Are you buying I bonds in 2014? And if so, for what role?

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Are you buying I bonds in 2014? And if so, for what role?

Postby bellemastiff » Sun Nov 24, 2013 1:02 pm

I haven't purchased an I Bond before but I'm thinking about buying them in 2014 and using them as a sort of medium term emergency fund.

I understand they could also potentially play a role (over time, given the 20k / yr max for married couple) as a component of the bond allocation in a larger (high six or seven-figure) portfolio that needs more tax advantaged space.

Just wanted to take an informal poll of Bogleheads... with current I bond composite rates ... do you plan to buy I bonds in 2014? And if so, what 'role' do they play in your overall financial picture? (e.g. emgcy fund vs. part of your 'bond allocation')
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby digit8 » Sun Nov 24, 2013 1:18 pm

I have been continuously tempted to move a portion of my emergency fund over to Ibonds for the last few years. I put it off for simple laziness and preemptive fear of additional bookkeeping, as well as a bit of paranoia about the security of my (mortgage industry) job.
For me, I'd like to place them in as kind of a next-to-last-resort emergency fund, something I tap after savings but before needing to go into the retirement funds. And, In a very happy world where I never need it, the bridge that lets me take early retirement without having to do early withdrawals on the retirement accounts.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Texas hold em71 » Sun Nov 24, 2013 1:23 pm

I do not. Since I have no state or local income tax and I-bonds are taxable for federal purposes, I am not sure I would benefit. I also make too much for them to be used for qualified educational expenses.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Geist » Sun Nov 24, 2013 1:27 pm

Yes. I currently hold about half of my EF in I-Bonds, which I've had for about 2-3 years now. In April/May timeframe (after clearing out my military SDP account), I'm planning to buy another $10k in I-Bonds as most of the remainder of my EF. All told, I'll have about 85% of my baseline EF in I-Bonds (with the remainder in a plain old online savings account).

I would say that I-Bonds can definitely play a part in your AA. I also have an additional $4k in I-Bonds that I consider a part of my overall portfolio's (currently fairly small) bond allocation. In the long term, I plan to continue adding I-Bonds as part of that AA, in addition to my bond holdings in the TSP.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Geist » Sun Nov 24, 2013 1:35 pm

digit8 wrote:For me, I'd like to place them in as kind of a next-to-last-resort emergency fund, something I tap after savings but before needing to go into the retirement funds.

The philosophy of their use is a undeniably a personal decision... But just to comment on this, I see them as the opposite -- I view my I-Bonds as "Stop #2" after my savings accounts, which as I mentioned above, are kept at a fairly low level. I-Bonds would be tapped before my taxable investment account, with retirement obviously being at the very bottom of the list.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Tyrobi » Sun Nov 24, 2013 2:01 pm

Texas hold em71 wrote:I am not sure I would benefit. I also make too much for them to be used for qualified educational expenses.


I wonder can one get around I Bond's income limit to be tax free for qualifying education expenses by (1) redeeming I Bond to contribute to a 529 plan when the time comes, (2) then use it for education expenses.

I haven't bought any I Bond yet and I'm still investigating in what role should I accommodate it in my overall portfolio before buying.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby happymob » Sun Nov 24, 2013 2:06 pm

Yes. For emergency fund and possibly, eventually, for college tuition (we don't know if we will meet the income restrictions or not). We may also buy some under the kids' names and have them pay interest annually (they are under the kiddie tax limitations right now).
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby John3754 » Sun Nov 24, 2013 3:06 pm

Yes, my wife and I buy $20k every year for exactly the reasons you stated, they are part of our emergency fund and our fixed income allocation.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby surfer1 » Sun Nov 24, 2013 3:12 pm

I look at I-bonds as a no-brainer and buy the max I can each year. It's basically a gift "CD" from the fed. You won't find a better risk-free interest rate. If you need the money, just break the bond after 12 months.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby sidartvader » Sun Nov 24, 2013 3:20 pm

This is the first year that I have started buying them, goal is to transfer about 50-75% of my EF over time into the I-Bonds. As far as retirement is concerned, I have not been convinced about their usefulness for me (State tax rate is relatively low + I doubt I would qualify for educational expenses tax benefit). Tax deferred growth is a good feature, of course.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Phineas J. Whoopee » Sun Nov 24, 2013 3:21 pm

surfer1 wrote:I look at I-bonds as a no-brainer and buy the max I can each year. It's basically a gift "CD" from the fed. You won't find a better risk-free interest rate. If you need the money, just break the bond after 12 months.

