Ibonds as Emergency Fund and Bond allocation

[Kevin21]

Hi all,

So my fiance and I have already maxed out our ROTHs for the year, and are working on maxing out 401k space with match. I've been toying around with what to do with additional savings, and the idea of buying Ibonds seems appealing, even though we are only 25/26.

I see several strong advantages to Ibonds:

------------
- Ibonds can serve as an emergency fund after one year, and I can hold less in my checking account at 0%. If I were to normally hold 20k in checking, I could have $10k set aside in Ibonds and only $10k at 0% in checking.

-Inflation protection.

- Whatever amount I have in Ibonds, I can decrease my bond allocation in retirement funds. (My current bond allocation is only 10%, so it's feasible that i could go all US/Int'l stock in IRAs and 401k. IBonds are also a potentially good alternative to other bond funds, in that they cannot possibly go below principal.

-Good parking place for short term purchases (grad school, house, etc.)

-If fixed rates go up, I have te option of simply exchanging the older Bond holdings for better rates.
----------------------


Is this sound thinking? Am I missing anything?

Thanks for the help!

[Waterboy]

I'm considering doing something similar. I'm currently 10% TBM and have my emergency fund in I Bonds, thinking of going to 20% bonds and including I Bonds in that 20% (which would actually result in me selling some of my current allocation of TBM) once the I Bonds are liquid later this year.

One concern to keep in mind is that if I Bonds are 100% of your bonds and your equities are all in 401k/IRA/etc. accounts it may be difficult to rebalance. If the stock market tanks, are you going to redeem I Bonds to buy more equities in taxable accounts? Would that cause you to not have enough money in your emergency fund?

[RyeWhiskey]

That sounds fine, but just remember not to conflate your emergency fund with your bond allocation. They are separate entities which exist for separate purposes. So if you're 90/10 and want to count I-Bonds as part of your 10% bond allocation, take the emergency fund I-Bonds out of the equation first, then do the math with the remainder. Otherwise, I don't see the issue other than it's probably a deviation from your IPS - but you are still staying the course in general.

[Kevin21]

One concern to keep in mind is that if I Bonds are 100% of your bonds and your equities are all in 401k/IRA/etc. accounts it may be difficult to rebalance. If the stock market tanks, are you going to redeem I Bonds to buy more equities in taxable accounts? Would that cause you to not have enough money in your emergency fund?

Good point about rebalancing. I think I would prefer using new investment purchases over redeeming the Ibond in order maintain proper AA levels. In extreme circumstances, I would consider redeeming to rebalance (but always keeping adequate Emerg fund.)

That sounds fine, but just remember not to conflate your emergency fund with your bond allocation. They are separate entities which exist for separate purposes. So if you're 90/10 and want to count I-Bonds as part of your 10% bond allocation, take the emergency fund I-Bonds out of the equation first, then do the math with the remainder. Otherwise, I don't see the issue other than it's probably a deviation from your IPS - but you are still staying the course in general.

Good points. Thanks!

As I get older, I will diversify fixed income assets, but for now I think that Ibonds are the only ones needed, with the rest being in equities.

[Dario33]

FYI, I'm likely going to do something similar. Currently have my emergency funds in a liquid money market account. Plan on directing 10k of these funds to i-bonds.

Bond allocation for retirement remains unchanged.

[papito23]

That sounds fine, but just remember not to conflate your emergency fund with your bond allocation.

It sounds like conflating is exactly the OP's proposition (quote: "- Whatever amount I have in Ibonds, I can decrease my bond allocation in retirement funds"). Since the emergency fund can be something of an exercise in mental accounting to some people (in my situation at least, with multiple financial goals at varying timespans), this is a completely personal decision, depending on your view towards risk, cash flow considerations, employment situation, etc.

I believe the venerable Mr. Larimore himself doesn't have or never had a dedicated "emergency fund" but like any savvy planner he knew he had access to certain low-risk funds if he was in a bind. Lots of BHs seem to have a "tiered" emergency fund. Etc.

