EE Series Savings Bonds

[ThePlatypus]

Hi Mustachians! I'll try to keep my initial post short and add more information as needed.

I have a set of EE Series Savings Bonds with issue dates ranging from 1994 - 2003. I've been trying to read and understand how the interest rates are calculated and the Treasury seems to have made it as difficult as possible. There are different rules for different time periods, etc.[1] So, that's fun.

I have a few bonds earning 4.00% at the moment, but many more that are earning ~0.6% :(. So, do I cash them all in or only the low earners? I think some of the low earners are about to finish their first maturity cycle and in theory will start earning closer to the 4%. Once the newer bonds reach that first maturity, their interest is based on the Treasury Yield average for the last 5 Years. It seems that once upon a time that was a good thing, but this [2] make it seem that those days are long over. I'm guessing I should ditch them all and put the money into finishing out a student loan and then VBINX for better returns?

[1] http://www.savings-bond-advisor.com/series-ee-savings-bond-interest-rates/
[2] http://finance.yahoo.com/q/bc?t=my&s=^FVX&l=on&z=l&q=l&c=&ql=1&c=^GSPC

[fiveoclockshadow]

I think that is really going to depend on each issue and its current value.  Be sure to take note of this:

Treasury guarantees that an EE Bond (whether paper bought at half of face value or electronic bought at full face value) will be worth at least double its purchase price when the bond reaches original maturity. Original maturity is a point part way into the bond's 30 year life.

    For EE Bonds with issue dates from May 1, 1997 through May 1, 2003, original maturity is 17 years after the issue date.
    For EE Bonds with issue dates from June 1, 2003 through April 1, 2005, original maturity is 20 years after the issue date.

This is a very important aspect of EE bonds in a low interest rate environment.  Once they hit maturity they immediately acquire face value even if they haven't gotten there yet based on interest accumulation.  So depending on the interest rate history of the bond you may very much want to at least hold them to maturity.

Next, EE bonds are very different from nominal Treasuries in that they don't have interest rate risk - that is their value doesn't decline in a rising interest rate environment.  Right now with extremely low interest rates and QE planned to be scaled back that needs to be factored into the equation.  Also, be aware of the difference between bond funds and individual bonds - they behave differently.  Individual bonds have a guaranteed face value at maturity, bond funds do not.  This is another consideration in a environment where interest rates may rise (note the use of "may" really no one knows what will happen).

It is complicated.  But consider that right now EE bonds even at 0% might be a good buy.  Why?  Because of the guaranteed doubling at maturity.  That means new EE bonds have 3.53% yield if held to the full 20 years and yet also a certain degree of short term principle protection not found in a long term treasury that is subject to interest rate risk.

Sorry if that is a long and complicated answer but your question is very, very much a "it depends" kind of thing.  And you must be very careful when comparing savings bonds to treasury bonds to bond funds.  They are all actually rather different instruments.

[ThePlatypus]

I included some of my actual data below if it helps. All of the 4% earners have doubled in value already (reached face value). Another 9 are showing face value, but low interest rates. I think they will start earning ~4% after their next accruals...

So, from your post it seems that I should wait at least until they reach face value before I cash them in at a minimum, but this still may not be the best course of action. I guess I'm hung up because even the guaranteed doubling only results in 3.5-4% returns and VBINX is at 7% over the last 5 years. Which is more likely to earn me more money over the next decade or two? I thought we weren't supposed to worry about dips in the stock market since we are investing for the long term and dips are when we get more shares for cheap. Sorry, I'm still in early stages learning all this stuff.

Right now with extremely low interest rates and QE planned to be scaled back that needs to be factored into the equation.

What interest rates and quarterly earnings are you referring to? Part of my problem is not knowing what equations/comparisons to use.

Also, be aware of the difference between bond funds and individual bonds - they behave differently.

Everything I have is an EE series bond; I have no bond funds.

