EE bonds vs iBonds

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atl2005
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EE bonds vs iBonds

Post by atl2005 »

My wife and I are looking to purchase some EE bonds next week. The reason I like these bonds is the guaranteed double on your initial investment, and the exemption from state taxes. We are investing the full 20k, so our return after our 28% federal taxes should be 34,400 after the full 20 years. I like the guaranteed return of 3.6% on average per year after taxes.

We are also trying to decide whether to invest in a 5 yr CD at 2.25% or in iBonds, but my knowledge of iBonds is very limited. I understand the rate is made up of two components, one which is fixed and one that is variable. However, I don't understand how it really works. It appears the fixed rate is currently 0%, so if I were to buy in now then my entire return is based on inflation rates? So for the iBonds to match the CD I would have to get close to a 2.25% composite (not figuring in state tax exemption), so inflation rate would have to be 1.13%?
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Re: EE bonds vs iBonds

Post by Iorek »

I think that's right, although don't forget you also can defer federal taxes on the i-bond interest.
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Re: EE bonds vs iBonds

Post by Mel Lindauer »

And the I Bonds can be tax-free if used for qualifying educational expenses for your or your children.
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Angst
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Re: EE bonds vs iBonds

Post by Angst »

Mel Lindauer wrote:And the I Bonds can be tax-free if used for qualifying educational expenses for your or your children.
As can be the EE Bonds!
Treasury Direct on Using Savings Bonds for Educational Expenses
Last edited by Angst on Sat Jan 17, 2015 3:31 pm, edited 1 time in total.
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Re: EE bonds vs iBonds

Post by Grt2bOutdoors »

Right now, given the current economic data, it's projected the inflation rate for I bonds for May will be 0% and the fixed rate may be somewhere between 0-.20%. If that holds, your composite rate of 1.13% is going to have to be a heck of a lot higher in the following six months come November.
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atl2005
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Re: EE bonds vs iBonds

Post by atl2005 »

Grt2bOutdoors wrote:Right now, given the current economic data, it's projected the inflation rate for I bonds for May will be 0% and the fixed rate may be somewhere between 0-.20%. If that holds, your composite rate of 1.13% is going to have to be a heck of a lot higher in the following six months come November.
Why do so many people seem to write off EE bonds? Just seems like most people want iBonds, even though there is no guarantee at all and no difference in tax advantage vs EE bonds. Is it just the 20 years that is simply too much? I guess for my age 29, I don't think of a 20 year investment as being that big of a deal. If I don't need the money, and I know I can double it safely why not go for it.
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Re: EE bonds vs iBonds

Post by john94549 »

In the current interest-rate environment, EE bonds are quite tasty. Just buy each year, and be patient. When (if) those 5-yr CDs begin to inch back to normal (say, 4%), then suspend the EE buys, buy the 5-yr CDs and ladder them.
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Re: EE bonds vs iBonds

Post by Dutch »

A lot can happen in 20 years, but EE bonds definitely look more attractive than I Bonds right now.
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Re: EE bonds vs iBonds

Post by Grt2bOutdoors »

ugaDAWGS09 wrote:
Grt2bOutdoors wrote:Right now, given the current economic data, it's projected the inflation rate for I bonds for May will be 0% and the fixed rate may be somewhere between 0-.20%. If that holds, your composite rate of 1.13% is going to have to be a heck of a lot higher in the following six months come November.
Why do so many people seem to write off EE bonds? Just seems like most people want iBonds, even though there is no guarantee at all and no difference in tax advantage vs EE bonds. Is it just the 20 years that is simply too much? I guess for my age 29, I don't think of a 20 year investment as being that big of a deal. If I don't need the money, and I know I can double it safely why not go for it.
Look up my posts, 5 years ago, I said the EE's were tasty with current coupons paying back then of 1.1-1.4% and was told I bonds were better fare. Now, we're still being told I bonds because of dreaded inflation, only we haven't had any real inflation to speak of, instead we've been treated to deflation - deflation in real estate prices, deflation in wage growth, deflation in benefits and low fixed real rates. Anyone who held LT nominals has made out like a bandit and then some, with no real risk - you hold to maturity you get your money back in nominal terms. My only hope now is the folks over at the Treasury don't take a good thing away.
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Re: EE bonds vs iBonds

Post by Userdc »

ugaDAWGS09 wrote:My wife and I are looking to purchase some EE bonds next week. The reason I like these bonds is the guaranteed double on your initial investment, and the exemption from state taxes. We are investing the full 20k, so our return after our 28% federal taxes should be 34,400 after the full 20 years. I like the guaranteed return of 3.6% on average per year after taxes.