FWIW I am in my late 20s and am moving my 90/10 port to a 100% stock Roth with an iBond complement. If I'm in a bind, I'll use iBonds first, then replenish them first when I'm ready to contribute again. That said, maybe I only feel that way since I have additional funds for a home downpayment conservatively invested - a further buffer. If you have an IPS, follow that. If you want to change, put it in writing then come back in a month (you won't be out a thing).

[Kevin21]

That sounds fine, but just remember not to conflate your emergency fund with your bond allocation.

It sounds like conflating is exactly the OP's proposition (quote: "- Whatever amount I have in Ibonds, I can decrease my bond allocation in retirement funds").

I wasn't too clear in my writing, but I would differentiate between Emergency fund and Bond allocation. If either goes plus or minus $1k in the other direction, no big worries from me.

For now, I am keeping my emergency fund as is until the Ibonds become more liquid. I am however, selling off bonds in my IRA, as illiquidity is ok (theyre still building interest and maintaining principle, regardless of the 1 year period.)

[Yipee-Ki-O]

I think I Bonds are an excellent place for your additional savings. And at your age, buying them over the long-term can be a good strategy for funding your retirement as Zvi Brodie points out in this interview on PBS:

http://www.pbs.org/newshour/rundown/201 ... bonds.html

For people of modest income, a combination of Social Security and an annual investment of up to $10,000 per year in I Bonds should suffice to finance a comfortable retirement without any significant risk and without any special tax-deferred retirement accounts. For example, a 30-year-old who buys $10,000 per year of I Bonds and retires at age 70 will have accumulated $400,000 of today's purchasing power. That would be enough to buy a guaranteed lifetime inflation-proof income benefit ("annuity") of more than $16,000 per year from a high quality insurance company.

Such a strategy is in keeping with Wade Pfau's latest research which emphasizes establishing an income floor in retirement.

[dratkinson]

Hi all, ...

-If fixed rates go up, I have te option of simply exchanging the older Bond holdings for better rates. ...

Am I missing anything? ...

[nitpicking]
The TD annual purchase limit is fixed. You can not exchange an older bond for a newer better bond. But you can sell the older bond (-$10K) and buy a newer bond (+$10K); this will consume your annual purchase limit. So at the end of the year and discounting earned interest, your TD account value will be unchanged from the previous year (-$10K +$10K = 0).

If you want your TD account to increase in value every year, then you must keep the older bonds.

But if you find a better investment opportunity outside of TD, then certainly consider selling the poorer bonds. I would.
[/nitpicking]



I'm doing the same thing and commingle my EF and bonds in my bond AA. For the purist, I guess I could increase my "bond" AA to account for my EF. I wonder how much that increase should be?

Assumption:
Age 25, 25% bond AA of $50K portfolio, $15K EF.
Age 60, 60% bond AA of $1M portfolio, $50K EF.

Numbers:
Age 25, the purist bond AA becomes ($12.5K bonds + $15K EF = 27.5/50) 55% bonds.

An absolute 30% difference required to account for the EF.
Age 60, the purist bond AA becomes ($600K bonds + $50K EF = 650/1000) 65% bonds.

An absolute 5% difference to account for the EF.

It would seem that with smaller portfolios, it is certainly wise to break out the EF and track it separately. But 5% of a larger portfolio is also significant. So I guess it is wise in all cases to track our EF separately from our bonds.



Question. How do I account for the fact that "If I don't use my savings bonds/CDs for an emergency, then they are part of my bond allocation?" Or am I being confused by some mental accounting/investor psychology blind spot?

[Mel Lindauer]

I think I Bonds are an excellent place for your additional savings. And at your age, buying them over the long-term can be a good strategy for funding your retirement as Zvi Brodie points out in this interview on PBS:

http://www.pbs.org/newshour/rundown/201 ... bonds.html

For people of modest income, a combination of Social Security and an annual investment of up to $10,000 per year in I Bonds should suffice to finance a comfortable retirement without any significant risk and without any special tax-deferred retirement accounts. For example, a 30-year-old who buys $10,000 per year of I Bonds and retires at age 70 will have accumulated $400,000 of today's purchasing power. That would be enough to buy a guaranteed lifetime inflation-proof income benefit ("annuity") of more than $16,000 per year from a high quality insurance company.

Such a strategy is in keeping with Wade Pfau's latest research which emphasizes establishing an income floor in retirement.

One problem with Zi Brodie's quote is that he overlooks the fact that I Bonds mature in 30 years. Therefore, the 30-year old bond would start maturing when the owner was 60, not 70 and they'd continue to mature each year after that. Regardless of whether you redeem the bonds at final maturity or not, the taxes on the accumulated interest over the past 30 years is due.

[Mel Lindauer]

Hi all,

So my fiance and I have already maxed out our ROTHs for the year, and are working on maxing out 401k space with match. I've been toying around with what to do with additional savings, and the idea of buying Ibonds seems appealing, even though we are only 25/26.

I see several strong advantages to Ibonds:

------------
- Ibonds can serve as an emergency fund after one year, and I can hold less in my checking account at 0%. If I were to normally hold 20k in checking, I could have $10k set aside in Ibonds and only $10k at 0% in checking.

-Inflation protection.

- Whatever amount I have in Ibonds, I can decrease my bond allocation in retirement funds. (My current bond allocation is only 10%, so it's feasible that i could go all US/Int'l stock in IRAs and 401k. IBonds are also a potentially good alternative to other bond funds, in that they cannot possibly go below principal.

-Good parking place for short term purchases (grad school, house, etc.)

-If fixed rates go up, I have te option of simply exchanging the older Bond holdings for better rates.
----------------------


Is this sound thinking? Am I missing anything?

Thanks for the help!

I think you're missing several things.

1. As a 25-year old, the bonds will mature in 30 years when you'll probably in your prime earning years (high tax bracket). The taxes are due when the bonds mature, even if you don't redeem them.
2. One way around this is to buy the bonds now and then use them for the tax-free educational benefit of your present or future children, or for youself and/or your spouse.
3. If you can project yourself as earning too much at a later date to qualify for the tax-free educational benefit, you can always redeem the I Bonds and put the proceeds in a 529 Plan for your children's education while you still qualify, since that qualifies for the tax-free educatinal expense.

[Kevin21]

Is this sound thinking? Am I missing anything?

Thanks for the help!

I think you're missing several things.

1. As a 25-year old, the bonds will mature in 30 years when you'll probably in your prime earning years (high tax bracket). The taxes are due when the bonds mature, even if you don't redeem them.
2. One way around this is to buy the bonds now and then use them for the tax-free educational benefit of your present or future children, or for youself and/or your spouse.
3. If you can project yourself as earning too much at a later date to qualify for the tax-free educational benefit, you can always redeem the I Bonds and put the proceeds in a 529 Plan for your children's education while you still qualify, since that qualifies for the tax-free educatinal expense.

No kids yet, but this could be an added benefit. Thanks for providing this insight and extra nuance to the plan!

[Kevin21]

Question. How do I account for the fact that "If I don't use my savings bonds/CDs for an emergency, then they are part of my bond allocation?" Or am I being confused by some mental accounting/investor psychology blind spot?

That means that you have avoided emergency, and have unlocked the extra bond allocation cheat code!

[Mel Lindauer]

Is this sound thinking? Am I missing anything?

Thanks for the help!

I think you're missing several things.

1. As a 25-year old, the bonds will mature in 30 years when you'll probably in your prime earning years (high tax bracket). The taxes are due when the bonds mature, even if you don't redeem them.
2. One way around this is to buy the bonds now and then use them for the tax-free educational benefit of your present or future children, or for youself and/or your spouse.
3. If you can project yourself as earning too much at a later date to qualify for the tax-free educational benefit, you can always redeem the I Bonds and put the proceeds in a 529 Plan for your children's education while you still qualify, since that qualifies for the tax-free educatinal expense.

No kids yet, but this could be an added benefit. Thanks for providing this insight and extra nuance to the plan!

May I say that I'm impressed that a 25-year old knows how to use the word "nuance"! (I was much older before I knew what it meant.)

[neurosphere]

Question. How do I account for the fact that "If I don't use my savings bonds/CDs for an emergency, then they are part of my bond allocation?" Or am I being confused by some mental accounting/investor psychology blind spot?