Code: [Select]

Issue Rate Value
Jan-94 4.00% $108.28
Mar-94 4.00% $107.56
Apr-94 4.00% $107.20
Jun-94 4.00% $106.48
Aug-94 4.00% $105.80
Oct-94 4.00% $105.08
Dec-94 4.00% $104.40
Feb-95 4.00% $103.72
Mar-95 4.00% $103.36
Jun-95 0.65% $100.68
Jun-95 0.65% $100.68
Aug-95 0.59% $100.40
Oct-95 0.59% $100.40
Dec-95 0.65% $100.28
Feb-96 0.59% $100.00
Mar-96 0.59% $100.00
May-96 0.65% $100.00
Jul-96 0.65% $100.00


[footenote]

I inherited EE bonds recently. FYI, the interest is subject to federal taxation when you cash the bonds:
http://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eetaxconsider.htm

So you may want to estimate tax impact, avoid cashing during a year when the additional income could impact your rate, etc.

[fiveoclockshadow]

Ah, sorry to confuse you I didn't read carefully and read VBINX as a bond fund rather than a balanced fund!

By QE I meant the Fed's Quantitative Easing which has inflated bond prices and increases the likelihood they will drop sometime in the future when the Fed stops buying up bonds left and right.

Anywho, assuming you are young you do want equity exposure and so VBINX gives you that compared to some bonds.  Going with a total market fund would get you even more exposure. You will have to decide what you can tolerate. With two funds, one bond and one stock market, you can create whatever balance you want besides the 60/40 split of VBINX.

So, if you are going to have some bonds which is better - your series EE or a bond fund?  For example instead of selling all your EE you could keep some or all of them and invest your new savings in a stock market fund until you reach the stock bond ratio you want.

So how to decide which to do? That was what I was referring to in my post - keep your EE or switch them to another bond. I'm not sure switching to another bond is a good idea. You'll need to do a little homework on bonds but understand most bonds you buy and any bond fund will drop in principle as soon as interest rates rise.  In fact, if they rise quickly enough a bond fund can actually go down faster than it is earning interest and end up with an overall negative return for a long holding period. The magic of EE bonds is they never lose principle as interst rates rise. So if an EE bond is yielding more than similar bonds (and at 4% they are better than any other treasury) in an environment where everyone is worried about rising interest rates it may be better to hold the EE bonds at least until their yield is lower than intermediate term treasuries.

I'm sorry that is a pretty esoteric discussion. The unfortunate thing about bonds is people think they are simple when in fact they are very complex. And EE bonds are odd balls that are difficult to compare to normal bonds.

Now if you are early on in your saving and plan to be investing for awhile you can of course just not worry about it, dump the EE bonds and buy that balanced fund so you have a simple easy to understand portfolio. That will probably serve you really well in the long run.  Honestly very early on it almost doesn't matter what you put your money in as long as you save rather than spend it. If you are just starting out you could sell those EE bonds or keep them for a few years and the end result would hardly different by the time you retire.

[ThePlatypus]

Thanks for the response! I'm still young (30) and I have enough money that I can still start investing without cashing out the EE bonds. I've been a decent saver compared to most people I know, but I am nowhere near MMM level. The simple easy-to-understand portfolio option is enticing, but I'll keep reading and learning before I decide to cash out the bonds. Once I do, I can't reverse that decision so I want to make sure it is the right one.

I realized that every time I've said VBINX so far - I really meant the Vanguard Total Stock Market Index Fund from:
http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/

So, that probably confused the matter some since VBINX is a 60/40 stock/bond split, from what I can tell. Sorry! I'm not looking into trading one type of a bond for another - I'm trying to determine whether to trade in my EE bonds to 1) pay off a smallish student loan and 2) invest the money differently for better returns. I can pay off the loan without cashing the bonds.

[aj_yooper]

I think fiveoclockshadow makes excellent points re your bonds.  I would go very slowly on this as it could cause taxes you don't want.  These types of bonds can be very useful in a portfolio.

[fiveoclockshadow]

Great, thanks for the clarification!

