Forbes recently published a focused piece summarizing the top reasons to use bonds for investing. Here are those reasons, in no particular order, and my comments as they relate to using TIPS and I-Bonds for retirement income security:
1. Preservation of Principal. This is definitely number one on the list for retirement planning. Moreover, you cannot get any more secure than government-backed TIPS and I-Bonds.
2. Saving. I have to agree with this one as well although purchasing TIPS and I-Bonds even right before retirement can be valuable to provide income 10-20 years down the road.
3. Managing Interest Rate Risk. This is not important for bonds in a Failsafe Retirement Income Plan. What is important is managing inflation risk which TIPS and I-Bonds do but Forbes doesn’t mention.
4. Diversification. I agree with this although not for the same reasons proposed by Forbes. Using TIPS and I-Bonds to meet essential retirement income needs gives you the safety and freedom to diversify and take risks with your other investments.
5. Expense Matching. This means using income from bonds to match up with known future expenses. That’s exactly what a retirement income fund does.
6. Long Term Planning. Forbes doesn’t mention long-term retirement planning but what could be more important for the individual bond owner?
As a final note, compare these uses of bonds with comparable uses of equities. Game over.
The Treasury has scheduled an auction of five-year TIPS on October 26, 2009. (To be more precise, with an issue date of 10/30, these TIPS will have an actual duration of four years and six months.) The official announcement date will be October 22. The last 5-year TIPS auction was on April 23, 2009. Those inflation protected securities carried a fixed interest rate of 1.125% and a high yield of 1.278%.
If you are looking at five-year TIPS as part of your retirement income plan, make sure that they fit in with your actual retirement date and/or that you will be prepared to sell and replace them with new TIPS issues when they mature.
If you are interested in I-Bonds (which you should be), be aware that the Treasury will announce the new fixed interest rate on November 1, 2009. This rate will apply to all bonds sold from November 1 through May 1, 2010. There is no official formula for determining or even predicting what that rate will be. Some speculate that the rate will be increased from the present measly rate of 0.1% because these will be the first I-Bonds that can be purchased with federal income tax refunds.
Also, based on this week’s government release of the official Consumer Price Index data, we now know what the inflation adjusted component of the I-Bond interest rate will be for the next six months. The March 2009 CPI-U was 212.709. The September 2009 CPI-U was 215.969, providing a semi-annual CPI increase of 1.53%. Based on the official formula, the inflation-adjusted (variable) interest rate for the next 6 month period will be 3.07%. This is quite a turnaround from the -5.56% rate for the current period, which brought the total I-Bond rate down to 0%!. (The rate cannot go below zero.)
If you already own I-Bonds, keep in mind that the rate adjustments may not affect your holdings immediately. New rate periods for existing bonds begin every six months starting with the month in which your I bond was issued. For example, if you own an I-bond that was issued in January, the new rate periods for that bond will begin in July and January.
Keep working on that Failsafe Retirement Income Plan!