Are I bonds for you?
Unless you’ve been living on another planet, you certainly know that we are experiencing the highest inflation in the U.S. in 40 years. The latest Consumer Price Index (CPI) figures came out on July 13th, indicating year-over-year inflation of 9.1 percent. Ouch! You don’t need to be an economist to know that or to read economic news. You know it every time you fill up your gas tank, go shopping for groceries, or almost anything. I don’t know when it is going to come down to a much better level, but I suspect it isn’t any time soon.
A question I often get is, “where can I put my savings money that is safe and can at least keep up somewhat with inflation.” Funny you should ask. It’s not often that the U.S. government offers a financial gift. But when it does, it’s your job to take it.
You may have heard about U.S. Treasury inflation bonds, or I bonds, which are 30-year bonds issued every six months on the first business day of May and November. You can purchase them anytime, but you will be buying the most recent issue date. The last issue in November 2021 will pay 7.12% over the first year. The current issue in May will pay an estimated 9.62% over the first year. I don’t know any other way to get nearly double-digit interest on a U.S. government-guaranteed bond.
While guaranteed by the U.S. Government, the process of buying I bonds is not very user-friendly but certainly not difficult. They can be purchased only directly from the U.S. government at www.TreasuryDirect.gov or by using part of your federal tax refund. Unfortunately, I can tell you how but I can’t do it for you. While this means maintaining another account, it also means that there are no brokerage or transaction fees of any kind.
The bonds cannot be redeemed for one year. If holders redeem between one and five years, they forfeit the last three months of interest. For example, those who buy the current May issue could hold for one year and one day, earn 9.62%, redeem them, give back the three months (2.5%) of interest, and still walk away with 7.22%. That’s certainly not bad in today’s environment. If you redeem them anytime in the first five years, you lose the last three months’ interest. Still not bad.
I bonds pay a composite interest rate that combines a fixed rate with the current inflation rate compounded semi-annually. For many years, the fixed rate has been zero, and it’s likely to be zero again in the future. This leaves the interest on I bonds completely dependent on the current inflation rate. That’s why you probably never heard much about them in the past when inflation was much lower. As inflation falls in the years ahead, the interest on I bonds also will drop. That’s fine because investors can redeem them any time after the first year. While inflation may drop back in the future, I would guess it isn’t getting back below 2 percent anytime soon.
The really frustrating part about I bonds is that purchasers are limited to $10,000 each year, or $15,000 if $5,000 of the purchase comes from a tax refund. Some members of Congress have proposed raising the limit to $100,000 per person, but we’re not there yet.
The bonds must be owned individually. Married couples can buy $10,000 each, and families can buy $10,000 per child. The only catch is that each person must have their own account. Corporate entities also can purchase $10,000 worth of I bonds, so you can invest in them in your corporation, partnership, or trust.
If you haven’t opened an account or several accounts at www.TreasuryDirect.gov and you have long- or intermediate-term savings in the money market or CDs earning almost nothing, I suggest you check this out. If you’re unsure how to do this, feel free to call me, and I’ll walk you through it. Thanks for reading.
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About Nick Massey
Nick Massey is a retired financial advisor and CFP, and former President of Massey Financial Services. He can be reached at firstname.lastname@example.org.