At this point, investors of all ages are well aware just how much inflation can cut into one’s spending power, whether it be for everyday expenses or big-time purchases.
Key Takeaways:
- Inflation affects investors of all kinds, but retirees feel the impact more than others because many rely on fixed-income strategies to cover everyday expenses.
- U.S. Treasury Inflation-Protected Securities (TIPS) offer a potential solution to inflation risk because their principal adjusts with the Consumer Price Index (CPI).
- The Northern Trust 2035 Inflation-Linked Distributing Ladder ETF (TIPB) provides streamlined, consistent access to TIPS in a laddered format, making it a compelling tool for retirees looking for steady inflation-protected cash flow.
While investors remain in the workforce, many benefit from salary adjustments that accommodate inflation. That said, this perk is largely absent for retirees, who cover cost-of-living expenses through other means.
Yes, Social Security benefits receive an annual Cost-of-Living Adjustment (COLA) to help keep their benefits apace with inflation. However, many retirees use bond strategies in the hopes of providing regular, consistent income to maintain their lifestyle. When inflation remains dominant, retirees relying on bond income see their purchasing power weaken. Furthermore, if interest rates rise due to inflation, existing bondholders may see their total returns fall.
This is why it’s important for retirees to consider allocating a portion of their nest egg to an approach that keeps the persistent threat of inflation at the forefront of its strategy. For example, many of the distribution ladder ETFs offered by Northern Trust Asset Management provide access to U.S. Treasury Inflation-Protected Securities (TIPS). For the uninitiated, TIPS adjust their principal based on the Consumer Price Index (CPI).
Tackle the TIPS Opportunity With TIPB
For a practical example, an investor who recently entered retirement may want to take a closer look at the Northern Trust 2035 Inflation-Linked Distributing Ladder ETF (TIPB). TIPB provides exposure to the advantages of TIPS through a disciplined, laddered format.
TIPB’s laddered portfolio separates its rungs by calendar year, ranging from 2025 to 2035. The Northern Trust team then fills each rung with TIPS that mature during the specified calendar year.
However, TIPB — and the distributing ladder ETF lineup as a whole — differs from traditional bond ladder ETFs in its principal-handling approach. Traditionally, when a bond reaches maturity in a bond ladder, its principal is reinvested in the next rung. That creates continuous, laddered exposure.
Instead, TIPB and other distributing ladder ETFs opt to return that principal to their investors annually. This provides an additional source of returns that can bolster a retiree’s spending power while also offering a more consistent, predictable stream of cash.
Inflation can be a burden on wallets of all sizes. However, the flexibility of the ETF wrapper can make the pain of inflation much more manageable. With funds like TIPB, retirees can stay on track to meet their lifestyle goals while minimizing inflation’s impact on their income.
Originally published on ETF Trends
For more news, information, and strategy, visit the Bond Ladders Content Hub.
Disclosures:
ETF investing involves risk, and principal loss is possible. Shares of any ETF are bought and sold at market price (not NAV). They are not individually redeemed from the ETF. Brokerage commissions will reduce returns. The net asset value of the Northern Trust ETFs will decline over time as income payments are made to shareholders. Individual bonds carry an obligation to fully return principal to investors at maturity, however ETFs have no such obligation.
Before investing, carefully consider the investment objectives, risks, charges, and expenses. This and other information is in the prospectus and a summary prospectus, copies of which may be obtained by visiting www.flexshares.com. Read the prospectus carefully before you invest.
Northern Funds Distributors, LLC, distributor. Northern Funds Distributors, LLC and FlexShares are not affiliated with Northern Trust.
All investments are subject to investment risk, including the possible loss of principal amount invested. Investments do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Not FDIC insured | May lose value | No bank guarantee
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