That means that you have avoided emergency, and have unlocked the extra bond allocation cheat code!

I love it. "Cheat code".

That is exactly what I have always done. For many years my I-bonds were the main source of my e-fund. As the years went by, the I-bond allocation went up. After many more years without an emergency my "e-fund" became too big, and so Bingo! They just became part of my bond allocation, and now I have a smaller e-fund which I am "rebuilding" to an extent with municipal bond funds.

For many people I-bonds can and often DO serve a simultaneous role as both bonds and e-fund. How to account for this in your allocation is a matter of taste, and what makes "sense" to you. Remember, if you have an emergency and need to liquidate your I-bonds, you can always just rebalance your equities so that after the emergency you end up with the same asset allocation (and with a need to rebuild the e-fund).

I always equate the I-bond/bond duality to the optical illusion where the vase sometimes looks like two faces, or the old woman is also a young woman: it just depends how you look at it, but in reality it's BOTH at the same time.

[papito23]

Remember, if you have an emergency and need to liquidate your I-bonds, you can always just rebalance your equities so that after the emergency you end up with the same asset allocation (and with a need to rebuild the e-fund).

Neuro - this is exactly what I would avoid in employing my strategy. If you were laid off in late 2008, redeemed your iBonds, then "rebalanced", you are selling stocks at exactly the wrong time. This is supposedly what an e-fund is supposed to help avoid - selling off long-term assets for short-term needs. In the end, I suppose it depends how much you are willing to drift from your desired AA. If you are unwilling to drift at all, I would recommend a separate e-fund, though again much of this is just personal preference. I bought stocks that I don't plan on selling for decades... I don't want to have to touch those (rebalance them to bonds) in an emergency.

Best,
-papito

[neurosphere]

Remember, if you have an emergency and need to liquidate your I-bonds, you can always just rebalance your equities so that after the emergency you end up with the same asset allocation (and with a need to rebuild the e-fund).

Neuro - this is exactly what I would avoid in employing my strategy. If you were laid off in late 2008, redeemed your iBonds, then "rebalanced", you are selling stocks at exactly the wrong time. This is supposedly what an e-fund is supposed to help avoid - selling off long-term assets for short-term needs. In the end, I suppose it depends how much you are willing to drift from your desired AA. If you are unwilling to drift at all, I would recommend a separate e-fund, though again much of this is just personal preference. I bought stocks that I don't plan on selling for decades... I don't want to have to touch those (rebalance them to bonds) in an emergency.

Best,
-papito

I'm not sure that an e-fund's purpose is necessarily meant to avoid selling stocks to buy bonds. One purpose, for example, is to avoid you having to put massive amounts on a credit card, or to avoid incurring taxes and penalties from withdrawals from retirement accounts.

Let's go back to your example of having had an emergency in 2008. Let's say your "allocation" was 60 stocks, 20 bonds, and 20 e-fund. So now you have an emergency and you use up your e-fund in it's entirety. Now your "allocation" is 75 stocks, 25 bonds and 0 e-fund. Even though your "retirement" allocation was 75/25 to start (and you also had an e-fund), your overall "risk" has just increased due to the loss of cash due to the emergency. What do you do now? You can either rebalance, or you can cross your fingers that you don't have another emergency as you are rebuilding your e-fund. It's party a matter of semantics of course. But one can consider the "cash" of an e-fund as something with decrease the risk of a portfolio. Put another way, any e-fund one has serves to make one's portfolio more conservative. Just because one has labelled it an "e-fund" does not negate the fact that it's a part of one's overall asset plan. So, now you have an emergency, you spend the e-fund, and your assets have overall become more risky. In 2008, you may decide it's the wrong time to sell stocks to buy bonds. But you would also be making a decision to have an overall higher allocation to stocks than you did previously.

So this goes back to my "is it a vase or is it two faces" analogy. Just because you may have I-bonds (or a checking account, or short-term bonds or cash under your mattress) and call it an e-fund does not change the fact that your "assets" or "allocation" or "net worth" or whatever is more conservative overall because of the e-fund. So if the e-fund is depleted, you MAY choose to not to make changes to the rest of your portfolio, or you MAY. I don't think there is a right answer.