We are also trying to decide whether to invest in a 5 yr CD at 2.25% or in iBonds, but my knowledge of iBonds is very limited. I understand the rate is made up of two components, one which is fixed and one that is variable. However, I don't understand how it really works. It appears the fixed rate is currently 0%, so if I were to buy in now then my entire return is based on inflation rates? So for the iBonds to match the CD I would have to get close to a 2.25% composite (not figuring in state tax exemption), so inflation rate would have to be 1.13%?
I look at EE Bonds every year, and I've come close a few times. I like the tax deferral, and it's a good 20 year US government guaranteed rate in this interest rate environment.

Rational or not, I always struggle with how the early withdrawal "penalty" is so large and grows over time. If it was a true 3.5% bond with an early withdrawal penalty that forfeits 24 months of interest, I'd buy $20K every year.
Last edited by Userdc on Sat Jan 17, 2015 4:04 pm, edited 1 time in total.
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Re: EE bonds vs iBonds

Post by Mel Lindauer »

Angst wrote:
Mel Lindauer wrote:And the I Bonds can be tax-free if used for qualifying educational expenses for your or your children.
As can be the EE Bonds!
Treasury Direct on Using Savings Bonds for Educational Expenses
I should have been clearer. Newly purchased EE Bonds do qualify, but some older ones don't. Only EE Bonds issued after 1989 qualify for the tax-free qualifying educational expense treatment. On the other hand, all I Bonds qualify.
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Re: EE bonds vs iBonds

Post by john94549 »

userdc, the EE is the classic "safety deposit box" investment. You buy it, you print out your receipt, plop in a safe place, and "fuggedaboutit" for twenty years. Think of it as the ultimate illiquid investment.
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Re: EE bonds vs iBonds

Post by Iorek »

Userdc wrote:
ugaDAWGS09 wrote:My wife and I are looking to purchase some EE bonds next week. The reason I like these bonds is the guaranteed double on your initial investment, and the exemption from state taxes. We are investing the full 20k, so our return after our 28% federal taxes should be 34,400 after the full 20 years. I like the guaranteed return of 3.6% on average per year after taxes.

We are also trying to decide whether to invest in a 5 yr CD at 2.25% or in iBonds, but my knowledge of iBonds is very limited. I understand the rate is made up of two components, one which is fixed and one that is variable. However, I don't understand how it really works. It appears the fixed rate is currently 0%, so if I were to buy in now then my entire return is based on inflation rates? So for the iBonds to match the CD I would have to get close to a 2.25% composite (not figuring in state tax exemption), so inflation rate would have to be 1.13%?
I look at EE Bonds every year, and I've come close a few times. I like the tax deferral, and it's a good 20 year US government guaranteed rate in this interest rate environment.

Rational or not, I always struggle with how the early withdrawal "penalty" is so large and grows over time. If it was a true 3.5% bond with an early withdrawal penalty that forfeits 24 months of interest, I'd buy $20K every year.
+1. I think about how things have changed over the last 20 years and I just don't like the idea of tying my money up for that long (yes I could cash them in, but if I do so I accept an interest rate of 0.10 %). Certainly it could be the case that 3.5% will turn out to be a great interest rate for the next 20 years, but the flip side is also true.
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atl2005
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Re: EE bonds vs iBonds

Post by atl2005 »

Quick question about the taxes you pay with these bonds. With EE bonds assuming I contribute 20k and make 20k. I will pay taxes on the full 20k amount when I cash them in after 20 years?
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Re: EE bonds vs iBonds

Post by Mel Lindauer »

ugaDAWGS09 wrote:Quick question about the taxes you pay with these bonds. With EE bonds assuming I contribute 20k and make 20k. I will pay taxes on the full 20k amount when I cash them in after 20 years?
Yes, you'd owe taxes on all of the accumulated interest. However, you can elect to pay interest each year if you choose.
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Re: EE bonds vs iBonds

Post by matthylland »

I will also vouch for EE bonds. Today the 30 year treasury bond is yielding 2.44%... you can get a 3.52% over 20 years with an EE bond ( 3.98% without considering taxes if you can use if for a qualified education expense).

