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"I" for Inflation.  Is an I Bond a Good Option for Me?

"I" for Inflation. Is an I Bond a Good Option for Me?

June 22, 2022
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Have you heard about the I Bond?  It is making a name for itself because it currently offers an attractive yield to fight inflation.

I Bonds are inflation-protected savings bonds and are 100% backed by the U.S. federal government.  The “I” stands for inflation. They are designed to protect the value of your money from inflation. The interest rate on I Bonds is directly correlated with inflation. If inflation is high, the interest rate is high. If inflation is low, the rate is low.

Purchases now through October 2022 will start with an appealing 9.62% annualized interest rate.   That rate is applied to the 6 months after the purchase is made.  For example, if you buy an I bond on August 1, 2022, the 9.62% would be applied through January 31, 2023.

Sounds enticing for a federal government guaranteed investment!  Since nearly everyone can purchase an I Bond, let’s explore some key facts about this opportunity.

How often Does the I Bonds Interest Rate get Recalculated?

A new rate is set for the I Bond every 6 months, each May 1st and November 1st.  The new rate would take affect for a bond after the first 6 months of issue.  For example, if a bond was purchased in August, the new rate set on November 1st would be applied to your bond on February 1st. So, the rate in any given 6 months may be higher or lower than the previous 6 months.  Another bonus is compounding:  Every six months from the bond's issue date, interest the bond earned in the six previous months is added to the bond's principal value, creating a new principal value. Interest is then earned on the new principal.

When Do I Get Paid?

The interest and principal are paid to you when you cash the bond.

Treasury Series I Bonds are issued by the Treasury and have some other key features:

  • These are not tradeable securities; therefore, I am unable to buy these for you.

  • These are US Savings Bonds, and you must create an account on Treasury Direct and buy them there.  You must also purchase and sell them via a bank account that you intend on keeping for the life of the I Bond.

  • YOU MUST HOLD IT FOR ONE YEAR. I repeat: No liquidity for 12 months! 

  • If you redeem before 5 years, you forfeit 3 months of interest.
  • You are limited to $10,000/person annually (calendar year). You can also give I Bonds as gifts.

  • Individuals & Trusts can own bonds with a limit of $10k per year each. A married couple with a Trust could invest a total of $30k per year into I Bonds.

  • I Bonds are Federally taxable, but not at the State or Local level

Hypothetical Example

Today’s rates are extraordinarily high relative to historical numbers. According to the Federal Reserve’s comments following their last meeting, the Fed anticipates getting their arms around inflation over the next 24 months and inflation levels reducing to around 2% by 2024. So, if you held for 3 years, you would be entitled to the current interest rate for the first 6 months and adjustments going forward for each successive 6-month period. The example table below shows the purchase of 3 I bonds (perhaps 2 individuals and a Trust or 2 individuals and a gift).  It assumes the inflation component for the I Bonds remains the same for the next 6-month interest period and depicts a 3-year hypothetical return assuming inflation rates come down.

Even if inflation is managed over the next 2 years, it is still a compelling zero risk investment. Will your current bonds perform as well? Potentially, as current rates are moving into the high 3% range, rates are expected to continue to increase over the next year. Additionally, current bond prices are trading at a discount to their maturity value. It’s a question as to which choice will ultimately be better in the end, but it certainly is an option for you to consider.

There is plenty of additional information on the website www.treasurydirect.gov. Feel free to call me if you have any questions.

 

*Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Government bonds are guaranteed by the U.S. government as to the timely payment of principal and interest and offer a fixed rate of return and fixed principal value.  Minimum term of ownership applies.  Early redemption penalties may apply.

The economic forecasts set forth in this material may not develop as predicted and there is no guarantee that strategies promoted will be successful.

Series I bonds are guaranteed by the US government as to the timely payment of principal and interest and offer a fixed rate of return and fixed principal value. Minimum term of ownership applies. Early redemption penalties may apply.