I agree, but just for the record, they aren't from the Fed. They're from Treasury. The Fed prints and mails the paper version as one of the banking services it provides to the US government.

When I pay my electric bill it isn't Charles Schwab Bank paying. It's me. They just handle the logistics on my behalf.

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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Mel Lindauer » Sun Nov 24, 2013 3:28 pm

Tyrobi wrote:
Texas hold em71 wrote:I am not sure I would benefit. I also make too much for them to be used for qualified educational expenses.


I wonder can one get around I Bond's income limit to be tax free for qualifying education expenses by (1) redeeming I Bond to contribute to a 529 plan when the time comes, (2) then use it for education expenses.

I haven't bought any I Bond yet and I'm still investigating in what role should I accommodate it in my overall portfolio before buying.


Contributions to a 529 Plan are considered to be a "qualifying educational expense". However, you'd still need to meet the income limits in the year you redeemed the bonds and contributed the proceeds to the 529 Plan for the transaction to be tax-free. This strategy is especially useful for those investors who do this just prior to the year in which their earnings will no longer qualify for the tax-free deduction.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Ganacel » Wed Nov 05, 2014 8:05 pm

Question for those of you who use i-bonds as part of your EF: how much do you keep in a savings account versus in i-bonds?

$10,000 would comfortably cover 4 months' worth of expenses for me if I cut most non-essential discretionary spending, including most post-tax saving contributions (so no Roth or taxable account contributions in this scenario). Right now, I have 7 months of expenses saved up in my savings account (second tier EF) plus another 2 months in my checking account that I use as my first tier EF for unexpected expenses (total of $23,000). I am thinking of doing one of the following with the savings account money before the end of 2014:

1) Keep five months of expenses in savings + two months of expenses in checking, and put the rest in i-bonds (would be a $5000 i-bond purchase, meaning of course that I lose the ability to buy the additional $5000 for 2014. But maybe that's not a big deal?)

2) Keep three months of expenses in savings + two months of expenses in checking, and buy the entire $10,000 in i-bonds for 2014 (I would then replenish my EF savings account in 2015 to replace that $10,000 and probably buy another $10,000 worth of i-bonds in 2015 as well. The 2015 i-bonds would become part of my fixed income allocation to help me forestall having to buy bonds in my taxable account, which I predict will start happening within the next 1-2 years otherwise.)

3) Leave well enough alone with my EFs, buy $10,000 of i-bonds in 2015 for my third tier EF (bringing total EF up to 13 months with 2 months in checking, 7 months in savings, and 4 months in i-bonds), and not worry about losing the i-bond space for 2014.

Since the i-bonds cannot be cashed for a year, I think I'm leaning toward option #1 right now as being the best compromise that will allow me to keep a decent liquid EF (seven months' worth in checking + savings) while still allowing me to take advantage of some of this tax-deferred bond space. Would appreciate any input from those of you who are experienced with these things.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Phineas J. Whoopee » Wed Nov 05, 2014 8:51 pm

I agree with you. The existence and availability of I Bonds doesn't change the Emergency Reserve logic any more than a really really cheap obviously undervalued stock nobody else can possibly understand does.

An I Bond emergency reserve is a good ultimate destination, but even if the one-year-lockup doesn't interfere with it on an intermediate-term level, the annual purchase restriction might.

There are a number of ways to accomplish the shift, and we can have a conversation about them, but I definitely would not give up the essence of emergency reserves just in order to transition to I Bonds really really fast.

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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Ganacel » Wed Nov 05, 2014 9:32 pm

Totally agree. The worst case scenario is that I'd have five months liquid reserves until I could replace the $10,000 (which I could do by the end of February, if that affects anyone's opinion). But I'm not sure how I feel about being a little tight with my reserves like that even though it would only be for two months.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Phineas J. Whoopee » Wed Nov 05, 2014 9:41 pm

Ganacel wrote:Totally agree. The worst case scenario is that I'd have five months liquid reserves until I could replace the $10,000 (which I could do by the end of February, if that affects anyone's opinion). But I'm not sure how I feel about being a little tight with my reserves like that even though it would only be for two months.

You could buy some at the end of this month (it's disadvantageous to buy toward the beginning) after you save a little bit more, and some toward the end of next month having saved again, rather than going all-in for a year or half a year's worth. The difference between a 0.00% and 0.10% or 0.20% real yield is not important in the context of emergency reserves, and you'd be starting the one-year (actually, advantageously, eleven month and one day) redeemability clock sooner.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Ganacel » Wed Nov 05, 2014 10:47 pm

Yes, I gathered from reading this and other threads that it's best to buy i-bonds at the end of the month, which works out well for me anyway since I should be getting a small bonus on the 28th of this month. I think what I will do is use $5000 from my savings and then contribute whatever else I can afford to contribute from my bonus on the 28th.

Thanks for helping me think this all out, Phineas.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Phineas J. Whoopee » Wed Nov 05, 2014 11:21 pm

What I'm here for.

Now hear what I'm here for and more. If you want to buy this month, it's through treasurydirect.gov, and you'd best get started on setting up an account there with a linked bank account from elsewhere. Often the latter part goes smoothly, but when not, it's very much not. Don't take chances. Begin today. Don't wait until the morning. Do it now.

28 November 2014 is, if my calendar isn't totally flummoxed, a Friday. If you're paid your bonus on a Friday, and order the I Bonds that day from a properly (see previous paragraph) linked bank account, they'll be purchased and delivered on Monday, which is 1 December; and as we've agreed, buying at the beginning of the month - because with savings bonds one earns the interest, no matter when they're purchased, on the last day of the month (paid the next day) - isn't useful, so you might as well wait until late December.

Keep the money in a good savings account until then, and you'll be paid by both your bank and the Treasury for the same month.

It only works for savings bonds, and it's only for, say, three weeks or so out of thirty years, but what the hey.

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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Ganacel » Thu Nov 06, 2014 1:15 am

Lol, thanks for the tip to start now. I made the account and everything seems to have gone through, but how would I know if there was a problem with linking my savings account?

As for the purchase dates, drats, you are correct that I get paid on a Friday (11/28). It's not the end of the world; I'll just have to move some money around the day before. Would it be in time for me to get the i-bonds in November if I bought them on Thursday 11/27 (presumably they would then be delivered on Friday 11/28)?
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby z3r0c00l » Thu Nov 06, 2014 7:20 am

Absolutely, I buy $10,000 every year for now. This is most of my eFund outside of a few thousand in the bank.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Ignatious P. Daily » Thu Nov 06, 2014 7:22 am

I do typically buy every year. However, I have not been holding onto my iBonds with a fixed rate less than 1%. I liquidated most to buy my house. I have a car purchase coming in a couple years, so I will likely liquidate more then. Hopefully we will be back over 1% after that as I have no more big purchases on the horizon after that....
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Call_Me_Op » Thu Nov 06, 2014 8:04 am

I buy I-Bonds and EE-Bonds each year. They are added to my "SAFE" allocation, which can be thought-of as cash-like.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Jack FFR1846 » Thu Nov 06, 2014 8:23 am

I've been buying iBonds forever. It was great when we could buy online with a rewards credit card. We had several years of first class upgrades in those times. I use the bonds as a savings account. No state tax when cashed. I have a solid 7 years of expenses in bonds so my ef box is ticked. We are only now getting paper bonds from our fed refund. They are so convenient and easy to cash same day at our credit union. Stopped buying otherwise when they went to electronic.

We went to cash 2 electronic bonds when my dad passed away. Each listed one of my sons as co owner. For $400 in bonds, it took about 3 hours on the phone with treasury direct. Too much hassle.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Grt2bOutdoors » Thu Nov 06, 2014 8:26 am

Call_Me_Op wrote:I buy I-Bonds and EE-Bonds each year. They are added to my "SAFE" allocation, which can be thought-of as cash-like.


I had been doing that, but have found paying down debt offers a far better, immediate return on my money.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Ignatious P. Daily » Thu Nov 06, 2014 8:29 am

Grt2bOutdoors wrote:
Call_Me_Op wrote:I buy I-Bonds and EE-Bonds each year. They are added to my "SAFE" allocation, which can be thought-of as cash-like.


I had been doing that, but have found paying down debt offers a far better, immediate return on my money.


I did this too. But now I am out of debt to go after... :oops:
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby bungalow10 » Thu Nov 06, 2014 10:32 am

Grt2bOutdoors wrote:
Call_Me_Op wrote:I buy I-Bonds and EE-Bonds each year. They are added to my "SAFE" allocation, which can be thought-of as cash-like.


I had been doing that, but have found paying down debt offers a far better, immediate return on my money.


Grt2bOutdoors - are you prepaying your mortgage at this point?
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Grt2bOutdoors » Thu Nov 06, 2014 10:56 am

bungalow10 wrote:
Grt2bOutdoors wrote:
Call_Me_Op wrote:I buy I-Bonds and EE-Bonds each year. They are added to my "SAFE" allocation, which can be thought-of as cash-like.


I had been doing that, but have found paying down debt offers a far better, immediate return on my money.


Grt2bOutdoors - are you prepaying your mortgage at this point?


Yep.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Call_Me_Op » Thu Nov 06, 2014 11:13 am

Grt2bOutdoors wrote:
Call_Me_Op wrote:I buy I-Bonds and EE-Bonds each year. They are added to my "SAFE" allocation, which can be thought-of as cash-like.


I had been doing that, but have found paying down debt offers a far better, immediate return on my money.


I don't have any debt left to pay-off. :)
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby bungalow10 » Thu Nov 06, 2014 11:36 am

Grt2bOutdoors wrote:
bungalow10 wrote:
Grt2bOutdoors wrote:
Call_Me_Op wrote:I buy I-Bonds and EE-Bonds each year. They are added to my "SAFE" allocation, which can be thought-of as cash-like.


I had been doing that, but have found paying down debt offers a far better, immediate return on my money.


Grt2bOutdoors - are you prepaying your mortgage at this point?


Yep.


Good for you. I just can't seem to decide what I want to do.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby HomerJ » Thu Nov 06, 2014 1:50 pm

Texas hold em71 wrote:I do not. Since I have no state or local income tax and I-bonds are taxable for federal purposes, I am not sure I would benefit. I also make too much for them to be used for qualified educational expenses.


We bought $30k worth over the last few years and I plan to retire before my kid's last year of college, so we can then use that money that year tax-free to pay for his last year.

Or maybe I won't retire in time and I'll just pay taxes on them someday... Oh well... I'll definitely be in a lower tax bracket by the time I redeem them.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby LK2012 » Thu Nov 06, 2014 6:26 pm

I've been buying them yearly since 2011. I try to max out each year for myself and spouse, although sometimes we don't make it all the way. Also do the $5000 tax return the past couple years. The IRS made an error the first year and gave me the $5000 back, but the past 2 years it has worked fine.

Before that I bought a small one in October 2001 (3% fixed rate). Boy, do I wish I could have afforded to buy more then!

I use them as a "back-up" EF tier.

I'm in such a low tax bracket that I pay the tax on the interest every year. May be in a higher tax bracket in the future.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby JDDS » Thu Nov 06, 2014 11:56 pm

I'm filling out my EF with them. I'm still considering whether to continue after that. My house downpayment fund is currently in CDs at PenFed. I've thought about adding a bit more to that, but whether another PenFed CD makes sense or I bonds will depend on the Dec or Jan PF CD rates.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Kalo » Fri Nov 07, 2014 12:22 am

I bought the full 10k about a year ago for my first purchase ever. Am thinking of buying my second 10k near the end of the month, plus my tax refund early next year.

Disappointing to think I will only get back the exact real value I am putting in and then have that amount reduced by taxes. Worse than a sucker's bet as you know what you're in for without a doubt.

But I do consider it part of my fixed income as well as emergency fund.

Possibly the most boring investment of all time. Which is its charm I guess.

I have learned the lesson about not timing the markets more from bonds than stocks. At least I've gotten it right with stocks occasionally. I've yet to be right about interest rates. Held off on buying I Bonds all year in hopes of a better fixed rate. I should have remembered, better the devil you know.

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Re: Are you buying I bonds in 2014? And if so, for what role

Postby toblerone » Fri Nov 07, 2014 1:18 am

I bought my first $10k in Nov 2013, next $10k in Oct 2014, and plan to continue for at least a few years. I'll be selling them to supplement my kids' 529s 4-10 yrs from now (if necessary). If they are not needed I will use to replace EF, currently in high yield savings. I think I-bonds are a good choice for low-risk and 5-10 year time horizon. Beyond 10 yrs I would instead put the $$ into my normal taxable investments and AA.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby JoMoney » Fri Nov 07, 2014 4:16 am

I started purchasing I Bonds this year via payroll deposit. Not thrilled with the fixed rate, but the "blended rate" has been pretty good and it should serve my purposes of emergency fund/savings well enough. I've been using the Vanguard Short-Term Bond index fund for the same emergency fund purpose, but it seems silly not to take advantage of the tax benefits/deferment features of Savings Bonds. I will probably continue to keep the Short-Term Bond fund, but try to migrate the bulk of my savings/emergency fund over to the IBonds once I have a reasonable amount past the one year minimum holding period.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby placeholder » Fri Nov 07, 2014 1:17 pm

I don't buy them for the following reasons:

1. No need for extra tax advantaged space for bonds as my 401k can comfortably hold my fixed income needs.

2. The 10k per year is so small compared to my fixed income allocation that it is a complication without much benefit.

3. I don't have a Treasury Direct account and don't want to futz with getting one.

4. My 401k offers a stable value fund that over the years that I've been looking at it has kept up well with inflation and provides protection for the principal and while not as secure as a government bond I feel is pretty safe based on the structure and the amount of assets in it plus I can put as much in that as I want and move in and out as needed.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Ice-9 » Fri Nov 07, 2014 2:21 pm

In 2003, I bought the then-max $30k I-Bonds and designated it as my emergency fund. This I-bond money yields 1.6% real.

A few years ago, I realized I couldn't ignore that my emergency fund was handily outperforming the part of my retirement portfolio allocated to inflation-indexed bonds. I have since been slowly buying some new, lower-yielding I-bonds each year so that, after they reach one-year of age, they will replace in my mental emergency fund a similar amount of the nicer 2003 I-bonds, which at that point are added to my asset allocation spreadsheet as part of my retirement portfolio rather than emergency fund. Then I sell an equivalent amount of TIPS from my retirement account and allocate per my asset allocation.

Whenever I get unenthusiastic about adding these low real rate I-bonds to my emergency fund, I remind myself that in one year (actually 11 months and a couple days) it will be that much more of my 1.6% real rate I-bonds that I will get to keep if an emergency were to happen. And, really, the new I-bonds still outperform an online savings account as an emergency fund, even at 0% real.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Phineas J. Whoopee » Fri Nov 07, 2014 3:47 pm

Ganacel wrote:Lol, thanks for the tip to start now. I made the account and everything seems to have gone through, but how would I know if there was a problem with linking my savings account?

It happened to me when I first signed up, and I found out because they gave me notice. I don't remember whether it was email, or snail mail, or something on their website, because that was back in 2010, the year I first became turned on to I Bonds. I could have bought some in the as-it-turns-out more lucrative early 2000s if they were on my radar, but in the early 1990s, in the pre-I Bonds days, I'd considered savings bonds, dismissed them as not especially useful in my personal circumstances, and didn't revisit the question until I had read some posts about them here. I was lurking well before then, but, in keeping with my earlier and reasonable-for-that-time decision, I didn't bother with savings bonds threads.