I don't know you and your wife's situations, but As a 27 year old, almost positive the money will go to educational expenses...its hard to find a better, safer savings vehicle for after tax dollars
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Re: EE bonds vs iBonds

Post by happymob »

Mel Lindauer wrote:
Angst wrote:
Mel Lindauer wrote:And the I Bonds can be tax-free if used for qualifying educational expenses for your or your children.
As can be the EE Bonds!
Treasury Direct on Using Savings Bonds for Educational Expenses
I should have been clearer. Newly purchased EE Bonds do qualify, but some older ones don't. Only EE Bonds issued after 1989 qualify for the tax-free qualifying educational expense treatment. On the other hand, all I Bonds qualify.
It's also trickier to time the educational expense with the 20-year doubling. In hindsight, I wish I had purchased some EE bonds when each of my kids were born. Now, with a 5-year-old, it's probably* too late to take advantage of doubling tax-free.

*As a college professor, I am well aware that a lot of 25-year-olds are in college, whether graduate or professional school, or working on an undergraduate education that went horribly wrong when they were 19.
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Re: EE bonds vs iBonds

Post by lazyday »

Iorek wrote:I think about how things have changed over the last 20 years and I just don't like the idea of tying my money up for that long
I've already bought and redeemed once, for Penfed 3% 5 and 7 year with reasonable early withdrawal policies.

Thinking about buying again this month, but probably won't. The spread to a 20 year zero is only about 1.1%, while there's 5 year CDs with spread about 1% and you don't lose much interest if you withdraw early. If I wanted 20 year maturity, or were low on tax advantaged space, I'd consider the EE much more seriously.
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Re: EE bonds vs iBonds

Post by Call_Me_Op »

Iorek wrote: I think about how things have changed over the last 20 years and I just don't like the idea of tying my money up for that long (yes I could cash them in, but if I do so I accept an interest rate of 0.10 %). Certainly it could be the case that 3.5% will turn out to be a great interest rate for the next 20 years, but the flip side is also true.
That's why I buy both I Bonds and EE Bonds. You can't predict the future, so you don't know which will turn out better. Both are fine investments for the SAFE portion of your portfolio. After all, look at the alternatives.

The I Bonds that were paying a good real rate were near perfect investments. We don't have that anymore.
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Re: EE bonds vs iBonds

Post by sam5 »

I have both EE and I bonds for my emergency savings fund.

Before 2011 EE bonds sold for 1/2 face value and were guaranteed to reach face value in about 20 years. Now the EE bonds sell for full face value. I can't find anything at treasurydirect dot com describing the guarantee of doubling your money in 20 years with an EE bond. Has this feature been taken away from the EE bond???

I have to decide whether to purchase EE or I bonds this year, and am enjoying this discussion.
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Re: EE bonds vs iBonds

Post by Iorek »

sam5 wrote:I have both EE and I bonds for my emergency savings fund.

Before 2011 EE bonds sold for 1/2 face value and were guaranteed to reach face value in about 20 years. Now the EE bonds sell for full face value. I can't find anything at treasurydirect dot com describing the guarantee of doubling your money in 20 years with an EE bond. Has this feature been taken away from the EE bond???

I have to decide whether to purchase EE or I bonds this year, and am enjoying this discussion.
"Electronic bonds are sold at face value (not half of face value). They start to earn interest right away on the full face value. Treasury guarantees that for an electronic EE Bond with a June 2003 or later issue date, after 20 years, the redemption (cash-in) value will be at least twice the purchase price of the bond. If the redemption (cash-in) value is not at least twice the purchase price of the electronic bond as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20 year anniversary of the bond's issue date to make up the difference."

https://www.treasurydirect.gov/indiv/re ... ndafer.htm
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Re: EE bonds vs iBonds

Post by gracemaclean »

This is probably a silly question, but, assuming that the composite iBond rate approximates 0% as of May 1, 2015, would it be possible to redeem
under-five-year bonds between July and October, 2015, without effectively incurring any three month interest penalty? Thank you.
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Re: EE bonds vs iBonds

Post by Dutch »

gracemaclean wrote:This is probably a silly question, but, assuming that the composite iBond rate approximates 0% as of May 1, 2015, would it be possible to redeem
under-five-year bonds between July and October, 2015, without effectively incurring any three month interest penalty? Thank you.
Yes, I believe that's correct. You just have to wait for 3 months of 0% interest to "accrue" which will then be "deducted" as the penalty.
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Re: EE bonds vs iBonds

Post by Mel Lindauer »

gracemaclean wrote:This is probably a silly question, but, assuming that the composite iBond rate approximates 0% as of May 1, 2015, would it be possible to redeem
under-five-year bonds between July and October, 2015, without effectively incurring any three month interest penalty? Thank you.
Your question is not clear, but here's the rule. For the first year, you can't redeem the I Bonds at all (except for certain stated emergency situations, as determined by the Treasury).