So here's what I would do in your situation:

You need an emergency fund regardless.  These EE bonds right now are going to be excellent as part of an emergency fund - yielding 4% is way above savings accounts and CDs.  Since they are a savings bond (i.e. principle never drops) they are ideally suited to an emergency fund (bond funds aren't as their principle can drop).  The other benefit is they grow tax deferred which a savings account or bond fund will not (i.e. with EE bonds you pay no tax until you redeem them which is an advantage for compounding).  As you said you can't undo your decision, so for the next few years I'd just keep these around as part of your emergency fund.  In another ten years or so they will stop earning any interest (at 30 years) at which point it will certainly be time to move the funds to something else.

Given your age (30) being nearly 100% equities is just fine.  So all your new investments can go to VTSMX (total stock market).  In a few more years as your investment accounts grow you may begin to want to diversify a bit more (some international for example and maybe start allocation a bit into bond funds) but right now no need to worry about it.

And yes, pay off that student loan as soon as practical but I think keep your EE bonds since you say you can manage that.

[Roadrunner53]

This conversation is very old and from 2013. I have questions regarding Series EE bonds and would like help.

I have a lot of bonds that I bought thru payroll deduction back in the late 80's to 2004. The older ones are starting to mature this coming year. My original plan was to cash the matured ones in 2019 and that would be approx. $14,700. Each bond was bought for $50 and face value is $100 give or take some might be a few dollars over $100 now.

Now, if I back calculate face value of $14,700 was originally worth $7,350.

I am confused on how taxes work on this. Do I add $7,350 or $14,700 to my income and it then comes out of the tax bracket I am in, as an example the 12% bracket? But I am thinking I should not be taxed on the original investment.

Now I am worried this is going to kick me into another tax bracket. The Series EE bonds are not taxed by the State only Federal taxes.

I hope some of this makes sense!

[LadyStash]

My parents started buying me Series EE Savings Bonds in 1986, and I received a few more through incentive programs in middle and high school. I cashed in the first group in 2016 when they matured, and a bond with a face value of $100 (bought in the 1980s for $50) paid $230.64. Based on what you say below, Roadrunner53, your bonds are likely worth more than you think because of that sweet 4% of compounding interest!

When I cashed my first batch in, the bank gave me a receipt and told me to keep it for tax purposes, though I later got an official form from them that listed the interest earned on those bonds (and it was the interest, not the principal / more info here: https://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eetaxconsider.htm). I don't have a huge quantity of bonds, so I haven't been adversely affected tax-wise each year when I cash them in. You might want to consult a tax professional to see if it makes sense to cash a batch in all in at once or a little at a time until there are minimal tax implications.

To know where you stand for sure in terms of the current value of your bonds, build a bond inventory using the Treasury's Savings Bond Calculator (https://www.treasurydirect.gov/indiv/tools/tools_savingsbondcalc.htm%20). It takes a little while to input the information the first time, but you can save it and it updates it automatically whenever you open your file! I love looking at mine to see how my bonds are doing and when I can cash them in!

[terran]

This conversation is very old and from 2013. I have questions regarding Series EE bonds and would like help.

I have a lot of bonds that I bought thru payroll deduction back in the late 80's to 2004. The older ones are starting to mature this coming year. My original plan was to cash the matured ones in 2019 and that would be approx. $14,700. Each bond was bought for $50 and face value is $100 give or take some might be a few dollars over $100 now.

Now, if I back calculate face value of $14,700 was originally worth $7,350.

I am confused on how taxes work on this. Do I add $7,350 or $14,700 to my income and it then comes out of the tax bracket I am in, as an example the 12% bracket? But I am thinking I should not be taxed on the original investment.

Now I am worried this is going to kick me into another tax bracket. The Series EE bonds are not taxed by the State only Federal taxes.

I hope some of this makes sense!

You would pay tax on the gain (amount you receive minus the amount you paid).

You may know this, but it's often the source of people's angst about going up a tax bracket, so I'll mention it in case you hold this common misconception: when you go into the next tax bracket, only the amount of income in that tax bracket is taxed at the new rate. Going into the next tax bracket does not subject all of your income to the new bracket.

[Roadrunner53]

LadyStach, Thanks for your insight. I am going to plug in my bonds tomorrow to find out the value of them. WOW! I certainly hope my bonds are worth what you say yours were cashed in for! I will be shocked if it is true!