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Thinking Ahead About Inflation? Here Are a
Few Ways to Protect Yourself
While the struggling economy has put a vice on inflation,
many experts don't expect things to stay that way for much
longer. Why? Many economic experts fear the current level of
federal spending will inevitably lead to printing more money,
and that's regarded as an inflationary solution.
As of late August, the federal deficit was estimated at $1.58
trillion and expected to increase roughly $1 trillion more based
on the final size of President Obama's healthcare plan. Even if
inflation moves slowly, it's not a bad idea to at least start
thinking about some savings, spending and investment strategies
that take inflation into account. Here are a few:
Refinance if it makes sense for you. In March, April
and May of 2009, mortgage rates were at 50-year lows. While
they've largely bounced around in recent months, an economic
recovery may mean rates are headed up. If you need advice on
whether refinancing is right for you, consider contacting a
CERTIFIED FINANCIAL PLANNER™ professional who can examine your
whole financial picture and determine whether the timing and
terms of a refinancing make the most sense. A CFP® professional
can look at your income, expenses, liabilities and other assets
as well as whether your property is adequately insured as
replacement costs increase with the rate of inflation.
Consider laddering CDs and other interest-bearing savings
vehicles. For emergency funds and other forms of savings, a
rising rate environment is actually a good thing.
"Laddering" means buying CDs, T-bills or other similar
investments consistently, so they'll mature on a consistent
basis. Like the steps of a ladder, this process allows a saver
to deposit money on a specific date each month - for example,
the first of the month - so as each month goes by at hopefully
higher interest rates, you can build the nest egg faster.
Consider TIPS. Treasury Inflation-Protected Securities
(TIPS) are Treasury securities whose principal and coupon
payments are indexed to inflation based on the movements of the
Consumer Price Index (CPI). Like ordinary Treasury securities,
TIPS have a fixed coupon interest rate but principal is adjusted
to reflect the inflation rate. If inflation goes up, the amount
of principal to be paid at maturity rises. Coupon payments rise
along with the principal since the rate is calculated on the
principal amount. If your bet goes wrong and there's deflation,
you won't lose your principal. There's a floor at par. When
rates rise, TIPS lose value, but they tend to lose a little less
because of inflation protection. It might be best to own TIPS in
an IRA or other tax-advantaged account because the periodic
inventory adjustment is subject to ordinary federal tax at
intervals before the bond matures.
I-Bonds might be right for you. Series I Savings
Bonds, also issued by the U.S. Treasury, might be worth
considering after you see rates finally headed upward. I-bonds
are sold with a fixed interest rate, which never change, plus an
inflation adjustment. It's a good idea to buy them when the
announced fixed rate is high, because you'll be guaranteed that
fixed return over the life of the bond plus any additional
inflation adjustments later. The fixed interest rate at issuance
guarantees a minimum return, plus any benefits from future
inflation adjustments. Purchases of I-Bonds are limited to
$10,000 per year per investor, though in addition to your name,
you may be able to buy bonds under the name of your spouse,
trust account and your children. Before you start buying, it
might be a good idea to talk to your tax professional about the
potential impact once you redeem them.
September 2009 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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