The ‘Safest Investment’ for Americans

BY Paul Solman  May 11, 2012 at 11:35 AM EST

Professor Zvi Bodie
Finance professor Zvi Bodie talks to Paul Solman in 2011 about pension woes.

In response to our post of May 9 on the benefits of Treasury Inflation-Protected Securities, this arrived from the eminent finance guru from Boston University, FoM¢* Zvi Bodie, aka our pension Bodie-sattva. It was Zvi who convinced me to invest a significant portion of my retirement portfolio in TIPS when they first were offered back in the ’90s, at that time via a new mutual fund run by TIAA-CREF.

Making Sense

For most Americans the safest investment is not TIPS, but Series I Savings Bonds. For the past several years the U.S. Treasury has been offering these bonds to the public at a guaranteed interest rate that is at least equal to the rate of inflation for a period of 30 years. This means that for every dollar you invest today, you have the right to take it out fully adjusted for inflation at any time over the next 30 years. So in a worst case scenario (unless the U.S. government defaults), you will have maintained the purchasing power of your money. If the U.S. Treasury raises the interest rate above the rate of inflation, you can cash in your old bond and buy a new one with no loss of accumulated interest. If you have held the old bond for over five years, there is no penalty when you cash it in. I know of no safer way to invest for a long time horizon. For people of modest income, a combination of Social Security and an annual investment of up to $10,000 per year in I Bonds should suffice to finance a comfortable retirement without any significant risk and without any special tax-deferred retirement accounts.

For example, a 30-year-old who buys $10,000 per year of I Bonds and retires at age 70 will have accumulated $400,000 of today’s purchasing power. Even at today’s high prices that would be enough to buy a guaranteed lifetime inflation-proof income benefit of more than $16,000 per year from a high quality insurance company. I believe that this option ought to be brought to the attention of every American by the government and trustworthy financial advisers.

*Friend of Making Sen$e

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions