EE Bonds as part of a retirement strategy?

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crowd79
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EE Bonds as part of a retirement strategy?

Post by crowd79 »

I realize EE Bonds are a very poor option at .20% interest for short-term investments of any kind. However at 20 years, a guaranteed return of 3.53% after doubling, add an additional 4.25% to that (Michigan state income tax rate avoidance) and it comes out to about 3.645% return. Inflation has remained below 2.5% on average in our country's history...although that can certainly change. Seems like a good very long term option in our low rate environment to start with, as I don't think rates will rise rapidly or anywhere near 3.5% for several years. So, what do you think?
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Re: EE Bonds as part of a retirement strategy?

Post by letsgobobby »

Higher exposure to unexpected inflation. Compare to I bonds; do you feel lucky?

Also, unlike I bonds, you have to redeem in exactly twenty years to get that 3.645% return. What will your tax bracket be then? In twenty years will you be in your peak earning years? or in retirement? Will your income allow you to qualify to redeem tax free for the benefit of your children's education at that precise moment?
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Re: EE Bonds as part of a retirement strategy?

Post by market timer »

I've been buying the max of EE bonds for the past three years, and will continue to do so as long as they remain attractive relative to Treasuries. My goal is to be retired before the first bonds mature in 2030, and will perhaps use them for education expenses (tax free). Any bonds not used for education will form part of an early retirement annuity until Social Security kicks in.
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Re: EE Bonds as part of a retirement strategy?

Post by Grt2bOutdoors »

letsgobobby wrote:Higher exposure to unexpected inflation. Compare to I bonds; do you feel lucky?

Also, unlike I bonds, you have to redeem in exactly twenty years to get that 3.645% return. What will your tax bracket be then? In twenty years will you be in your peak earning years? or in retirement? Will your income allow you to qualify to redeem tax free for the benefit of your children's education at that precise moment?
Compared to holding outright cash, EE bonds are a swell idea. If you view them as twenty year zero-coupon, I think they are providing a competitive yield versus what is available on the open market. If you view them as being part of a much larger portfolio, they have a place. If you view them in isolation, they are your total portfolio, realize that inflation can devalue the purchasing power of your EE bonds in twenty years. IMO, EE bonds have a place in a retirement portfolio, along with I bonds, diversified equity and fixed income options. You could do much worse than not to buy EE bonds.

Now, no one says you must redeem at 20 years, that is the point where they reach the double, with each following year reducing the overall yield to maturity due to the 20 basis point annual coupon of the bond. You can hold them for 30 years if you wish. No one knows what their tax bracket is going to be 5 years from now, let alone 20 or 30 years - that should not be your primary motivator of whether to purchase or not. Current yield is not your primary motivator, either. Your primary determinant should be "what do I need 20 or 30 years from now and how will I get there"? Save more, keep expenses low, diversify. If it's truly for retirement, you must think long term. Right now, the EE yields more than a 30 year T-Bond. On basis of yield alone assuming you hold for at least 20 years, which is the better investment?

BTW, I've been buying them - last go round was at the 60bps level. They are part of the total portfolio and are only purchased if extra funds are available. It's 401k, Roth, 529, then I bonds, followed by EE's.
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Re: EE Bonds as part of a retirement strategy?

Post by letsgobobby »

EE bonds compare favorably to cash only if held for twenty years. There are many cash options today which pay more than EE bonds, including most CDs and many rewards checking type accounts.

They compare favorably to I bonds only if future inflation is greater than currently predicted and only if it occurs over almost precisely twenty years, maybe plus a little.

They are better than 30 year treasuries but not many have been suggesting those, especially on this board.

Ignoring one's personal tax situation is potentially hazardous. In 20 years I'll be 58 and will likely still be in a high tax bracket. If I were ten years older I'd be more attracted by the long term tax deferral.

I agree that all tax deferred space and I bonds should be used before EE bonds.
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Re: EE Bonds as part of a retirement strategy?

