EE Bonds - break even scenarios

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EE Bonds - break even scenarios

Postby burma7734 » Mon Jan 07, 2013 8:03 pm

I will max out my primary investment choices: 401k, rIRA (backdoor), I-bonds ($10k + $5k tax return) this year, and expect to have another $10k to invest in the bond side of my portfolio. I have 18% of my bonds in Emerging (FNMIX) for a little yield chasing, but don't want to push that any higher.

I have read several thread in these forums and found this website discussing EE Bonds.

http://www.longtermreturns.com/2012/12/ ... bonds.html

So, it got me to thinking, under what future scenarios would the guaranteed 3.8% 20 yr return on EE Bonds be a bad choice. I ran some rough numbers comparing 20 year future scenarios for taxable (CD) or muni investment to see what sort of rising rate environment would it take to break even with EE Bonds.

https://docs.google.com/spreadsheet/ccc ... WxVU055V3c

Short story is, you would need CD rates to rise to roughly 4.5% in the next five years or munis returns to rise (after taking a haircut due to rising rates) to around 3.7%. If I think either of these is "unlikely" then the EE bond investment makes sense.
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Re: EE Bonds - break even scenarios

Postby Noobvestor » Mon Jan 07, 2013 8:25 pm

Great work, and not to make more of it, but: there is a kind of liquidity bonus on the EE side too, in that even if rates rose faster, you could still cash out, switch over, and not have lost too much early on (e.g. if rates on CDs jumped to 4.5% next year, you could switch from EEs to them and have lost little in the process).

I am personally stocking up on EEs after I Bonds, though in the case of EEs I may wait until the next set of rates is released.
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Re: EE Bonds - break even scenarios

Postby crowd79 » Mon Jan 07, 2013 8:44 pm

Totally agree with EE Bonds. I'm buying $250 per month. The "yield to maturity" rises over time. I believe starting 10 years from now, interest rates would have to average greater than 6% from the 10th to 20th year of holding EE Bonds to be worth cashing out and taking the loss. If interest rates were to suddenly rise sooner, say in the next few years, then I can cash out at the poor .20% rate. Compared to the top savings accounts right now of 1%, it really isn't that much of a loss. It still beats out a Wells Fargo savings account of .01% plus monthly fees, if anyone is crazy enough to have savings with them, for example, lol.
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Re: EE Bonds - break even scenarios

Postby bigspender » Mon Jan 07, 2013 9:27 pm

I kind of wished I bought EE Bonds years back. Basically it is a very good emergency fund. Hold for 20 years and you get tax free growth of 3.53% yearly.
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Re: EE Bonds - break even scenarios

Postby Langkawi » Mon Jan 07, 2013 10:51 pm

bigspender wrote:I kind of wished I bought EE Bonds years back. Basically it is a very good emergency fund. Hold for 20 years and you get tax free growth of 3.53% yearly.

If you bought them years back, you'd only have to hold them 17 years for the double.
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Re: EE Bonds - break even scenarios

Postby Mel Lindauer » Mon Jan 07, 2013 10:57 pm

Langkawi wrote:
bigspender wrote:I kind of wished I bought EE Bonds years back. Basically it is a very good emergency fund. Hold for 20 years and you get tax free growth of 3.53% yearly.

If you bought them years back, you'd only have to hold them 17 years for the double.


And many of the older EE Bonds continue to pay a guaranteed minimum of 4% until final maturity.
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Re: EE Bonds - break even scenarios

Postby TT » Tue Jan 08, 2013 6:23 am

Mel Lindauer wrote:
Langkawi wrote:
bigspender wrote:I kind of wished I bought EE Bonds years back. Basically it is a very good emergency fund. Hold for 20 years and you get tax free growth of 3.53% yearly.

If you bought them years back, you'd only have to hold them 17 years for the double.


And many of the older EE Bonds continue to pay a guaranteed minimum of 4% until final maturity.


I purchased the maximum allowed 12/1992 and 1/1993 for myself and my spouse and intended to use them for the children's college tuition. Interest rates were definitely declining so I decided to keep them. 6% guaranteed for first 12 years then 4% the remaining 18 years. Who would have thought these rates would be high compared to current rates and the added benefit of no state taxes due. March of 1993 was end of these rate guarantees.
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Re: EE Bonds - break even scenarios

Postby tfb » Tue Jan 08, 2013 2:03 pm

bigspender wrote:I kind of wished I bought EE Bonds years back. Basically it is a very good emergency fund. Hold for 20 years and you get tax free growth of 3.53% yearly.

They are a very poor emergency fund. Have an emergency in year 19 and tap it? See the value plunge by 45%.
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Re: EE Bonds - break even scenarios

Postby Grt2bOutdoors » Tue Jan 08, 2013 3:19 pm

tfb wrote:
bigspender wrote:I kind of wished I bought EE Bonds years back. Basically it is a very good emergency fund. Hold for 20 years and you get tax free growth of 3.53% yearly.

They are a very poor emergency fund. Have an emergency in year 19 and tap it? See the value plunge by 45%.