[dratkinson]

Submitted for what it is worth.

This topic got me to thinking I should at least look into this issue for my AA.

So I've spent the last couple of days redoing the spreadsheet formulas that compute my Target and Actual AAs (2 sheets). I've added a toggle (multiple =if statements) to my tracking spreadsheets to consider or ignore my EF (CDs and savings bonds) as part of my AA. It certainly seem to make a difference depending upon the accounting method chosen.

Assume cell A1 contains 0/1. Assume cell B1 contains "Consider EF as part of AA? (0/1)"

Example formula to consider/ignore EF:

=if(A1=1,formula to consider EF in AA, formula to ignore EF in AA)

Two formulas needed to compute: stock%, bond%. (This is a sub-AA.)

(You don't need any special formula to compute: stock%, int'l stock%, REIT%---pure equity allocation. This is a sub-AA.)

Two formulas needed to compute: bond%, TIPS/I bond%. (This is sub-AA.)

Four formulas needed to compute: stock%, int'l stock%, bond%, REIT% for total portfolio. This is my Target AA, which is compared to my Actual AA with 5% rebalance bands.

Repeat above for Actual AA sheet.

By setting cell A1 to "0" or "1" on each sheet (Target AA, Actual AA), I can quickly see the difference between including or excluding my EF in my target and actual AAs.

Bottom line. It looks like I should buy a few more non-EF bonds to pad my AA... just to be safe. Luckily, it seems stocks are currently high and bonds are more of a bargain.

[RyeWhiskey]

Maybe as a 26 year-old I'm old-fashioned, but it would seem to me as though conflating your emergency fund with your bond allocation is not in accordance with either logic or a Bogleheads philosophy.

On the logic side, if you conflated them, why call it an emergency fund at all? When you conflate them, you don't have an emergency fund. Instead, you have a bond allocation a part of which you are willing to liquidate no matter the economic environment for emergencies. As an analogy:
You have a house with a yard and a bunch of gardening tools. You can either a) build a shed and put the tools in there, or b) put the tools in the mud room of the house. If you opt for b, then you do not have a 'shed' in the house. You have a mud room which you are using in place of a shed.

On the Bogleheads philosophy side, an emergency fund is supposed to be liquid. If you aren't 59 and a half, you can't take earnings out of the Roth penalty free. And furthermore, assume that the emergency occurs during a massive equity crash. You liquidate your bond allocation in order to handle the emergency (you're young, so 10-20% of you portfolio isn't that big), and now you're left with less than 50% of your retirement savings.

I dunno - it just doesn't seem to make much sense. And especially for folks who are not experienced Bogleheads, having a separate fund for emergencies is clear and concise. Stretching for an extra 1% on that amount can be done, sure, but it complicates things. Does it not? Or am I just too rigid with my mental boxes?

[mike_slc]

Maybe as a 26 year-old I'm old-fashioned, but it would seem to me as though conflating your emergency fund with your bond allocation is not in accordance with either logic or a Bogleheads philosophy.

I think it also depends on the size of the portfolio. If the e-fund is large relative to the portfolio then it should be keep strictly separate, because any change in the size of the e-fund will dramatically affect the AA of the overall portfolio. I would assume this is the case for most normal 26 year olds. If the e-fund is insignificant to the size of the portfolio then using it will not affect the AA in any meaningful way and you probably don't need to keep them separate. Of course if you don't do any taxable investing then you will always need an e-fund.

[DAK]

I have accumulated Ibonds for 3 years running now and I consider it part of my bond allocation. That being said, if I have an emergency that a credit card wont cover until I get a paycheck or two, I would cash some I bonds. I do not have a specific emergency fund per se.

[dratkinson]

Maybe as a 26 year-old I'm old-fashioned ... Or am I just too rigid with my mental boxes?

I agree with all you said and I thought the exact same thing, too: an EF should be separate from our normal AA. When my EF was 6-months, it made sense and was insignificant compared to my larger investments. But I kept buying savings bonds and my EF got larger and larger.