Post by Grt2bOutdoors »

The difference between your higher-yielding current savings options and EE's is the OP is considering using the EE's as part of the retirement strategy with an assumed horizon of 20 or more years. Yes, current savings account yield more in the short-term, however those rates are subject to change on someone's whim, the EE's under current terms have a baked in yield of 3.53% if held for 20 years. The OP is not interested in current yield, only yield to maturity. You can not make the claim that current savings vehicles offer comparable or better investment returns given the maturity mismatch - 20 years vs. a daily, monthly or even 10 year investment option. Even I-bonds with the better current yield are no sure bet, especially if past performance fails to continue and we experience a decade or two of ultra-low rates - nominal bonds will outperform in a deflationary enviornment unless you are holding some of those 3.6% I-bonds of the past. I'll bet insurance companies and pension funds would gobble up those 20 year zero's if they could purchase institutional sized amounts.
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Re: EE Bonds as part of a retirement strategy?

Post by STC »

EE-Bonds are good only if you know with 99% certainty that you will hold for 20, and ONLY 20 years. It is suitable for those who are less than 20 years from retirement, as part of an expense mapping strategy - so long as the AA is maintained. Knowing that you have $40k per year ($20k couples contribution doubled), helps with known expenses and can be used to bridge the gap between retirement and a SPIA.
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Re: EE Bonds as part of a retirement strategy?

Post by Average Investor »

Tomorrow never knows.
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Re: EE Bonds as part of a retirement strategy?

Post by Grt2bOutdoors »

When you invest for retirement in equities, are you guaranteed anything? One uses a 401k, IRA for the sole purpose of retirement usually. Now, for those questioning whether holding EE's for twenty years is much too long of a duration, I ask the question - what are you guaranteed by holding equities? What is your intention when investing for retirement? - to practice market-timing or to buy and hold/re-balance for the purpose of retirement? Buying EE's is no different than liability driven investing, you buy them to meet a specific need, not for the ability to switch out in 5 years or 12 years because the soup du jour is now something else.
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Re: EE Bonds as part of a retirement strategy?

Post by EyeYield »

I started buying EE's on a monthly basis in 1983, when the yield was 4%, and continued through 1994ish, when the rate became variable. The final maturity on the first one is 2013. I plan to cash them in on a monthly basis as they reach their final maturity, hoping to avoid a huge tax bill in any one year. I really don't have a choice, I don't think. Part of a retirement strategy from 30 years ago, it seems to have been an ok investment (today), even though during the time I was buying them, 4% was nothing compared to what a CD was paying. 30 years from now?? The pendulum is bound to swing the other way. RTM (reversion to the mean) :)
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Re: EE Bonds as part of a retirement strategy?

Post by 555 »

Grt2bOutdoors wrote:"...You could do much worse than not to buy EE bonds. ..."
What's an example of something that is much worse than not buying EE bonds?
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Re: EE Bonds as part of a retirement strategy?

Post by sscritic »

555 wrote:
Grt2bOutdoors wrote:"...You could do much worse than not to buy EE bonds. ..."
What's an example of something that is much worse than not buying EE bonds?
Overdosing on drugs?
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Re: EE Bonds as part of a retirement strategy?

Post by 555 »

sscritic wrote:
555 wrote:
Grt2bOutdoors wrote:"...You could do much worse than not to buy EE bonds. ..."
What's an example of something that is much worse than not buying EE bonds?
"Overdosing on drugs?"
That's already included in the given scenario.
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Re: EE Bonds as part of a retirement strategy?

Post by Grt2bOutdoors »

Cash placed under your mattress, cash buried in a coffee can and placed under the porch, cash placed in your wallet, lottery tickets, Vegas, buying Greek debt at issuance, Argentine bonds.
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Re: EE Bonds as part of a retirement strategy?

Post by nisiprius »

crowd79 wrote:I realize EE Bonds are a very poor option at .20% interest for short-term investments of any kind. However at 20 years, a guaranteed return of 3.53% after doubling, add an additional 4.25% to that (Michigan state income tax rate avoidance) and it comes out to about 3.645% return. Inflation has remained below 2.5% on average in our country's history...although that can certainly change. Seems like a good very long term option in our low rate environment to start with, as I don't think rates will rise rapidly or anywhere near 3.5% for several years. So, what do you think?
I don't see it. I'd compare it against series I savings bonds. The advantage of EE bonds over I bonds is slim, require you to hold for 20 years--a pretty long time--and includes a rather big old pack of assumptions.