Between one and five years, you can redeem the I Bonds, but you'd lose the last three months' interest. The only way that would be $0 is if the composite rate (the fixed rate PLUS the inflation adjustment) for the three months prior to redemption was 0%.

Hope that helps.
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Re: EE bonds vs iBonds

Post by wow!howmuch? »

Very new here. In the process of learning more and in some ways getting back to investing (finished Grad school.....now a Family Nurse Practitioner :happy :shock: ). We have a few EE bonds for the kids dating back to 2003 and a few I bonds.

I am confused on the "the guaranteed return of 3.6% on average per year after taxes." in the OP. If i buy a new EE bond it states 0.10% and and the bond can earn interest for 30years. How or where does the 3.6% come in?


I realize I am old school and love love having the paper bonds, I plan on getting some paper I bonds with my tax return. Do you all like the treasure.gov set up? just leerie with the whole healthcare .gov......failures
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Re: EE bonds vs iBonds

Post by teacher5 »

OK I must be missing something about EE bonds. I just checked the treasury direct website and it says the fixed rate on EE bonds is 0.10 %. How are people coming up with over 3% ?
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Re: EE bonds vs iBonds

Post by Grt2bOutdoors »

teacher5 wrote:OK I must be missing something about EE bonds. I just checked the treasury direct website and it says the fixed rate on EE bonds is 0.10 %. How are people coming up with over 3% ?
The current coupon is 0.10%, however at the 20 year mark (initial maturity), if the value of the bond has not doubled, the US Treasury will make a one-time adjustment. The compounded annual growth rate equates to 3.53% nominal over the 20 year period. After the 20 year initial maturity, the Treasury can either leave the 0.10% coupon rate intact or they can change it as they wish.
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Re: EE bonds vs iBonds

Post by staythecourse »

Not to divert the topic, but was wondering if anyone has looked at the chances of a 20/80 portfolio not doubling in a 20 yr. horizon. Just wondering how important is the guarantee to double if something else could do the same with very little volatility and not annual restriction on how much one can invest.

Good luck.
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Re: EE bonds vs iBonds

Post by teacher5 »

Thanks! I have a portion of my emergency fund in I bonds (beats a savings account). At 50 I don't think the 20 year guarantee is as attractive as it would be for younger people.
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Re: EE bonds vs iBonds

Post by market timer »

staythecourse wrote:Not to divert the topic, but was wondering if anyone has looked at the chances of a 20/80 portfolio not doubling in a 20 yr. horizon. Just wondering how important is the guarantee to double if something else could do the same with very little volatility and not annual restriction on how much one can invest.

Good luck.
While I don't know the chances that a 20/80 portfolio will double over the next 20 years, the chances are certainly improved by using EE bonds in the bond portion of the 20/80 portfolio.
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Re: EE bonds vs iBonds

Post by jmk »

EE bonds seem like perhaps the best bet for the small investor looking to fill the "safe" part of their long term allocation. Treasuries, that would normally fill this function, are much lower (with much higher volatility and interest risk). Bank, CDs, MMs, also much lower. So as long as you don't need them for 20y, they seem like a great vehicle. I own a bunch of ibonds back when the real rate was 3.6%, so have plenty of inflation protection. That's the thing you'd need to hedge against with EE bonds. But still.

One can't hold EE bonds or Ibonds in an IRA though, can they?
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Re: EE bonds vs iBonds

Post by Mel Lindauer »

jmk wrote: One can't hold EE bonds or Ibonds in an IRA though, can they?
There's no legal reason why they can't be held in an IRA, but there is a practical reason. You need a custodian for your IRA, and as of now, there is no custodian who will hold Savings Bonds for your IRA account (there's just no financial incentive/reward for them to do so).

