A retirement strategy virtually guaranteed to beat inflation
A 40-year-old investing for retirement would do well to put more than half of his portfolio in bonds.
Credit for discovering this strategy goes to Allan Roth, founder of WealthLogic and an investment adviser who has made a career of identifying simple ways for an individual investor to duplicate complex investment products at a fraction the cost. To illustrate, imagine that my hypothetical 40-year-old has $100,000 in his 401 or IRA. If he invests $54,492 in the TIPS that matures in 2050, this TIPS portion in 2050 will be worth $100,000 in today’s dollars. That’s because its current real yield is 2.338%, which is enough to compound $54,492 into $100,000 over the 26-plus years between now and the TIPS’ maturity.
Another potential catch, Roth said in an interview, is so-called reinvestment risk. A TIPS pays out interest each year , and if interest rates fall, that annual interest will have to be reinvested at lower rates. Its yield to maturity that I used in the above calculations assumes the ability to reinvest at current rates.
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