They have the same state tax exemption, for what that's worth.

I admit I'd use 3% as the inflation number, for no good reason other than it's a frequently used round number. For series I savings bonds, if inflation runs about as expected, they do almost as well as EE, and you don't need to wait 20 years. If inflation spikes, the I bonds are better. If there's very little inflation, then I bonds do worse, but I can take it philosophically since they are still holding their real purchasing power.
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Re: EE Bonds as part of a retirement strategy?

Post by crowd79 »

I don't see it. I'd compare it against series I savings bonds. The advantage of EE bonds over I bonds is slim, require you to hold for 20 years--a pretty long time--and includes a rather big old pack of assumptions.

They have the same state tax exemption, for what that's worth.

I admit I'd use 3% as the inflation number, for no good reason other than it's a frequently used round number. For series I savings bonds, if inflation runs about as expected, they do almost as well as EE, and you don't need to wait 20 years. If inflation spikes, the I bonds are better. If there's very little inflation, then I bonds do worse, but I can take it philosophically since they are still holding their real purchasing power.
I already purchased my usual allotment of I-Bonds this year back in Feb and April, and probably will do so again next year, but wait until April/May until I know the full year's value of the I-Bond. Buying in January at only 1.76% is a bit risky, especially if there is zero inflation early next year and the next component is even lower or 0%, which would only equate to .88% interest for a whole year. I do agree I-Bonds are a very good shorter-term investments, and my current allocation is being saved up for a home purchase hopefully within a few years?? I don't know. I do very much like the idea of just keep renting and putting the "expected" home ownership costs instead into my retirement accounts.
Last edited by crowd79 on Mon Dec 10, 2012 10:03 pm, edited 1 time in total.
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Re: EE Bonds as part of a retirement strategy?

Post by 555 »

Grt2bOutdoors wrote:
555 wrote:
Grt2bOutdoors wrote:"...You could do much worse than not to buy EE bonds. ..."
What's an example of something that is much worse than not buying EE bonds?
"Cash placed under your mattress, cash buried in a coffee can and placed under the porch, cash placed in your wallet, lottery tickets, Vegas, buying Greek debt at issuance, Argentine bonds."
But these are just examples of not buying EE bonds.

What's an example of something that is much worse than not buying EE bonds?
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Re: EE Bonds as part of a retirement strategy?

Post by Grt2bOutdoors »

If you place cash under a mattress - what is your return after 20 years of 3% inflation? $1 is now worth significantly less than $1 in purchasing power.

If you purchased $1 in Series EE - what is your return after 20 years of 3% inflation? $1 has now become $2, $2 is worth $1 and change after the impact of taxes and inflation.

Which is worth more in twenty years? Hence, you could do worse than buying EE's. or did I phrase it incorrectly up above in previous posts? Quick, call the grammar police. :wink:
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Re: EE Bonds as part of a retirement strategy?

Post by crowd79 »

EE Bonds are an excellent hedge against possible ultra-low interest rates for many, many years. Also, inflation has stayed well below 3.6% (the rate EE Bonds pay in 20 years when they double) in the history of the U.S.. I think they do serve as a very good long-term bond diversification AFTER maxing out yearly I-Bond purchases first. I have began purchasing $250 of EE Bonds every month starting now.
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Re: EE Bonds as part of a retirement strategy?

Post by Noobvestor »

Curiosity question. EE bonds run for 30 years. After 20 years, they get a one-time adjustment and double.

After that happens, do they then continue to gain at the fixed rate unless the rules change (i.e. in this environment, .2% or whatever)?

Or do they 'stay' at the doubled amount until/unless the fixed rate 'catches up' (which in this case they never would, so they'd be the same after 30 as after 20 years).

Or, simply put, is a .2% fixed-rate EE bond cashed in 30 years worth (1) double the original value invested or (2) double the value + 10 years of .2% interest on top of that doubling.
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Re: EE Bonds as part of a retirement strategy?

Post by Johm221122 »

"At a minimum, the U.S. Treasury guarantees that an EE Bond's value will double after 20years, its original maturity, and it will continue to earn the fixed rate unless a new rate or rate structure is announced. If a bonddoes not double in value as the result of applying the fixed rate for 20years, the U.S. Treasury will make a one-time adjustment at original maturityto make up the difference. Series EE bonds earn interest for30 years."
http://www.treasurydirect.gov/indiv/res ... dterms.htm
I think choice 2 ,double after 20 years and .2% from 20-30 years
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Re: EE Bonds as part of a retirement strategy?

