Where Is a Safe, Conservative Place to Invest Retirement Money?
Question: The recent meltdown hit us hard just after I retired. About 40 percent of our money is in mutual fund stocks and we’re losing. My adviser says “don’t look at it.” I was shocked. Where is a conservative place to invest going forward?
Paul Solman: Hey, Kevin, if you read this page, you’ll have seen me give the same answer to questions like yours, time and again: TIPS (Treasury Inflation Protected Securities) for long-term money and U.S. Government Savings I-bonds for short-term money that would otherwise be in the bank or a money market fund.
The key word in your e-mail is “conservative.” And despite my loud ties and funky past, that’s what I am when it comes to personal finance. VERY conservative, in fact. I take an occasional plunge with, as Andy Tobias constantly writes, MONEY I CAN AFFORD TO LOSE. But for my retirement, my wife and I have invested more than half our life savings in TIPS, and have since they first were issued by the U.S. government in the late 90s.
Why? Because they protect against inflation by guaranteeing you the CPI, plus a few percent more, in annual interest. You don’t collect it until the securities “mature” — until it has to be repaid by the government, that is. The idea of saving is to protect yourself when you no longer have enough income to sustain your lifestyle. This presumably happens at or after retirement.
In fact, our TIPS are in a mutual fund because that was the only option my 401k offered. The price changes daily with the market for TIPS. It’s a little unnerving, but not nearly so much as investing in stocks. That’s because the idea of saving via TIPS is strictly to protect yourself against a fall in the value of the dollars you’ve saved and invested.
You get a low “real” rate of interest — less than 2 percent if you buy today, plus the CPI index of inflation — but the return is guaranteed. It’s tough to imagine a scenario in which the U.S. government defaults and the TIPS don’t get repaid. Not impossible — but sure as heck unlikely. Thus TIPS have been the conservative choice of choice for years.
A warning, however. The price of TIPS, as I say, varies with the market for them. When there’s a flight to the dollar, for example, as there has been lately, the price goes UP: these are U.S. government dollar-denominated securities. The flight to the dollar IS a flight to U.S. bonds, and TIPS are among them.
If the dollar starts LOSING value, however, TIPS will go DOWN in value. Or if TIPS suddenly become less attractive as investors stop worrying about inflation, and thus stop trying so hard to protect against it.
There’s yet another argument against TIPS. Suppose money gets so tight that the real interest rate goes UP. That is, money is so scarce that, all else equal, people demand a higher price to lend it out. Well, if you buy TIPS (or a TIPS mutual fund) paying less than 2 percent, as they are these days, and the real interest rate goes up to 3 percent, your TIPS will be worth less.
Bottom line? I put my mouth where my money is: TIPS, despite all of the above.