Ganacel wrote:As for the purchase dates, drats, you are correct that I get paid on a Friday (11/28). It's not the end of the world; I'll just have to move some money around the day before. Would it be in time for me to get the i-bonds in November if I bought them on Thursday 11/27 (presumably they would then be delivered on Friday 11/28)?

A) If everything goes smoothly, yes.

B) I have never personally had a purchase experience at http://www.TreasuryDirect.gov that didn't go smoothly.

C) I always make it a practice to leave a couple of extra days, just in case.

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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Ganacel » Fri Nov 07, 2014 4:49 pm

Thanks, Phineas. After further consideration, I've decided that what makes the most sense for me is to wait to buy the i-bonds until I get my December bonus (on the 26th), which would give me three extra days (29th through 31st) the following week to make sure everything goes as planned. This will also allow me to save up another $2500+ this month and next month so that I can buy the entire $10,000 worth of i-bonds for 2014 and still have at least six months of expenses total in my EF at all times. In January/February, I will replace whatever is still missing from savings to bring me up to a total of six months expenses in savings + two months in checking (total eight months of expenses) since the i-bond cannot be used as part of my EF yet. Then starting next December 1, I will have the i-bond third tier of EF (and a total of one year's expenses set aside among the three tiers).

Does it seem ironic to anyone else here that I'm going to almost be living paycheck to paycheck for a few months so that I can buy i-bonds??? I know it's for a good purpose and it's not like I'm blowing the money on some frivolous consumer item, but I still kind of have to laugh at how hard I'm working to rearrange my budget to accommodate this "unexpected purchase." Not to mention that I'm going to try to work a few extra days next month and in January to help pay for it faster. :P
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Phineas J. Whoopee » Fri Nov 07, 2014 6:01 pm

Irony? No, unless one considers the usual US usage of the word ironic which flips back on itself so thoroughly I'm fearful of thinking about it lest I offend the logic deities and simply disappear, as Descartes did, when, after polishing off a white wine spritzer, and upon having been asked by the bartender if he'd like another, replied I think not.

Rationality? Yes.

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Re: Are you buying I bonds in 2014? And if so, for what role

Postby DAK » Fri Nov 07, 2014 8:58 pm

Selling 40k in I bonds this year from Treasury Direct. Highest tax bracket and Id rather put the money elsewhere. Plus the extra accounts at TD were a pain. I will keep the 30k I have in paper I bonds.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby stevewolfe » Fri Nov 07, 2014 9:03 pm

My IPS says I need a floor of 20% of my fixed income to be in inflation protected bonds. So I need to buy inflation protected bonds each year as I am in the accumulation phase. I sold out of my TIPS fund a few years ago, so unless that becomes a more attractive option next year, I'll be buying more I-Bonds. I will probably wait to see if we can get a > 0.00% fixed rate till May and then buy. Not that it'll matter that much... :beer
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Tamales » Sat Nov 08, 2014 11:18 am

Phineas J. Whoopee wrote:
surfer1 wrote:I look at I-bonds as a no-brainer and buy the max I can each year. It's basically a gift "CD" from the fed. You won't find a better risk-free interest rate. If you need the money, just break the bond after 12 months.

I agree, but just for the record, they aren't from the Fed. They're from Treasury....
PJW


Could you elaborate on this "gift CD from [treasury]" aspect?
When I look here: http://www.treasurydirect.gov/indiv/res ... dterms.htm
it says the current composite rate for an I Bond purchased in late November would be 1.48%

and when I look here: http://www.interest.com/cd-rates/rates/ ... e&MSA=6200
that 1.48% rate on I Bonds matches most closely with the highest yielding 3 year CD, nationwide.

So I'm not entirely clear on what is meant by it being like a gift CD, since you can get that same rate or higher via CDs (if you shop around and are OK with 3 year or longer term CD)?
If instead you compare the I Bond to a 5 year CD (since I bonds have an "early withdrawal penalty" of 3 months interest if cashed out within first 5 years, similar to many 5 year CDs) they are quite a bit less.