Post by SpecialK22 »

From my perspective, I don't see holding EE Bonds as requiring an iron resolve to delay gratification. That the penalty is so high for "early redemption" and the yield is ever increasing as the bond nears maturity prevents temptation to cash in early. Of course liquidity issues may arise where one is forced to cash in, but even then it seems there are many other alternatives before being left with no choice. In the current environment, that even includes borrowing (i.e. PenFed's 1.99% HEL).

New EE Bonds have a yield of approximately 3.53% for twenty years, which is good for a safe investment in this interest rate environment. That yield continues to increase every year. For example, with the .2% rate EE Bonds the yield with 19 years left is approximately 3.61%. Halfway through at 10 years they would be yielding approximately 6.96%. With one year left they would be yielding approximately 92.5%.

If rates rise to where yields on similarly safe investments of the same duration as that left on an EE Bond exceed the EE Bond, then I will cash in and invest the proceeds. For a long-term horizon such as retirement, I think EE Bonds can definitely play a role.
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Re: EE Bonds as part of a retirement strategy?

Post by Dandy »

I wouldn't devote too much of my allocation to EE bonds but I am a big fan of having a decent allocation to safe investments. I have old EE bonds that are paying 4% -- safe and now paying well over comparable yields and inflation. Early on they were below market. Not a bad idea to have some assets that have a guaranteed rate better than current and safe. 20 years is a long payoff though so make sure you can stick to it. That is another reason to allocation only a small portion of assets to EE bonds.
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Re: EE Bonds as part of a retirement strategy?

Post by STC »

I plan on starting to max out ($20k per year for me and wife) my EE bond purchases in 2 years at age 35. The idea is to build a 20 year ladder, and start taking distributions at retirement - age 55. This core plus IBonds will serve as my base liability matching engine through the first 20 years of retirement.
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Re: EE Bonds as part of a retirement strategy?

Post by crowd79 »

I am officially using EE's as a bridge to possible early retirement. I'm nearing 34 and I've been routinely buying $250 a month and will continue to do so until age 47. I'll probably add $10/month to account for inflation/rising costs every year. The goal is to have guaranteed income from 53 1/2 until 67, when SS will replace EE Bond income.
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Re: EE Bonds as part of a retirement strategy?

Post by Mel Lindauer »

My latest Forbes column discusses this very subject. Here's a link:

http://www.forbes.com/sites/theboglehea ... n-annuity/
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Re: EE Bonds as part of a retirement strategy?

Post by lucky3 »

Mel:

Read your Forbes article...but if I'm 66 and buy EE's and wait 20 years, oy, I may not be here to collect the "annuity".


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Re: EE Bonds as part of a retirement strategy?

Post by Grt2bOutdoors »

lucky3 wrote:Mel:

Read your Forbes article...but if I'm 66 and buy EE's and wait 20 years, oy, I may not be here to collect the "annuity".


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Re: EE Bonds as part of a retirement strategy?

Post by Mel Lindauer »

Grt2bOutdoors wrote:
lucky3 wrote:Mel:

Read your Forbes article...but if I'm 66 and buy EE's and wait 20 years, oy, I may not be here to collect the "annuity".


Lucky3
Think about your heirs. :moneybag
Precisely the point. If you bought a SPIA and died, the money would belong to the insurance company, not your heirs.
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Re: EE Bonds as part of a retirement strategy?

Post by camaro327 »

Well, Vanguard just released its latest analysis on the bond market and expects 1 to 2% returns over the next decade. I think that makes a good argument for anyone interested in EE bonds and it fits their time horizon.
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Re: EE Bonds as part of a retirement strategy?

Post by relentless »

letsgobobby wrote:[EE bonds] compare favorably to I bonds only if future inflation is greater than currently predicted and only if it occurs over almost precisely twenty years, maybe plus a little.
I think this is incorrect. EE bonds will likely have a higher return than I bonds if future inflation is LOWER than 3.526% per year (whether expected or not does not matter) and assuming no deflationary periods. For example if future inflation were zero percent (or negative) for every 6 month period that is used for I bond return calculations, the nominal return of I bond would be zero while that of EE bond 3.526% which would be a very respectable real return.