Savings bonds are tax-exemptadvantaged. So our tax-advantage space is increased. This is a normal AA consideration.
I bonds are inflation indexes. This is a normal AA consideration.

As some point, I realized I have 3+ years worth of EF (more than I need for a conventional emergency) and their characteristics help my normal AA.

Should I stop buying savings bonds? They are beneficial to my normal AA and more is better. So keep buying.

Should I exclude them from my AA? There's more than enough for any conventional emergency, and it seems wrong to exclude this growing pool.

Idea. Maybe I could modify my tracking spreadsheet to exclude 2-years worth as my EF and include the excess in my normal AA. (I don't know yet.)

I don't have the perfect answer, but looking at a large EF both ways, may help me resolve this issue for myself. (Besides, fiddling with spreadsheets keeps me off the street and out of trouble.)



We can call this an optional road to Dublin where the traveler must decide this for themselves.

Until resolved, we can add this to the list of many things BHs vehemently disagree about with accompanying arm waving, fist shaking, and voices raised "...full of sound and fury...."



Edit: Correction noted/appreciated. Originally said something like "fed tax deferred and state tax exempt", but fumble-fingered the edit in an attempt at brevity.

[dyeusdi]

FWIW I am in my late 20s and am moving my 90/10 port to a 100% stock Roth with an iBond complement. If I'm in a bind, I'll use iBonds first, then replenish them first when I'm ready to contribute again.

If the value of the Roth fell dramatically -- would you rebalance by buying stocks in taxable?

[Village Idiot]

Savings bonds are tax-exempt. So our tax-advantage space is increased. This is a normal AA consideration.
I bonds are inflation indexes. This is a normal AA consideration.

Just to be clear, I think you meant "tax deferred" not tax exempt. I'm new to this as well and want to be sure I'm getting this.

[crowd79]

Savings bonds are tax-exempt. So our tax-advantage space is increased. This is a normal AA consideration.
I bonds are inflation indexes. This is a normal AA consideration.

Just to be clear, I think you meant "tax deferred" not tax exempt. I'm new to this as well and want to be sure I'm getting this.

Federal tax deferred until redeemed or when they stop paying interest in 30 years. You'll then owe taxes at your marginal tax rate.

State tax exempt forever. Useful for those in high-income tax states like California.

[sls239]

I think it depends on if you've decided your AA based on something like "risk tolerance" or based on how much equities do I need to reach my goal.

I think when you are younger, because there is a lot of uncertainty in how much you might need to reach your goal (and even a lot of uncertainty about what is the goal), the tendency is to make an AA based on "risk tolerance." In that case, I think the EF should be separate because a person's "risk tolerance" is highly influenced by how risky they perceive their current situation to be - which could be in error.

Older people, who have more certainty in what their goal is and what they need to reach it are more likely to create an AA that only takes the risk needed to reach that goal. In that case, I think a dedicated EF is probably unnecessary because the AA isn't based on an assessment of their current personal situation.

[dratkinson]

My *EF is made up of CDs and my TD account. These account values are growing and the excess warrants tracking. While the actual EF portion should be excluded.

*I track my investments and EF in the same spreadsheet. It's just easier for me to keep everything together.

My CD values are calculated based on months-since-issue and FV calculations. This saves me the trouble of logging in to my bank account each month to get the updated totals.

My savings bond totals (paper/electronic) are copied/pasted from TD each month.

These EF account funds are already beginning to dwarf my actual EF needs. So, after thinking about it, this is what I've decided to do to track the excess funds

I count all my EF accounts as bonds, but subtract my smaller actual EF as an EF Exclusion $amount. In this way, my smaller actual EF (the exclusion $amount) is removes from consideration (bond AA% and TIPS/I bond AA%), while the remainder of the growing account values are included. Seems like this should work okay and be easy to account for and track going forward.



So to the question, "Should our EF funds be separate from our bonds, or is okay to commingle them with our bonds?", my answer is "Yes".

Joking aside, above now excluding my actual EF from my bond AA, which is a reversal for me. I concede the wisdom in doing so.

Interesting topic. Kept me off the street and out of trouble for another day.