Also wondering, has this relationship held historically (i.e. that I bonds are approximately the same yield as the highest yielding 3 year CD at any given date, or is that just a coincidence of the present? Has the composite rate on I bonds ever been less than the highest yielding 3 year CD? 2 year? 1 year?)
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby b4nash » Sat Nov 08, 2014 12:50 pm

Yep, maxed it out for house downpayment.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Phineas J. Whoopee » Sat Nov 08, 2014 2:38 pm

Tamales wrote:
Phineas J. Whoopee wrote:
surfer1 wrote:I look at I-bonds as a no-brainer and buy the max I can each year. It's basically a gift "CD" from the fed. You won't find a better risk-free interest rate. If you need the money, just break the bond after 12 months.

I agree, but just for the record, they aren't from the Fed. They're from Treasury....
PJW

Hi Tamales,

Tamales wrote:Could you elaborate on this "gift CD from [treasury]" aspect?

No, I could not, because I didn't write that. I was helping with terminology a little bit for something surfer1 said. Re-rading my words now, I see I could have been more clear that I was agreeing with the "you won't find a better risk-free interest rate" aspect, but not necessarily the other aspects. I needed to leave the "gift" part in because I was specifically differentiating between the Fed and the Treasury and that was its context.

Perhaps surfer1 would care to elaborate.

Tamales wrote:When I look here: http://www.treasurydirect.gov/indiv/res ... dterms.htm
it says the current composite rate for an I Bond purchased in late November would be 1.48%

and when I look here: http://www.interest.com/cd-rates/rates/ ... e&MSA=6200
that 1.48% rate on I Bonds matches most closely with the highest yielding 3 year CD, nationwide.

So I'm not entirely clear on what is meant by it being like a gift CD, since you can get that same rate or higher via CDs (if you shop around and are OK with 3 year or longer term CD)?
If instead you compare the I Bond to a 5 year CD (since I bonds have an "early withdrawal penalty" of 3 months interest if cashed out within first 5 years, similar to many 5 year CDs) they are quite a bit less.

A zero percent fixed I Bond will keep up with inflation, on a before-tax basis, for up to thirty years. I'm not sure where the comparison to three- and five-year CDs comes from. One will be misled if one fails to distinguish between nominal and real returns.

If I calculate the 5-year break-even rate today it's 1.59%. The I Bond's inflation adjustment will change each six months to represent realized inflation, so 1.48% is almost certainly not what it will return over any period longer than six months.

Furthermore, the post you responded to is a year old. Nominal and real interest rates then were not what they are now.

Tamales wrote:Also wondering, has this relationship held historically (i.e. that I bonds are approximately the same yield as the highest yielding 3 year CD at any given date, or is that just a coincidence of the present? Has the composite rate on I bonds ever been less than the highest yielding 3 year CD? 2 year? 1 year?)

I don't know. Perhaps if you look up historical data on high-rate CDs for the past several years somebody could volunteer an analysis. I would be surprised if the relationship is persistent because nominal and real rates don't move in tandem.

PJW
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby john94549 » Sat Nov 08, 2014 11:00 pm

PJW, for quite a few years, I have compared IBonds with my other fixed-income options. Five-year CDs usually trumped. As they do now.

http://www.ibonds.info/I-Bond-Rates/I-B ... -Rate.aspx

Ignoring purchase limitations, the widest disparity I can recall was back in May, 2010, with the composite at 1.74% and a seven-year after-tax USAA CD at 3.8%. Which I bought.
Last edited by john94549 on Sat Nov 08, 2014 11:29 pm, edited 1 time in total.
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Re: Are you buying I bonds in 2014? And if so, for what role

Postby Phineas J. Whoopee » Sat Nov 08, 2014 11:25 pm

john94549 wrote:PJW, for quite a few years, I have compared IBonds with my other fixed-income options. Five-year CDs usually trumped. As they do now.

http://www.ibonds.info/I-Bond-Rates/I-B ... -Rate.aspx

If I Bonds were 5-year fixed-rate nominal bonds with no purchase restrictions doing so would make a lot of sense.
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