy to spot because they make unrealistic claims about your money.  Unfortunately there are also many well thought out scams that are hard to spot.  Sometimes scammers assume the identities of actual, licensed investment planners with outstanding credentials.  If you are not careful you can lose a lot of money in a short amount of time.

The best way to avoid these types of scams is to double-check all of your references.  Never send anybody money for investment services until you are absolutely sure they are who they claim to be.  Most reputable investment planners have only a select few websites that they operate with, and these websites are usually well documented by services that specialize in this kind of research.  When in doubt, do a google search with the name of the individual or service in question followed by the word ‘scam’ to find complaints other people have had.  When in doubt, follow this golden rule of Internet investing:  If it sounds to good to be true it probably is.  There are many legitimate investment services out there just waiting for you to find them.
 

The recession is on everyone’s minds these days. If you are retired or nearing retirement this adds to the concern and stress. I recently wrote an article about the key points you need to know about how the recession effects your retirement.

Eventhough this is a difficult time for everyone, there are tips and techniques on how to comfortably retire in the midst of a weak economy: View the article here   http://www.financialadvisormatch.com/community/articles/1115_retirement_and_the_recession_what_you_need_to_know.html

We have seen quite a bit of financial destruction and deception from the banks and the large financial institutions. Many people are starting to questions will we have the same fallout with insurance companies. Many of you know that I attended a conference in the beginning of January to learn more about the state of the insurance industry. At that time I listened to the insurance company executives talk about the problems they were going to have. Their problems were not so much centered on losing business but more of too much business. Many of these executives were worried with the crash of the stock market and the low yields on CDs and bonds people would flock to annuities in unprecedented numbers.

They were concerned with not only how they would handle the investment of all the influx but how would they handle the necessary staff needed for all the additional business. It seemed as though the general contention was to put a limit of the amount of business that they would accept. They also talked about reducing some of the benefits to reduce the amount of inflow. In the last two weeks we have now seen quite a lot of change from the insurance companies. Here is a small list of some of the changes some of the big players are making;

1) Reduction of maximum issue age they are willing to accept.
2) Reduction in the amount of maximum investment by any one person or family.
3) Reduction of the upfront bonus. Example: A certain company reduced their upfront bonus from 10% to 8%
4) Reduction in the cap on the annual earnings.
5) Reduction in the rider benefits. Example is: A certain company was giving a 8% guaranteed income rider for 10 years. They have now reduced this to 5%
6) A limit on the total amount of the business they will accept: Example: A certain company had set a limit on the amount of new money they would take in 2009 to nine billion. They hit six billion in the first three months of 2009. They are now setting monthly maximum limits. The problem with this is we just wait in line and send in the money and they may send it back because they have hit their maximum.
7) Only new money accepted. One of the costs of the annuity company is when they will facilitate the moving of money from brokerage accounts, Bank CDs, or other annuities. Some of the larger companies are now putting this task on the client and will only accept an annuity application with a physical check.

I felt it important to update everyone on this recent development. My opinion is that in today’s environment of low CD rates, volatile markets and unknown economic horizons annuities still play in important part of a pre-retirement or retirement plan.

In your lifespan you will encounter three phases. The accumulation phase, the pre-retirement phase and the retirement or distribution phase. Annuities play an important part in the pre-retirement and the distribution phase. I am still a big believer that only under certain circumstances should annuities be used for younger people – ie in the accumulation phase.
 

If you are of retirement age, you are no doubt concerned about the stability of your social security benefits.  For a lot of people, their investments only provide a portion of their income and they have to rely on Social Security to help pay their bills.  Kelly Greene of the Wall Street Journal  written an article about how she thinks the present economy is going to affect Social Security in the next few years.

According to the Congressional Budget Office, Social Security benefits are not likely to increase for the year 2010.  This announcement has caused many retirees to worry about their personal financial security for the oncoming years.  Many are wondering if the state of the economy could cause retirees to lose some of their precious benefits that they rely on to pay their bills.

Worried retirees can rest easy tonight, because Ms. Greene cited a statement by Mark Lassiter, a Social Security spokesman in Baltimore, who states that even if there is economic deflation, Social Security benefits will not be cut for the year 2010.  This is good news.

On the other hand, this is a prime example of why investing for retirement is so necessary for the future.  In the best-case scenario, a retiree is able to spend their golden years living off of their retirement savings and investments without having to fuss with the worries that accompany Social Security.  It is ever so important, especially in this era of economic instability, that people take control of their financial lives and make wise investments for the future.  Do some research, become familiar with the common investment terms used in the markets. 

I have said it before, it is YOUR money.  Let it work for you and you will be free of the worries that plague so many today.