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Let's say I have an account with $30,000 set aside for long-term unemployment, medical emergency, etc. This account will most likely (and hopefully) remain unused for at least 5-10 years. I could place it into a savings account, but even the best online banks have an interest rate of around 1%, which doesn't even come close to meeting the average inflation rate of 3%. Even short-term bond funds are less than 1.5% annually.

What is the least unsafe investment vehicle where I can place my money that will at least meet a 3% inflation rate?

  • Can you edit and add country tag. Investment options differ country to country and so does inflation and taxes. Can you also clarify that you are looks at returns less of taxes equal to inflation or just returns equal to inflation. – Dheer Dec 15 '15 at 11:34
  • @Dheer sorry, meant to put the country tag. As far as taxes go, obviously meeting inflation post tax would be great, but I'd be happy with just not losing money year over year to inflation. – Soviero Dec 15 '15 at 11:37
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    FYI, inflation isn't 3%. The Fed's ongoing, long-term target is 2%, and we're currently below that. – Mike Haskel Dec 15 '15 at 14:59
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    @MikeHaskel: No, someone's index based on cherry-picked basket of goods is below that. YMMV applying it to any real-world expense. OP mentioned that the fund is intended to cover medical expenses, which are growing far faster than 3% annually. – Ben Voigt Dec 15 '15 at 16:29
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    Some good charts to show @MikeHaskel 's point: usinflationcalculator.com/inflation/current-inflation-rates – David Grinberg Dec 15 '15 at 16:47
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This is subject to some amount of opinion, but I think that Treasury Inflation Protected Securities (TIPS) are closest to what you describe. These are issued by the US Treasury like a treasury bond, but the rate is adjusted for inflation.

https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

I see your comment about taxes. TIPS are exempt from state and local taxes, but they are subject to federal tax on the income and on the growth of the principal.

  • Can you provide any advice about what duration(s) would be appropriate for this investment purpose? – Mike Haskel Dec 15 '15 at 14:58
  • @MikeHaskel No, I think that such advice would have to be made in context of a person's individual goals and financial situation, which is too personal for this format. Also, to be clear, I don't necessarily recommend (or recommend against) TIPS in general. The OP asked for a specific type of investment, and I named one that matches the criteria provided. As far as I know, by the way, it is the only such investment vehicle meeting those criteria, but I wouldn't be shocked if someone else could name another. – user32479 Dec 15 '15 at 15:01
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    Minor warning: note that the base rate on TIPS can go negative, so that, technically, they don't necessarily keep up with inflation. – user11599 Dec 15 '15 at 21:14
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    As I understand it, you are only guaranteed the quoted return over inflation if you hold the bond to maturity; you can sell early, but I assume you just get whatever market price is. If this is to be used as an emergency fund, then that may or may not be enough liquidity. – Nate Eldredge Dec 16 '15 at 0:29
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Series I Savings Bonds would be another option that have part of their return indexed to inflation though currently they are yielding 1.64% through April 30, 2016 though some may question how well is that 3% you quote as an inflation rate. From the first link:

Series I savings bonds are a low-risk savings product. While you own them they earn interest and protect you from inflation. You may purchase electronic I bonds via TreasuryDirect or paper I bonds with your IRS tax refund. As a TreasuryDirect account holder, you can purchase, manage, and redeem I bonds directly from your web browser.

TIPS vs I Bonds if you want to compare these products that are rather safe in terms of avoiding a nominal loss.


This would be where a portion of the funds could go, not all of them at once.

  • I wasn't aware of this option. Interesting, although it appears that it might be difficult to invest the $30k the the OP specified since there's a lower per-year limit on purchase of savings bonds. (See first link in this answer.) Still +1. – user32479 Dec 15 '15 at 16:19
  • It would only take 3 years for a single person to turn a $30k emergency fund into I-bonds. It would take less time if there are two people (e.g. a married couple). In the grand scheme of things, not a big deal. Do note that I-bonds can't be redeemed in the first year, so depending on risk-averseness and expected acuteness of emergency (by which I mean, needing all $30k at once), you might want to come up with an extra $10k during the transition, so that there's always $30k available. – stannius Dec 20 '15 at 20:28
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There are two industrial sectors with a recent history of raising revenue and profit faster than inflation: education and health care. While there is indeed some political risk, my assumption is these sectors would continue to beat inflation even under a theoretical socialist President Bernie Sanders. There are several such sector funds available from popular low ER mutual fund companies; I don't believe this forum likes specific commercial investment touting so I decline to name specific ones.

  • Care to explain the down votes? TIPS and I Bonds have political risk too: Senator Ted Cruz has flirted with US bond default and may continue to do so as senator or theoretical president. The OP is entitled to a spectrum of answers to choose what fits his definition of risk and safety. There is no free lunch. Developing risk through discussion adds utility. – user662852 Dec 16 '15 at 12:09
  • If the US government defaults on treasury bonds, education and health care stocks will plummet just like the rest of the market. Also note that just because education and healthcare prices have risen faster than inflation in the past, does not mean they will continue to do so, nor even if they do, does it mean that stocks in such companies will rise faster than average stocks. – stannius Dec 20 '15 at 20:30

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