That's like saying - I sold VTSMX at 15, if I'd held on for just one more additional year, I could have sold it for 29. Come on, anyone hold an accrual bond would know better than to value it for higher than it is actually worth. Your statement above is not factual - there is no value plunge. At year 19, the bond is worth $1,038.69 - the opportunity cost of cashing out in year 19 is the difference between $2,000 (proverbial double) and $1,038.69 or $961.31. Steep, yes - any different than if you needed to make a firesale on any other asset, no.

EE's are 20 year RipVanWinkle equivalents - buy em, put em to sleep for 20 years, wake up and cash em - maybe they buy less than what you could purchase today, inflation adjusted, maybe not if you have deflation - Bogleheads don't care, we diversify amongst all asset classes to give what the market will bear. For those who say - they are a waste, well that is the equivalent of market-timing, wouldn't you say? :greedy
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Re: EE Bonds - break even scenarios

Postby Mitchell777 » Tue Jan 08, 2013 3:25 pm

burma7734 wrote:I will max out my primary investment choices: 401k, rIRA (backdoor), I-bonds ($10k + $5k tax return) this year, and expect to have another $10k to invest in the bond side of my portfolio. I have 18% of my bonds in Emerging (FNMIX) for a little yield chasing, but don't want to push that any higher.

I have read several thread in these forums and found this website discussing EE Bonds.

http://www.longtermreturns.com/2012/12/ ... bonds.html

So, it got me to thinking, under what future scenarios would the guaranteed 3.8% 20 yr return on EE Bonds be a bad choice. I ran some rough numbers comparing 20 year future scenarios for taxable (CD) or muni investment to see what sort of rising rate environment would it take to break even with EE Bonds.

https://docs.google.com/spreadsheet/ccc ... WxVU055V3c

Short story is, you would need CD rates to rise to roughly 4.5% in the next five years or munis returns to rise (after taking a haircut due to rising rates) to around 3.7%. If I think either of these is "unlikely" then the EE bond investment makes sense.

Interesting view. I thought of something similar recently as I was annoyed at my EE bonds yielding way less than 1%. However when I looked at the 3.5% guarantee for 20 years and the fact that my yield to date was well less than 3%, I realized if I held another 10 to 12 years I would be receiving ~ 4% over those future years. So, I decided to hold
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Re: EE Bonds - break even scenarios

Postby tfb » Tue Jan 08, 2013 3:58 pm

Grt2bOutdoors wrote:That's like saying - I sold VTSMX at 15, if I'd held on for just one more additional year, I could have sold it for 29. Come on, anyone hold an accrual bond would know better than to value it for higher than it is actually worth. Your statement above is not factual - there is no value plunge. At year 19, the bond is worth $1,038.69 - the opportunity cost of cashing out in year 19 is the difference between $2,000 (proverbial double) and $1,038.69 or $961.31. Steep, yes - any different than if you needed to make a firesale on any other asset, no.

Sorry I disagree. The typical assets people recommend for emergency fund will not see that kind of difference/opportunity cost. Investors holding these are valuing them as 3.5% CDs. Just look at how many times 3.5% is mentioned in this thread. It doesn't make these bad investments. Just bad for emergency fund.
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Re: EE Bonds - break even scenarios

Postby Grt2bOutdoors » Tue Jan 08, 2013 4:12 pm

tfb wrote:
Grt2bOutdoors wrote:That's like saying - I sold VTSMX at 15, if I'd held on for just one more additional year, I could have sold it for 29. Come on, anyone hold an accrual bond would know better than to value it for higher than it is actually worth. Your statement above is not factual - there is no value plunge. At year 19, the bond is worth $1,038.69 - the opportunity cost of cashing out in year 19 is the difference between $2,000 (proverbial double) and $1,038.69 or $961.31. Steep, yes - any different than if you needed to make a firesale on any other asset, no.

Sorry I disagree. The typical assets people recommend for emergency fund will not see that kind of difference/opportunity cost. Investors holding these are valuing them as 3.5% CDs. Just look at how many times 3.5% is mentioned in this thread. It doesn't make these bad investments. Just bad for emergency fund.


Agree - these should not be viewed as a 3.5% yielding emergency fund. That is far from the case - these are long term investments that if used should only represent a small piece of the portfolio.
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Re: EE Bonds - break even scenarios

Postby crowd79 » Tue Jan 29, 2013 6:01 pm

Just got my hands on a $50 denominated EE Bond gifted to me that I never knew I had from my Grandparents. It was purchased back in August of 1986, so it has 4 more years until it stops paying interest. Probably hardly worth much though...
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Re: EE Bonds - break even scenarios

Postby stevewolfe » Tue Jan 29, 2013 7:09 pm

Congrats, you nearly have a C note. Present value is $98.42 versus the original purchase amount of $25. :moneybag
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Re: EE Bonds - break even scenarios

Postby crowd79 » Tue Jan 29, 2013 8:19 pm

According to the TD website, this bond is currently paying 4% interest. Dang, pretty sad that this is my highest yielding safe asset and it's worth less than 100 bucks :P ....but I'm happy! :D
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Re: EE Bonds - break even scenarios

Postby Default User BR » Wed Jan 30, 2013 1:48 pm

I was in the payroll deduction plan for EE bonds back in the day, four $50 face bonds per year. They have been reaching final maturity now. The rate over the past few years has been good, but the overall annualized return is something like 5.872%.


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