So, for all practical purposes, you can't hold Savings Bonds in an IRA. Besides, they're already tax-deferred, so there's even less incentive for an investor to put them there. Finally, they're free from state and local taxation, whereas withdrawals from an IRA are usually subject to state and local taxation.
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Re: EE bonds vs iBonds

Post by Iorek »

Call_Me_Op wrote:
Iorek wrote: I think about how things have changed over the last 20 years and I just don't like the idea of tying my money up for that long (yes I could cash them in, but if I do so I accept an interest rate of 0.10 %). Certainly it could be the case that 3.5% will turn out to be a great interest rate for the next 20 years, but the flip side is also true.
That's why I buy both I Bonds and EE Bonds. You can't predict the future, so you don't know which will turn out better. Both are fine investments for the SAFE portion of your portfolio. After all, look at the alternatives.

The I Bonds that were paying a good real rate were near perfect investments. We don't have that anymore.
Reviving this thread because for 2016 I started splitting the amount I was putting into I-bonds between i-bonds and EE bonds but now with Yellen talking about trying to get the fed funds rate back up around 3% and [insert banned political speculation], I am wondering whether to go back to i-bonds only for the flexibility, or whether the fact of splitting between i bonds and EE is enough of a hedge.

I am not worried about having to tap these bonds over the next 20 years (in fact, one thing that is better about I bonds is they keep earning an attractive interest rate between year 20 and year 30, but on the other hand I will be retired 20 years from now, so the timing isn't bad).

In the end, the money we're talking isn't enough to materially change things, but I am curious if any Bogleheads have wrestled with this, or changed views, lately.
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Re: EE bonds vs iBonds

Post by JWooden10 »

I am not worried about having to tap these bonds over the next 20 years (in fact, one thing that is better about I bonds is they keep earning an attractive interest rate between year 20 and year 30, but on the other hand I will be retired 20 years from now, so the timing isn't bad).

In the end, the money we're talking isn't enough to materially change things, but I am curious if any Bogleheads have wrestled with this, or changed views, lately.
I also fall into the category where this quantity won't materially change things and will be in retirement yet before RMD's in 20 years. I've been mulling over if adding ibonds for some additional "safe" money in my portfolio in 2016 makes sense. I'm over-weighted in my asset allocation and should be adding additional bonds. Been playing around with how this may work out instead of rebalancing in 401k. Holding off so far.
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Re: EE bonds vs iBonds

Post by fipt2030 »

Would love to revive the topic for 2017,
We have a low seven figure portfolio now in bond funds and cash,still working on AA plan
Our strategy moving forward is to allocate
10K for both,I bond and EE bond every year for both of us (early 40's) from now till we retire at 60, while pumping 40K more to equities

We are very conservative at AA, any comments are welcome
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Re: EE bonds vs iBonds

Post by Grt2bOutdoors »

fipt2030 wrote: Sat Oct 07, 2017 3:19 pm Would love to revive the topic for 2017,
We have a low seven figure portfolio now in bond funds and cash,still working on AA plan
Our strategy moving forward is to allocate
10K for both,I bond and EE bond every year for both of us (early 40's) from now till we retire at 60, while pumping 40K more to equities

We are very conservative at AA, any comments are welcome
Suggest you start a new thread, and show your current portfolio as noted in the link by my signature ---> Asking Portfolio Questions. You'll likely receive more comments that way.
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Re: EE bonds vs iBonds

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Re: EE bonds vs iBonds

Post by LadyGeek »

^^^ Here's the start of the thread: 2M savings investment help

Further responses to help fipt2030 should go in the above thread.
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Re: EE bonds vs iBonds

Post by Mel Lindauer »

ugaDAWGS09 wrote: Sat Jan 17, 2015 3:39 pm
Grt2bOutdoors wrote:Right now, given the current economic data, it's projected the inflation rate for I bonds for May will be 0% and the fixed rate may be somewhere between 0-.20%. If that holds, your composite rate of 1.13% is going to have to be a heck of a lot higher in the following six months come November.
Why do so many people seem to write off EE bonds? Just seems like most people want iBonds, even though there is no guarantee at all and no difference in tax advantage vs EE bonds. Is it just the 20 years that is simply too much? I guess for my age 29, I don't think of a 20 year investment as being that big of a deal. If I don't need the money, and I know I can double it safely why not go for it.
One word of caution: In 20 years, you'll be 49 and perhaps in your prime earning years, and thus in a high tax bracket. If that's so, you might want to consider holding them until after you retire (hopefully before 30 years) and are in a lower tax bracket when you redeem them.
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Re: EE bonds vs iBonds

Post by Mel Lindauer »

Here's a Forbes column I did some time back, showing how investors can build their own annuity using EE Savings Bonds.

https://www.forbes.com/sites/theboglehe ... 8ab42d7ba3
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