How to Fight Inflation Through TIPS or I Bonds

Patrick Cote |

BY: PATRICK R. COTE CFA, CFP®

With higher inflation continuing to persist, there are two main investment options that have become attractive in order to generate returns greater than the inflation rate.

For emergency funds, it is a good idea to keep your money in safe and accessible investments.  We mentioned I bonds a couple of years ago, when they were paying out up to 9%, which was attractive back then compared with bank account rates of near zero!

There are two parts to I bond returns:  the inflation payout and an additional “fixed” rate.  The fixed rate is the real rate you would receive beyond inflation.  The fixed rate was zero for most of 2020 – 2022 because the Treasury did not need to make I bonds more enticing at the time.

Now that rates have gone up and there are more options for near-cash investments, the Treasury has been raising the fixed rates.  The fixed rate for new I bonds purchased as of November 2023 is now 1.3%, bringing the total payout to a 5.27% annual rate for the next 6 months.  The nice part is that the 1.3% fixed rate will apply for the life of the bond.

If you bought I bonds in late 2021/early 2022, you can redeem them and invest in the new I bonds with the 1.3% real rate.  However, the old ones have to have been held for at least 12 months (the new 12 month lock-up period will start now) and you will need to pay a 3 month penalty.  You will also need to pay the federal income taxes on the interest.  You will forfeit a little over 1% now, however, you will get an additional 1.3% per year for the entire life of the bond, up to 30 years. 

Another options is to invest in TIPS (Treasury Inflation Protected Securities) or TIPS funds.  However, since they are not tax-efficient, you should purchase them in your tax-deferred accounts (e.g., 401K or IRA).  Although they are different from I bonds, they share the same benefit of adjusting for inflation.  With TIPS, the principal of the bond is adjusted for inflation each period.  TIPS are now paying an additional 2.2% - 2.3% real returns over inflation, which makes them an interesting choice for bond investing.

If you are thinking about investing in inflation-protected investments, please feel free to call us to chat about your situation in more detail.