Author Topic: Should I cash in my bonds?  (Read 871 times)

Longwell

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Should I cash in my bonds?
« on: March 20, 2017, 07:11:55 AM »
I am fortunate that my grandparents bought me a good amount of bonds as I was growing up. I went through and checked the value of these bonds and found that a good majority of these bonds are making a pretty reasonable 3.5-4% which I am pretty happy with. However, there are 7 of these bonds that are only making 1.07%. Wouldn't it be in my best interest to cash these out now and just reinvest that money into my index funds? Appreciate any help in advance!



L.A.S.

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Re: Should I cash in my bonds?
« Reply #1 on: March 20, 2017, 07:34:33 AM »
It all depends on where they fit into your overall investment plan.  But, personally, I'd leave them alone. 

Just mentally account for them as part of your emergency fund.  They are not quite as liquid as cash in a savings account, however you should be able to put something on the card and cash in enough bonds to pay the balance by the next bill should you need to. For emergency fund money, this is a pretty good rate.  Most online high-interest savings are yielding around 1% right now.

U.S. savings bonds have the benefit of not being interest rate sensitive.  Most other bond prices will if interest rate changes.  So you could suffer a capital loss if you invest in regular gov't bonds and the rate goes up.  But this does not happen with U.S. Savings bonds.  Although the market interest rates on other bonds may go up and your rate could become unattractive, you will not suffer a capital loss, per se. 
« Last Edit: March 20, 2017, 07:36:25 AM by L.A.S. »

Longwell

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Re: Should I cash in my bonds?
« Reply #2 on: March 20, 2017, 07:38:16 AM »
They are pretty much just extra "bonus" money at this point. I just want to maximize what this money can make for me and returns of 1% aren't that great. I was just thinking that they would be able to make more money if I cashed out the low interest ones and put that money into my Betterment account.

VoteCthulu

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Re: Should I cash in my bonds?
« Reply #3 on: March 20, 2017, 09:44:42 AM »
I would cash them in and re-invest them, but not in Betterment  (the fees aren't worth the benefits IMO). Your situation could call for keeping them, though, so consult your IPS as to how much you should keep in cash and low interest very stable bonds.

Ramparts

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Re: Should I cash in my bonds?
« Reply #4 on: March 20, 2017, 10:25:21 AM »
What kind of bonds are these? If they are Series EE, there are some weird rules about the bond being guaranteed to double after a certain period of time. So if you are making 1.07% now and sell it just before it is guaranteed to double, you are potentially forgoing lots of interest. This site seems to explain it a little better:

http://savings-bond-advisor.com/series-ee-interest-rate-rules/
http://savings-bond-advisor.com/series-ee-savings-bond-interest-rates/

But poke around more by searching for things like "Series EE guarantee double" or "how Series EE bonds work" if you do indeed have those types of bonds so you can get a solid understanding of how they work before you make a decision to sell. The rules also seem to vary based on when the bond was purchased.

As a particular example to you, if you sell your 09/2000 bond today you will get $775.20 back. But according to the site above, bonds issued in this timeframe are guaranteed to double after 17 years. So I think you will find that if you go and price this bond again in 6 months, you'll see that you could sell it for $1000 (the coupon amount, since the bond was probably purchased for $500). That is obviously a far cry from 1.07%, and if you sell that bond today there is no safe alternative investment that will get you to $1000 by this September. So please take the time to do a little more research so that you understand what exactly it is that you have and the rules surrounding it. At the very least, wait until September and see what happens to that bond!

I am (fortunately!) in a similar situation to you, and I just hold the bonds until full maturity (30 years) and then cash them in and reinvest according to my IPS.

Car Jack

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Re: Should I cash in my bonds?
« Reply #5 on: March 20, 2017, 11:27:01 AM »
As Ramparts mentions, EE bonds double in 20 years.  Otherwise, the interest rate is pretty dismal.  So if any are EE, keep them until they're 20 years old.  I doubt that any of the 1% bonds are iBonds unless you are not adding the rate plus inflation portions.  If you use the savings bond wizard, it'll give you both rates (which you add together to get the combined rate).

Also, remember that if you cash the bonds in order to get more than the 1%, you're going to pay federal tax on the gain.  So you'll start with less money.  Also, savings bonds are always state and local tax free.  If you live in a state with an income tax, take that into consideration if you plan to put the money somewhere else that's taxable.

Longwell

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Re: Should I cash in my bonds?
« Reply #6 on: March 21, 2017, 06:48:42 AM »
What kind of bonds are these? If they are Series EE, there are some weird rules about the bond being guaranteed to double after a certain period of time. So if you are making 1.07% now and sell it just before it is guaranteed to double, you are potentially forgoing lots of interest. This site seems to explain it a little better:

http://savings-bond-advisor.com/series-ee-interest-rate-rules/
http://savings-bond-advisor.com/series-ee-savings-bond-interest-rates/

But poke around more by searching for things like "Series EE guarantee double" or "how Series EE bonds work" if you do indeed have those types of bonds so you can get a solid understanding of how they work before you make a decision to sell. The rules also seem to vary based on when the bond was purchased.