Now if you had the right combination of inflationary and deflationary periods even with a net zero inflation over a 20 year period, the I bond could theoretically still beat the EE bond. For extreme example 100% inflation for 2 years followed by deflation over next 18 years to the original price level would give a return of at least 7.177% for the period.
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Re: EE Bonds as part of a retirement strategy?

Post by DavidC »

camaro327 wrote:Well, Vanguard just released its latest analysis on the bond market and expects 1 to 2% returns over the next decade. I think that makes a good argument for anyone interested in EE bonds and it fits their time horizon.
Hmm... I'm assuming you are referring to this article? If true it may make series EE bonds look better but remember it is still essentially an apples (e.g. intermediate term bonds) vs. oranges (e.g. long term bonds) comparison.
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Re: EE Bonds as part of a retirement strategy?

Post by DualIncomeNoDebt »

Reading this, I regret not having bought U.S. savings bonds in my 20s.
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Re: EE Bonds as part of a retirement strategy?

Post by bobcat2 »

crowd79 wrote:Inflation has remained below 2.5% on average in our country's history...
Where does this bogus inflation history come from? The US government started calculating the CPI during WWI. We have estimated CPI data from before WWI, but those estimates are not very reliable. From WWI thru 2012 (nearly the last 100 years) inflation has averaged about 3.3% per year - not below 2.5% per year. Over the last 40 years (1/73 - 1/2013) inflation as measured by the CPI-U has averaged about 4.3% per year - not below 2.5% per year.
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Re: EE Bonds as part of a retirement strategy?

Post by statsnerd »

bobcat2 wrote:
crowd79 wrote:Inflation has remained below 2.5% on average in our country's history...
Where does this bogus inflation history come from? The US government started calculating the CPI during WWI. We have estimated CPI data from before WWI, but those estimates are not very reliable. From WWI thru 2012 (nearly the last 100 years) inflation has averaged about 3.3% per year - not below 2.5% per year. Over the last 40 years (1/73 - 1/2013) inflation as measured by the CPI-U has averaged about 4.3% per year - not below 2.5% per year.
Everyone is entitled to their own opinions, but they are not entitled to their own facts.
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BobK
Yes, the CPI-U has averaged 4.3% per year over the past 40 years.
However broken out by decade (January of each year)

Code: Select all

1973-1983: (97.8/42.6) ^ (1/10) - 1      = 8.67%
1983-1993: (142.6/97.8) ^ (1/10) - 1     = 3.84%
1993-2003: (181.7/142.6) ^ (1/10) - 1    = 2.45%
2003-2013: (230.28/181.7) ^ (1/10) - 1   = 2.40%
So your 4.3% over the past 40 years is largely weighted by the 73-83 period. Over the past 20 years, it has been below 2.5%
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Re: EE Bonds as part of a retirement strategy?

Post by bobcat2 »

statsnerd wrote:
bobcat2 wrote:
crowd79 wrote:Inflation has remained below 2.5% on average in our country's history...
Where does this bogus inflation history come from? The US government started calculating the CPI during WWI. We have estimated CPI data from before WWI, but those estimates are not very reliable. From WWI thru 2012 (nearly the last 100 years) inflation has averaged about 3.3% per year - not below 2.5% per year. Over the last 40 years (1/73 - 1/2013) inflation as measured by the CPI-U has averaged about 4.3% per year - not below 2.5% per year.
Everyone is entitled to their own opinions, but they are not entitled to their own facts.
-Daniel Patrick Moynihan

BobK
Yes, the CPI-U has averaged 4.3% per year over the past 40 years.
However broken out by decade (January of each year)

Code: Select all

1973-1983: (97.8/42.6) ^ (1/10) - 1      = 8.67%
1983-1993: (142.6/97.8) ^ (1/10) - 1     = 3.84%
1993-2003: (181.7/142.6) ^ (1/10) - 1    = 2.45%
2003-2013: (230.28/181.7) ^ (1/10) - 1   = 2.40%
So your 4.3% over the past 40 years is largely weighted by the 73-83 period. Over the past 20 years, it has been below 2.5%
Hi statsnerd,

crowd79 didn't write, "Over the past 20 years, inflation has been below 2.5%".

