I Bonds: Should we All run out and buy them?
A client called the other day after she heard someone announce at a group dinner, “You can get almost ten percent interest on I Bonds right now! We should ALL be buying I Bonds!”
Her question: “Should I run out RIGHT NOW and buy these?”
I Bonds have been growing in popularity – if you are looking into purchasing them right now like our client, you are very on trend. Over the last six months, almost 11 billion in I bonds have been issued (almost 10x the amount issued in the same period in 2020 and 2021).
What is causing the rise in popularity for I Bonds? Until very recently, finding risk-free returns on investments has been almost non-existent. Interest rates have been at a generational low with assets like savings accounts and CDs and bonds getting virtually nothing in yields or interest. I Bonds offered one of the few avenues to find virtually risk-free returns.
Let’s start with some basic facts about IBonds:
Series I Bonds (or IBonds for short) are issued by the US Treasury Department.
You can purchase up to 10k annually of I Bonds.
They earn interest in two ways: a fixed rate AND a variable rate moving with inflation. (specifically, the Consumer Price Index) – the goal is to give investors a modest return while protecting purchasing power.
But are I Bonds a good fit for you? Here are some pros and cons in the fine print that could help you determine the answer:
Pros:
Virtually no risk to the principal.
The interest rate will be higher when inflation is rampant, which will help you not lose purchasing power.
Cons:
If you cash them out between one and five years, you will lose the previous three months of interest.
In periods of low inflation, I Bonds might not be your best tool to build and grow your money. For example, from May 2016 to October 2016, the composite rate was 0.26%.
I Bonds are only sold through Treasury Direct, and the buying process can be cumbersome.
You are not going to get great reporting tools and they aren’t integrated with your other investments (pointer: make sure you print the paper trail and document the account well).
Overall, if you are trying to decide whether or not to purchase I Bonds, you should think about how they fit into the picture of your larger investment portfolio. For some people, it might make more sense to purchase a treasury bond or a CD at a fixed rate as interest rates have been on the rise (as an example, there are currently two year CD’s with an interest rate of almost 5% available). Some might prefer this as opposed to the variable rates of the I Bond (for example, the rate from May – November 2022 was 9.62%, but the current rate for the next six months is 6.89%. Beyond next May the rate of interest is unknown).
Whatever your scenario may be, I Bonds should work alongside your other assets for a comprehensive plan that will help you reach your retirement goals.
Disclaimer: this information is for illustrative purposes only and is believed to be accurate at time of publication. In the case or error or omission, please refer to the IRS or Treasury Department websites.
