"How Should Income Investors Take Advantage of TIPS -- the Treasury Inflation Protected Securities"

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Who Would Benefit from TIPS

If you are an income investor who currently lives off your investment income, you would benefit from the increase in interest checks that will be paid to you if the CPI goes up.

However, you must also be prepared to have enough cash on hand to pay taxes on the increase in principal caused by that inflation.

As long as you budget for those taxes, Treasury Inflation Protected Securities are a good way to grow your income so that it keeps up with the rate of inflation.

If you are currently saving for retirement and you reinvest the income from your investments . . .

TIPS are a Great Way to Save

(Relying on capital gains/price appreciation is the current paradigm which I think will not survive for much longer.)

So if you are saving for retirement, TIPS should be a large percentage of your retirement funds.

Put Your TIPS in an IRA (Traditional or Roth), Keogh or Other Retirement Account

That will eliminate the disadvantage of paying taxes on the increase in principal. They will grow sheltered from taxes.

Plus, it will shelter you from paying taxes on the interest.

You'll know that when you retire, the money you put aside will be able to buy just as much as it does now. Plus, you'll have earned a real rate of return on top of that.

Buy TIPS by Vanguard Inflation Protected Securities Fund (symbol: VIPSX)

If you live in Canada, check out the Real Return Bonds offered by your government. U.S. TIPS were modeled on your similar bonds. The United Kingdom has issued "Inflation-linked Gilts" (ILGs) since 1981. Sweden, Australia and New Zealand also issue inflation-indexed bonds.

It may be a good idea if you can find a mutual fund that will invest in all of these. That would avoid country risk (the risk that one country will default) and currency risk. Also, a good mutual fund manager could shop around for the best interest rates.

If you believe the United States is headed for high inflation -- and lots of people believe this -- then TIPS are one way of managing this risk.

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