What crowd79 did write was, "Inflation has remained below 2.5% on average in our country's history".

What crowd79 wrote isn't close to being true. Over the last 100 years inflation has averaged about 3.3% - not less than 2.5%.

The US started collecting and reporting the inflation rate (CPI) during the 1910s decade. Here are the decade by decade inflation rates for the 20th century. To whom does this look like inflation has remained below 2.5% on average?

Code: Select all

Decade       Inflation Rate
10-19          7.3%
20-29         -1.0%
30-39         -2.0%
40-49          5.4%
50-59          2.2%
60-69          2.5%  
70-79          7.4%
80-89          5.1%
90-99          2.9%  
Inflation was below 2.5% in only three of the nine decades. In four decades the inflation rate was more than double 2.5%, including two decades where the inflation rate was nearly triple 2.5%.

crowd79's inflation rate assertion appears to be a case of recency bias. Since inflation has been relatively low since 2000, it must be the case that it has always been low. I well remember the 1980s when it was difficult to convince anyone that it was not true that, "average inflation has remained above 5.0% on average in our country's history". :happy BTW that belief was not totally unreasonable during that time, since inflation averaged 4.5% per year for the fifty year period 1940-1989.

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Re: EE Bonds as part of a retirement strategy?

Post by statsnerd »

bobcat2 wrote:
statsnerd wrote:
bobcat2 wrote:
crowd79 wrote:Inflation has remained below 2.5% on average in our country's history...
Where does this bogus inflation history come from? The US government started calculating the CPI during WWI. We have estimated CPI data from before WWI, but those estimates are not very reliable. From WWI thru 2012 (nearly the last 100 years) inflation has averaged about 3.3% per year - not below 2.5% per year. Over the last 40 years (1/73 - 1/2013) inflation as measured by the CPI-U has averaged about 4.3% per year - not below 2.5% per year.
Everyone is entitled to their own opinions, but they are not entitled to their own facts.
-Daniel Patrick Moynihan

BobK
Yes, the CPI-U has averaged 4.3% per year over the past 40 years.
However broken out by decade (January of each year)

Code: Select all

1973-1983: (97.8/42.6) ^ (1/10) - 1      = 8.67%
1983-1993: (142.6/97.8) ^ (1/10) - 1     = 3.84%
1993-2003: (181.7/142.6) ^ (1/10) - 1    = 2.45%
2003-2013: (230.28/181.7) ^ (1/10) - 1   = 2.40%
So your 4.3% over the past 40 years is largely weighted by the 73-83 period. Over the past 20 years, it has been below 2.5%
Hi statsnerd,

crowd79 didn't write, "Over the past 20 years, inflation has been below 2.5%".

What crowd79 did write was, "Inflation has remained below 2.5% on average in our country's history".

What crowd79 wrote isn't close to being true. Over the last 100 years inflation has averaged about 3.3% - not less than 2.5%.

The US started collecting and reporting the inflation rate (CPI) during the 1910s decade. Here are the decade by decade inflation rates for the 20th century. To whom does this look like inflation has remained below 2.5% on average?

Code: Select all

Decade       Inflation Rate
10-19          7.3%
20-29         -1.0%
30-39         -2.0%
40-49          5.4%
50-59          2.2%
60-69          2.5%  
70-79          7.4%
80-89          5.1%
90-99          2.9%  
Inflation was below 2.5% in only three of the nine decades. In four decades the inflation rate was more than double 2.5%, including two decades where the inflation rate was nearly triple 2.5%.

crowd79's inflation rate assertion appears to be a case of recency bias. Since inflation has been relatively low since 2000, it must be the case that it has always been low. I well remember the 1980s when it was difficult to convince anyone that it was not true that, "average inflation has remained above 5.0% on average in our country's history". :happy BTW that belief was not totally unreasonable during that time, since inflation averaged 4.5% per year for the fifty year period 1940-1989.