[Gauntlet]

Livesoft once described money has being fungible. The idea of money being fungible really resonated with me and the light bulb went off. I realized that I don't need to have "buckets" for everything. I don’t need an emergency fund bucket as long as I have access to money in the event of an emergency. Besides, if you have a specific "bucket" for an emergency fund in very safe investments then your overall asset allocation is probably a little more conservative than you think. This is especially true for small portfolios. I’m not saying this is wrong or there is any right or wrong way to handle it but I don’t think there is any reason to subscribe to a theory that one must have a specific e-fund. I personally have I-Bonds as part of my bond allocation and if I have an emergency than I will cash them out. This doesn’t mean I have to immediately sell stocks to fix my AA.

[skibbi9]

Hi all,

So my fiance and I have already maxed out our ROTHs for the year, and are working on maxing out 401k space with match. I've been toying around with what to do with additional savings, and the idea of buying Ibonds seems appealing, even though we are only 25/26.

I see several strong advantages to Ibonds:

------------
- Ibonds can serve as an emergency fund after one year, and I can hold less in my checking account at 0%. If I were to normally hold 20k in checking, I could have $10k set aside in Ibonds and only $10k at 0% in checking.

-Inflation protection.

- Whatever amount I have in Ibonds, I can decrease my bond allocation in retirement funds. (My current bond allocation is only 10%, so it's feasible that i could go all US/Int'l stock in IRAs and 401k. IBonds are also a potentially good alternative to other bond funds, in that they cannot possibly go below principal.

-Good parking place for short term purchases (grad school, house, etc.)

-If fixed rates go up, I have te option of simply exchanging the older Bond holdings for better rates.
----------------------


Is this sound thinking? Am I missing anything?

Thanks for the help!

I think you're missing several things.

1. As a 25-year old, the bonds will mature in 30 years when you'll probably in your prime earning years (high tax bracket). The taxes are due when the bonds mature, even if you don't redeem them.
2. One way around this is to buy the bonds now and then use them for the tax-free educational benefit of your present or future children, or for youself and/or your spouse.
3. If you can project yourself as earning too much at a later date to qualify for the tax-free educational benefit, you can always redeem the I Bonds and put the proceeds in a 529 Plan for your children's education while you still qualify, since that qualifies for the tax-free educatinal expense.

Mel, in regards to #1, aren't they just capital gains... which has the same tax no matter when they mature?

[Mel Lindauer]

Hi all,

So my fiance and I have already maxed out our ROTHs for the year, and are working on maxing out 401k space with match. I've been toying around with what to do with additional savings, and the idea of buying Ibonds seems appealing, even though we are only 25/26.

I see several strong advantages to Ibonds:

------------
- Ibonds can serve as an emergency fund after one year, and I can hold less in my checking account at 0%. If I were to normally hold 20k in checking, I could have $10k set aside in Ibonds and only $10k at 0% in checking.

-Inflation protection.

- Whatever amount I have in Ibonds, I can decrease my bond allocation in retirement funds. (My current bond allocation is only 10%, so it's feasible that i could go all US/Int'l stock in IRAs and 401k. IBonds are also a potentially good alternative to other bond funds, in that they cannot possibly go below principal.

-Good parking place for short term purchases (grad school, house, etc.)

-If fixed rates go up, I have te option of simply exchanging the older Bond holdings for better rates.
----------------------


Is this sound thinking? Am I missing anything?

Thanks for the help!

I think you're missing several things.

1. As a 25-year old, the bonds will mature in 30 years when you'll probably in your prime earning years (high tax bracket). The taxes are due when the bonds mature, even if you don't redeem them.
2. One way around this is to buy the bonds now and then use them for the tax-free educational benefit of your present or future children, or for youself and/or your spouse.
3. If you can project yourself as earning too much at a later date to qualify for the tax-free educational benefit, you can always redeem the I Bonds and put the proceeds in a 529 Plan for your children's education while you still qualify, since that qualifies for the tax-free educatinal expense.

Mel, in regards to #1, aren't they just capital gains... which has the same tax no matter when they mature?

No, it's not capital gains; it's interest income which is taxed at one's highest ordinary income tax rate.