As a particular example to you, if you sell your 09/2000 bond today you will get $775.20 back. But according to the site above, bonds issued in this timeframe are guaranteed to double after 17 years. So I think you will find that if you go and price this bond again in 6 months, you'll see that you could sell it for $1000 (the coupon amount, since the bond was probably purchased for $500). That is obviously a far cry from 1.07%, and if you sell that bond today there is no safe alternative investment that will get you to $1000 by this September. So please take the time to do a little more research so that you understand what exactly it is that you have and the rules surrounding it. At the very least, wait until September and see what happens to that bond!

I am (fortunately!) in a similar situation to you, and I just hold the bonds until full maturity (30 years) and then cash them in and reinvest according to my IPS.

Everything that I'm seeing is only showing that bonds issued after 2005 will double. Ones before that will be adjusted to reach their face value if they haven't already when they hit maturity. Hopefully I'm wrong though because I would love to see $1000 become $2000 overnight!

MustacheAndaHalf

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Re: Should I cash in my bonds?
« Reply #7 on: March 21, 2017, 07:42:14 AM »
If these bonds don't have the "EE" feature of doubling, you might consider cashing them out and investing in something else.  In the 25% or higher tax bracket, Vanguard's tax-exempt bond funds beat out the similar regular bond funds.  Instead of earning 1.07% and getting 0.80% after tax, you could buy into a Vanguard tax-exempt bond fund and earn 2.2% after tax.  Otherwise 12-15 years is a long time to wait at 1% interest.

Ramparts

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Re: Should I cash in my bonds?
« Reply #8 on: March 21, 2017, 10:00:38 AM »
Everything that I'm seeing is only showing that bonds issued after 2005 will double. Ones before that will be adjusted to reach their face value if they haven't already when they hit maturity. Hopefully I'm wrong though because I would love to see $1000 become $2000 overnight!

You can go here for details on other dates: https://treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eeratesandterms.htm

For example, your bonds between May 1997 and April 2005: https://treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eeratesandterms_eebondsissued051997_042005.htm

Under the section labeled "How does the value of my EE Bond grow?":

Quote
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...

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

If an EE Bond has not earned enough interest to be worth an amount that is double its purchase price on the date it reaches original maturity, Treasury will make a one-time adjustment on the original maturity date of the bond to make up the difference.

If these are paper EE Bonds, then your $1000 bond was actually purchased for $500, and the "doubling" will mean that the bond will be 2 * 500 = $1000 (ie: its face value) at the maturity date. Your 09/1999 bond has already reached the maturity date, which is why it is now over $1000, while your 09/2000 bond has not reached its maturity date (I believe it will this coming September), which is why there is such a large difference between the two bonds, despite being only one year apart and the same value. You should see the 09/2000 bond jump from $775 to $1000 in September 2017 due to the one-time adjustment feature. I think it would be a mistake to cash out those bonds that have not at least reached their initial maturity, again assuming these are indeed EE bonds (which they appear to be based on the values in your table and the doubling schedule).

iowajes

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Re: Should I cash in my bonds?
« Reply #9 on: March 21, 2017, 10:08:32 AM »
I have a ton of EE bonds. The oldest ones have decent interest rates (4%), so I am holding them until they stop earning interest (30 years).
The later ones have dismal interest rates (some are like 0.75%), so I am cashing them in and investing elsewhere once they hit their doubling date.

Longwell

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Re: Should I cash in my bonds?
« Reply #10 on: March 21, 2017, 12:05:20 PM »
I have a ton of EE bonds. The oldest ones have decent interest rates (4%), so I am holding them until they stop earning interest (30 years).
The later ones have dismal interest rates (some are like 0.75%), so I am cashing them in and investing elsewhere once they hit their doubling date.

This is exactly what my initial question was. However, it sounds like even though these bonds may have terrible interest rates they are still guaranteed to hit their face value 17 years after the issue date. Which in reality on a $500 bond for it to hit $1000 in 17 years that means it's interest rate is something like 4.25% (not really but if you did the math for it to double its value). So maybe its worth holding onto them...

iowajes

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Re: Should I cash in my bonds?
« Reply #11 on: March 21, 2017, 12:14:08 PM »
I have a ton of EE bonds. The oldest ones have decent interest rates (4%), so I am holding them until they stop earning interest (30 years).
The later ones have dismal interest rates (some are like 0.75%), so I am cashing them in and investing elsewhere once they hit their doubling date.

This is exactly what my initial question was. However, it sounds like even though these bonds may have terrible interest rates they are still guaranteed to hit their face value 17 years after the issue date. Which in reality on a $500 bond for it to hit $1000 in 17 years that means it's interest rate is something like 4.25% (not really but if you did the math for it to double its value). So maybe its worth holding onto them...

That's why my strategy for my later bonds is to hold until doubling, but not longer than that.  It's crap after that and you can get way better returns elsewhere.

My old bonds are still doing better than most CDs I can find (even though they are past doubling time)- so I think holding THEM is reasonable.