BobK
If his quote is it has remained below 2.5% in our nation's history. The US was founded in 1776, not 1913. A professor at Oregon State conducted a study to measure this going back to 1774 http://oregonstate.edu/cla/polisci/site ... cv2012.pdf

A price level of $1 in 2012 corresponds with 0.038 in 1776.

Thus, (1 / 0.038) ^ (1 / (2012-1776)) - 1 = 1.40% annualized
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Mel Lindauer
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Re: EE Bonds as part of a retirement strategy?

Post by Mel Lindauer »

statsnerd wrote:
bobcat2 wrote:
statsnerd wrote:
bobcat2 wrote:
crowd79 wrote:Inflation has remained below 2.5% on average in our country's history...
Where does this bogus inflation history come from? The US government started calculating the CPI during WWI. We have estimated CPI data from before WWI, but those estimates are not very reliable. From WWI thru 2012 (nearly the last 100 years) inflation has averaged about 3.3% per year - not below 2.5% per year. Over the last 40 years (1/73 - 1/2013) inflation as measured by the CPI-U has averaged about 4.3% per year - not below 2.5% per year.
Everyone is entitled to their own opinions, but they are not entitled to their own facts.
-Daniel Patrick Moynihan

BobK
Yes, the CPI-U has averaged 4.3% per year over the past 40 years.
However broken out by decade (January of each year)

Code: Select all

1973-1983: (97.8/42.6) ^ (1/10) - 1      = 8.67%
1983-1993: (142.6/97.8) ^ (1/10) - 1     = 3.84%
1993-2003: (181.7/142.6) ^ (1/10) - 1    = 2.45%
2003-2013: (230.28/181.7) ^ (1/10) - 1   = 2.40%
So your 4.3% over the past 40 years is largely weighted by the 73-83 period. Over the past 20 years, it has been below 2.5%
Hi statsnerd,

crowd79 didn't write, "Over the past 20 years, inflation has been below 2.5%".

What crowd79 did write was, "Inflation has remained below 2.5% on average in our country's history".

What crowd79 wrote isn't close to being true. Over the last 100 years inflation has averaged about 3.3% - not less than 2.5%.

The US started collecting and reporting the inflation rate (CPI) during the 1910s decade. Here are the decade by decade inflation rates for the 20th century. To whom does this look like inflation has remained below 2.5% on average?

Code: Select all

Decade       Inflation Rate
10-19          7.3%
20-29         -1.0%
30-39         -2.0%
40-49          5.4%
50-59          2.2%
60-69          2.5%  
70-79          7.4%
80-89          5.1%
90-99          2.9%  
Inflation was below 2.5% in only three of the nine decades. In four decades the inflation rate was more than double 2.5%, including two decades where the inflation rate was nearly triple 2.5%.

crowd79's inflation rate assertion appears to be a case of recency bias. Since inflation has been relatively low since 2000, it must be the case that it has always been low. I well remember the 1980s when it was difficult to convince anyone that it was not true that, "average inflation has remained above 5.0% on average in our country's history". :happy BTW that belief was not totally unreasonable during that time, since inflation averaged 4.5% per year for the fifty year period 1940-1989.

BobK
If his quote is it has remained below 2.5% in our nation's history. The US was founded in 1776, not 1913. A professor at Oregon State conducted a study to measure this going back to 1774 http://oregonstate.edu/cla/polisci/site ... cv2012.pdf

A price level of $1 in 2012 corresponds with 0.038 in 1776.

Thus, (1 / 0.038) ^ (1 / (2012-1776)) - 1 = 1.40% annualized
Thanks for providing that interesting factoid (the annualized inflation rate for our nation's history is 1.4%). If inflation remains anywhere near that number, or even near the inflation figure for the past 20 years, then the EE Bond's return of ~3.5% at the 20-year mark will actually outstrip inflation by a percentage point or more.
Best Regards - Mel | | Semper Fi
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bobcat2
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Re: EE Bonds as part of a retirement strategy?

Post by bobcat2 »

These inflation numbers going back to the 1700s are of extremely poor quality. They are inflation estimates made in the last 40 years or so for history from the late 1700s thru to about 1900. Just how good do you think the inflation estimate for the year 1802 is when the estimate is made about 175 years later? If you want to put any confidence in those early data, PM me immediately. I have some bridges for sale that you will undoubtedly want to purchase. :D

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
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