US Savings Bonds vs Vanguard intermediate-term tax-exempt fund

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susleni
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Joined: Thu Apr 06, 2017 12:04 pm

US Savings Bonds vs Vanguard intermediate-term tax-exempt fund

Post by susleni » Thu Apr 06, 2017 12:20 pm

I'd like to request guidance on US savings bonds (I Bonds) vs. the Vanguard intermediate-term tax-exempt fund.

I'm 33 years old, single (25% tax bracket, 5.75% state), currently max out my 401k and Roth IRA, and contribute approximately $1,000 per month into a Vanguard three-fund taxable portfolio (total stock, total international stock, and intermediate-term tax-exempt fund).

I hold $10,000 in I Bonds purchased in 2003, which currently yield between 3.88% and 4.38%.

Should I sell the I Bonds and put them into the Vanguard intermediate-term tax-exempt fund? Pros? Cons?

Any help is appreciated!

Thanks!

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willthrill81
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Re: US Savings Bonds vs Vanguard intermediate-term tax-exempt fund

Post by willthrill81 » Thu Apr 06, 2017 2:54 pm

susleni wrote:I'd like to request guidance on US savings bonds (I Bonds) vs. the Vanguard intermediate-term tax-exempt fund.

I'm 33 years old, single (25% tax bracket, 5.75% state), currently max out my 401k and Roth IRA, and contribute approximately $1,000 per month into a Vanguard three-fund taxable portfolio (total stock, total international stock, and intermediate-term tax-exempt fund).

I hold $10,000 in I Bonds purchased in 2003, which currently yield between 3.88% and 4.38%.

Should I sell the I Bonds and put them into the Vanguard intermediate-term tax-exempt fund? Pros? Cons?

Any help is appreciated!

Thanks!
Considering that you're likely around 30 years from retirement, I would personally not be interested in a guaranteed ~4% investment. I would recommend investing it in your taxable account according to your desired AA.

Alternatively, do you have an HSA that you can save the money in? What about a 529 plan for college expenses?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

asif408
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Re: US Savings Bonds vs Vanguard intermediate-term tax-exempt fund

Post by asif408 » Thu Apr 06, 2017 3:16 pm

My advice is to hold on to the I-bonds as long as you can and use them as part of your fixed income portion of your portfolio. You've held them since 2003, so I'm assuming the fixed rate is around 1%, which is pretty good. So even with deflation you earn a minimum of 1% vs a 2% yield on a bond fund that may drop in value if inflation picks up. And if inflation really picks up your I-bonds should easily outperform any bond fund, as their rate will adjust every 6 months based on the CPI with no drop in value. Even with low or moderate inflation the composite rate on the I-bonds will probably be more than 2% with no risk of falling in value. Plus they are very liquid, just like a bond fund, so if you had the desire to sell them to rebalance into stocks it would be easy. Maybe one day after bond rates have risen some they will look more appealing than I-bonds, but as of now I can't see a compelling reason to favor any bond fund over I-bonds.

The only con I see is that you have to hold I-bonds through Treasury Direct and can't have everything at one place. But unless you really dislike TD, which some folks here do, I wouldn't get rid of the I-bonds for that reason.

Just my 2 cents.

Geist
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Re: US Savings Bonds vs Vanguard intermediate-term tax-exempt fund

Post by Geist » Thu Apr 06, 2017 11:17 pm

asif408 wrote:My advice is to hold on to the I-bonds as long as you can and use them as part of your fixed income portion of your portfolio. You've held them since 2003, so I'm assuming the fixed rate is around 1%, which is pretty good. So even with deflation you earn a minimum of 1% vs a 2% yield on a bond fund that may drop in value if inflation picks up. And if inflation really picks up your I-bonds should easily outperform any bond fund, as their rate will adjust every 6 months based on the CPI with no drop in value.
Agreed with this. Hang on to the I-Bonds that you have, the 1% fixed component is quite nice, and keeps you on-par or above what VWITX is earning. What's more, you might consider buying more I-Bonds! My situation is very similar to yours, and I'm adding money to both I-Bonds and to VWITX. I find "all or nothing" scenarios to be losing propositions... So I tend to follow multiple courses to moderate risk & meet multiple objectives simultaneously. However, I will say that I use my I-Bonds & VWITX differently -- I-Bonds are my Emergency Fund. I'm transitioning toward using VWITX for short-to-mid term (2-5 years) savings.

Topic Author
susleni
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Re: US Savings Bonds vs Vanguard intermediate-term tax-exempt fund

Post by susleni » Fri Apr 07, 2017 5:30 am

Much thanks to everyone! Thus far, I've been holding the I Bonds in my plan-B emergency fund, secondary to my small high-yield checking account, like Geist mentioned. (I forgot to mention in the original post that yes, I max out my HSA as well.)

Thanks again!

aristotelian
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Re: US Savings Bonds vs Vanguard intermediate-term tax-exempt fund

Post by aristotelian » Fri Apr 07, 2017 6:31 am

susleni wrote:Much thanks to everyone! Thus far, I've been holding the I Bonds in my plan-B emergency fund, secondary to my small high-yield checking account, like Geist mentioned. (I forgot to mention in the original post that yes, I max out my HSA as well.)

Thanks again!
What is in the rest of your portfolio? What is your tax bracket?

I-Bonds are a great choice for the purpose you describe. The returns you are getting on yours are much better than anything you can get on the market now. If you cash them in, you will need to pay taxes on the interest. I would hold, unless for some reason you are in an extremely low tax bracket and you need the money.

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susleni
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Re: US Savings Bonds vs Vanguard intermediate-term tax-exempt fund

Post by susleni » Fri Apr 07, 2017 7:12 am

Thanks, Aristotelian. I'm single, 25% tax bracket, 5.75% state income tax.

Aside from the $10k in I Bonds and a small high-yield checking account,

my 401k, Roth IRA, HSA, and Vanguard taxable account (VTSAX, VTIAX, VWIUX) combine for 87% stock (120-age) and 13% bond. The domestic/international stock index ratio is approximately 67%/33%.

Thank you again for any additional guidance!

stevew7
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Re: US Savings Bonds vs Vanguard intermediate-term tax-exempt fund

Post by stevew7 » Fri Apr 07, 2017 8:57 am

susleni wrote: I hold $10,000 in I Bonds purchased in 2003, which currently yield between 3.88% and 4.38%.

Should I sell the I Bonds and put them into the Vanguard intermediate-term tax-exempt fund? Pros? Cons?
Your ibonds from 2003 are great and I certainly wish I had purchased them back in 2003 when the fixed rate was 1.1%! If you purchase an ibond today (in comparison) the fixed portion of your interest rate would be 0 (zero).

https://www.treasurydirect.gov/indiv/re ... .htm#fixed

Currently VWITX has a SEC yield of 2.04%, which is roughly 2.72% tax-equivalent yield if you are in the 25% tax bracket. On top of that, you are subject to price fluctuations in the fund (and the fund has slipped slightly over the past few months).

I agree with others that selling the virtually no risk 2003 ibond to replace it with a riskier and currently lower yielding intermediate term tax exempt fund is not a decision I would make.

Topic Author
susleni
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Re: US Savings Bonds vs Vanguard intermediate-term tax-exempt fund

Post by susleni » Fri Apr 07, 2017 10:27 am

Thanks for the advice, stevew7, and to each contributor for your clarity!

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