TIPS is short for Treasury Inflation Protected Securities. TIPS are government bonds that have their principal indexed to inflation. The coupon rate remains unchanged, but as the principal adjusts according to the rate of inflation, the actual interest payment--which is paid twice per year--changes. In this way, the owner of Treasury inflation protected securities is shielded from the erosive effects of inflation. While the principal is adjusted upwards in inflationary conditions, it does not fall below its original amount, even in deflation. TIPS interest is exempt from state and local taxes, but is subject to federal tax. TIPS are issued in 5, 10 and 30 year maturities and can be purchased direct through a Treasury auction or in the secondary market. It is important to note that the consumer price index (CPI) is the inflation benchmark used to adjust TIPS principal.

Zvi Bodie on the Safety of Stocks in the Long Run

The notion that stocks are risky in the short-run but safe in the long run is a dangerous financial fallacy according to Boston University professor Zvi Bodie.

Professor Bodie has been communicating this view consistently for many years, and the financial crisis has provided strong support for his argument.

The gist of Bodie's view involves that impact that equity market...

Seven Solid Financial Tips for Recent Grads

A great list of financial tips to pass along to any young (or older) person, with straightforward advice such as "saving is a form of freedom" and "the key to financial well-being is spending less than you earn:" Don't buy individual stocks. Start contributing to a 401k early. Know what is in your 401k. Make more than the minimum payment on your credit card balance. Your credit score is critically important. Saving is a form of freedom. Buy things cheap - the easiest way to save money is by not...
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Start Thinking of Retirement Account as Part of Your "Longevity Planning"

Forbes magazine publishes a relatively new section called "Forbes Woman" that is dedicated to issues affecting professional and executive women. A recent column discusses financial planning and the need to consider longevity risk when constructing a portfolio--particularly in light of recent capital market volatility . Longevity risk is especially relevant to women since their life expectancies are longer than men. In addition, many women find themselves solely responsible for their family...

Longevity Risk Listed as Top Retirement Risk - "Biggest and Most Difficult to Figure Out"

A list of ten risks faced by retirees includes the obvious such as stock market risk , but also includes issues that may not be top-of-mind for many retirees such as inflation risk and interest rate risk . Longevity risk is at the top of the list. Immediate annuities and the longevity annuity are mentioned as a potential solutions to the risk of outliving one's assets: "Given that, what's the best way to manage that risk? Social Security , traditional pensions and payout annuities all promise...

How do annuities protect against inflation?

This is a super important question and consideration--particularly given the financial crisis and our current economic environment.  There are some comments on this topic throughout the site including this blog post.

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