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Thursday, June 13, 2024

Here’s an option to protect your portfolio from inflation

  • As inflation rises, many older investors and retirees worry about their nest eggs.
  • Investors may consider adding I bonds to their portfolio, a relatively safe and nearly risk-free asset.
  • But I bonds may not be right for all investors, financial experts say.

Older couple meeting with a financial advisorGetty Images

Inflation is a top concern as investors fret about the rising cost of groceries, housing, gasoline and other living expenses.

The May Consumer Price Index, a key inflation gauge, will be revealed on Thursday and may be higher after an alarming spike in April.  

"Clients are asking about it," said certified financial planner Leona Edwards, wealth advisor at Mariner Wealth Advisors in Nashville, Tennessee. "They're all concerned about inflation going up." 

As older investors and retirees scour for ways to maintain purchasing power, they may miss a nearly risk-free option they can purchase through the U.S. government: I bonds. 

While I bonds currently offer a 3.54% annual rate, it may not be right for every portfolio, financial experts say. Here's what investors need to know.  

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The Treasury Department created 30-year I bonds in 1998 as a hedge against inflation for everyday long-term savers.

There are two parts to I bond returns: a fixed rate and a variable rate, which changes every six months based on the Consumer Price Index. The value of an I bond doesn't decline, and rates won't drop below zero. 

"In today's environment, government bonds are paying little to no interest," said Christopher Flis, CFP and founder of Resilient Asset Management in Memphis, Tennessee. "So the inflation protection component is relatively attractive compared to what it has been in the past."

While the I bond's annual rate is currently 3.54% through October 2021, the Treasury will announce a new yield in November, and it may be higher or lower. This chart shows the history of both rates. 

Although I bond interest doesn't incur state and local taxes, investors still owe federal levies, unless they use the money for qualified education expenses.

I bonds may work for risk-averse investors to diversify the bonds in their portfolio, said Virag Shah, portfolio strategist at Van Leeuwen Company in Princeton, New Jersey.

These assets may also be good for those in a lower tax bracket with a large portfolio, perhaps from an inheritance. I bonds may be better for lower earners because there's less of a tax bite, Flis said.

But I bonds are "not going to turn night into day for any investor," he said.

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