Final answer:
Treasury Inflation Protected Securities (TIPS) safeguard investors' retirement savings against inflation by adjusting the bond's principal value to the inflation rate. They provide a real rate of return and security for those worried about the long-term purchasing power of their savings. TIPS can be particularly important when economic policies may lead to high inflation, affecting investors and the economy.
Step-by-step explanation:
Investors concerned about the impact of inflation on their savings, such as those saving for retirement, might consider purchasing Treasury Inflation Protected Securities (TIPS). TIPS provide a safeguard by adjusting the principal value of the bond with inflation and paying interest based on the adjusted principal, ensuring a real rate of return that is above the inflation rate. This feature is particularly attractive for retirees who need to ensure their savings retain purchasing power over time.
When countries experience a rising percentage of debt to GDP, there may be an inclination towards inflationary measures to reduce the debt's real value, potentially upsetting financial markets and undermining confidence in fiscal management. TIPS can serve as a hedge for investors against such inflationary policies because they offer a built-in adjustment mechanism for inflation.
Uncertainty about future inflation and complex economic situations, such as the response to the pandemic in 2020, has made investors more cognizant of the importance of protecting against inflation. Whilst some people's incomes or savings may be indexed to inflation, not everyone benefits equally, and that includes businesses and less financially savvy individuals.