A Safe Place to Park Retirement Cash

Dear Dr. Don,With the expectation that either inflation or government interference will destroy the value of money, where would you advise I invest several thousand in cash to preserve it? We are retired, both age 77.-Amelia Ration

Dear Amelia,Purchasing power risk is a major concern when investing retirement savings. Too many investors just focus on risk to principal, investing conservatively so they know the value of their portfolio can't shrink, only to find out that it did shrink -- in terms of what the money can buy.

Currency exchange rates, interest rates and inflation are all interdependent. A weakening dollar can drive up the price of imports, result in increased commodity prices and portend future inflation.

How liquid do you need this investment to be? For liquid investments, investors should strike a balance among safety, convenience and yield. If you've got an intermediate to long-term investment horizon for this cash, then there are more investment opportunities.

I like the 20-year or 30-year Treasury Inflation-Protected Securities, or TIPS, for protecting purchasing power over time.

The shorter term issues, including five-year and 10-year, may be more appropriate for your investment horizon, but you'll give up a fair amount of yield by investing in the shorter maturities. The five-year TIPS are currently priced to yield 0.1 percent plus inflation, and the 10-year TIPS are priced to yield 1.08 percent plus inflation. I'd suggest that an investor considering the five-year TIPS also take a look at the Series I Savings Bond, which currently pays zero percent plus inflation, but gives the owner the option to defer income taxes on the earnings until the bond is redeemed or matures.

The problem with the longer-term securities in your portfolio is that you are likely to have to redeem them prior to them maturing. The securities vary in price with changes in the interest rate environment, so there's some risk to principal. There are also some tax considerations that you should discuss with your tax professional, mainly that you owe tax on the inflation earnings each year, but you only realize those earnings when you redeem the security. A plus is that you can buy these securities from the government using TreasuryDirect.

Another option is to invest in commodity or currency-linked certificates of deposit. You can learn more about these by reading the Bankrate features, "Index CD may boost returns but add risk," "Currency-linked CDs: too good to be true?" and "A little foreign change in your portfolio?" There's even an earlier Dr. Don column, "Are foreign deposits FDIC-insured?" that speaks to the difference between currency risk and the risk of bank failure.

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