Author Topic: I Bonds, worth a look, especially before May  (Read 978 times)

Indexer

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I Bonds, worth a look, especially before May
« on: April 18, 2019, 07:09:02 PM »
I only started looking at I bonds recently, after reading another poster on these forums was using them for their EF*.  Since most cash instruments, and even many bond investments, under perform inflation over time I-bonds make for a great Emergency Fund since they are guaranteed to at least keep up with inflation. I decided to buy some, did a lot of research on 'when' to buy them, and there is a high likelihood "now" is the answer.

Background: I-bonds function like a CD that adjusts for inflation. They are guaranteed by the government, the principle doesn't fluctuate(like other bonds), and they pay you interest that is guaranteed to keep up with inflation. When you buy an I bond you can't get the money back for a year, there is a small penalty if you take it back out within 5 years, but you can hold onto them for 30 years if you like. Oh, and you can defer taxes until you close the I-bond if you like.


Calculation: A fixed rate + inflation adjustments. The inflation part of the rate is variable and changes every 6 months based on inflation. If we have deflation you might not get any interest at all. The fixed rate is fixed for 30 years.

Right now that calculation is 0.5% fixed + 2.32% for inflation = 2.83%.

Interest rates: If rates drop again your I-bond will still at least pay 0.5% + inflation which is likely to be higher than CDs and saving accounts in a low rate environment(remember 0.01%). On the other hand, if we see higher rates in the future, you could just switch out your I bonds for new I-bonds with higher fixed rates.

Why now?  The fixed rate is why. Since 2009 the rate has been steadily around 0% + inflation. They hit 0.5% + inflation in November, and while the inflation adjustment changes every 6 months, the fixed rate is fixed for 30 years. I-bonds bought on or after May 1st will receive a new fixed rate. Rates on treasury bonds and inflation protected bonds have been falling since November so it is highly likely that the new fixed rate will be lower than 0.5%. If you want an EF that is as safe as a CD and guaranteed to outpace inflation over time it's a good time to research I-bonds.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

*They can't replace your entire EF instantly. You can only buy 10k at a time, and you have to hold them for at least one year.

leland

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Re: I Bonds, worth a look, especially before May
« Reply #1 on: April 21, 2019, 11:59:40 AM »
I've been doing I bonds for a few years as a supplement to cash ... At $10k/year it doesn't amount to much, but it will keep my mind busy in 25 years trying to remember why the heck I did this to cause a tax impact for the interest so I'll also get the benefit of staving off or accelerating senility :D

Curious as to the "switch out your I bonds for new I-bonds with higher fixed rates" - how does that work? Take the penalty, tax hit then re-buy subject to the 10k/yr maximum? That probably doesn't pay. Also I thought the point of the I bond was that it floats so you don't have to worry about it?

GizmoTX

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Re: I Bonds, worth a look, especially before May
« Reply #2 on: April 21, 2019, 12:48:32 PM »
I-bonds were what DS bought with his savings when he was young, after we discovered that banks essentially paid nothing. He's 25 now & still has them. Yes, he considered cashing them out when he was in a lower tax bracket, but they're still earning more than CDs.

Indexer

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Re: I Bonds, worth a look, especially before May
« Reply #3 on: April 21, 2019, 02:22:30 PM »
Curious as to the "switch out your I bonds for new I-bonds with higher fixed rates" - how does that work? Take the penalty, tax hit then re-buy subject to the 10k/yr maximum? That probably doesn't pay. Also I thought the point of the I bond was that it floats so you don't have to worry about it?

If you were going to buy 10k that year anyway it would be pointless to sell existing bonds since you would still be limited to only buying 10k. However, let's say someone wanted 20k at that was it. If rates went up a good amount they could close 10k of existing I-bonds and buy 10k worth at the higher rates. Yes, if you did it in the first 5 years there would be a small penalty(similar to a CD), but that should be negligible compared to years, possibly decades, of higher rates.

The inflation rate floats, but the fixed rate is fixed for 30 years. In the 90s there were I-bonds paying 3%+inflation, most of the past decade they have been 0%+inflation, and now they are 0.5%+inflation.

leland

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Re: I Bonds, worth a look, especially before May
« Reply #4 on: April 21, 2019, 04:33:02 PM »
If you were going to buy 10k that year anyway it would be pointless to sell existing bonds since you would still be limited to only buying 10k. However, let's say someone wanted 20k at that was it. If rates went up a good amount they could close 10k of existing I-bonds and buy 10k worth at the higher rates. Yes, if you did it in the first 5 years there would be a small penalty(similar to a CD), but that should be negligible compared to years, possibly decades, of higher rates.

Gotcha, makes more sense now on the two IF conditions ... I've been doing my 10k/yr for five years. Maxing out on that 0% fixed interest :) Figure I'll stop in another five years or so. Then maybe worth exiting a 5+ year model for one with much higher interest should that situation occur.

CorpRaider

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Re: I Bonds, worth a look, especially before May
« Reply #5 on: April 22, 2019, 08:38:11 AM »
Good post.

I also "recycled" some of my I bonds with much lower real returns/fixed (most of them were @ 0 real/guaranteed rates) rates earlier this month. 

I wanted to do this partially to see how long it would take to cash in the bonds, as I've never sold any before.  If memory serves, the cash was available for reinvestment the next day (it was definitely fast).  I suppose there would be a lag from the bank in crediting your account for the deposit (I didn't test that part).  But I think they are sufficiently liquid for my  (ef/bond hybrid) purposes.

I wish they would bring back paper bonds for contributions, it would make it a lot easier to help like older relatives and make gifts and whatnot.
« Last Edit: April 22, 2019, 12:49:15 PM by CorpRaider »