EE and I Bonds

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thefoggycity
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EE and I Bonds

Post by thefoggycity »

Could someone clarify, is it possible to buy $10,000 per calendar year of I Bonds AND EE bonds for a total of 20k per year?

Also, if we are 20 or so years away from retirement, are EE bonds a wise choice to supplement an early retirement?

Thank you!
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Re: EE and I Bonds

Post by whodidntante »

I don't think ee bonds are a good investment. They pay essentially nothing for 20 years and then you can get a balloon payment of sorts. So it's in your best interests to treat them as illiquid and like a 20 year bond. I expect more of a premium for that and it's not clear that they offer a premium as all. A lot can happen in 20 years.
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Re: EE and I Bonds

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Tracyfaa
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Re: EE and I Bonds

Post by Tracyfaa »

Treasury direct guarantees that EE bonds will either be worth face value in 20 years if paper or double in value in 20 years if electronic. That's roughly 3.5% compounded annually, as long as you go the full 20.

https://www.treasurydirect.gov/indiv/re ... r.htm#full

D
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Re: EE and I Bonds

Post by kjvmartin »

thefoggycity wrote:Could someone clarify, is it possible to buy $10,000 per calendar year of I Bonds AND EE bonds for a total of 20k per year?

Also, if we are 20 or so years away from retirement, are EE bonds a wise choice to supplement an early retirement?

Thank you!
EE bonds would be the last thing I invest in after maxing all 401k, IRA, 529, and a healthy emergency fund.
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Re: EE and I Bonds

Post by Grt2bOutdoors »

Bonds are for monies you can NOT afford to lose. Use equities to take risk. Apple's and oranges, to those who say they offer nothing that all depends on when sequence risk decides to pop up and for how long it stays. Insurance companies and pensions have no problem holding 20 year bonds.
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Mel Lindauer
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Re: EE and I Bonds

Post by Mel Lindauer »

Here's a Forbes column I did on using EE Bonds to build your own retirement annuity. Laddering $10k for you and $10k for your wife annually would guarantee you a retirement income of $40K per year.

https://www.forbes.com/sites/theboglehe ... 61aacb7ba3
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Re: EE and I Bonds

Post by Tracyfaa »

Mel Lindauer wrote:Here's a Forbes column I did on using EE Bonds to build your own retirement annuity. Laddering $10k for you and $10k for your wife annually would guarantee you a retirement income of $40K per year.

https://www.forbes.com/sites/theboglehe ... 61aacb7ba3
Excellent article Mel. Makes me wish I had kept up my auto purchases years ago.
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thefoggycity
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Re: EE and I Bonds

Post by thefoggycity »

Mel Lindauer wrote:Here's a Forbes column I did on using EE Bonds to build your own retirement annuity. Laddering $10k for you and $10k for your wife annually would guarantee you a retirement income of $40K per year.

https://www.forbes.com/sites/theboglehe ... 61aacb7ba3
Thanks, everyone. This article is terrific!
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Re: EE and I Bonds

Post by kjvmartin »

Mel Lindauer wrote:Here's a Forbes column I did on using EE Bonds to build your own retirement annuity. Laddering $10k for you and $10k for your wife annually would guarantee you a retirement income of $40K per year.

https://www.forbes.com/sites/theboglehe ... 61aacb7ba3
I had not read or thought of that. That's a great plan, but I think the prevailing wisdom here would be to max Roth + 401k before doing this, right? So, if you were unable to max out tax advantaged, this would not be something to consider?

Two 401ks at 18k and two Roths at 11k is $47,000/yr in tax advantaged savings. US median income is around $57,000, I think, so there would be very few people who would consider the EE bond annuity option, right? $67,000/yr in retirement savings is a very nice idea, but nigh impossible for most.
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Re: EE and I Bonds

Post by Kevin M »

It's important to remember that it's purchasing power that matters to most people, as opposed to nominal dollars. $40K in nominal dollars is only $26.9K in purchasing power assuming 2% inflation (40000/1.02^20). That's not to say that 3.53% isn't a good nominal return for a 20-year bond with no credit risk, given that the 20-year Treasury yield is only 2.65%, but that's another discussion (that has been covered extensively in the thread linked in an earlier reply: I don't understand the case for EE bonds - Bogleheads.org).

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bligh
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Re: EE and I Bonds

Post by bligh »

kjvmartin wrote:
Mel Lindauer wrote:Here's a Forbes column I did on using EE Bonds to build your own retirement annuity. Laddering $10k for you and $10k for your wife annually would guarantee you a retirement income of $40K per year.

https://www.forbes.com/sites/theboglehe ... 61aacb7ba3
I had not read or thought of that. That's a great plan, but I think the prevailing wisdom here would be to max Roth + 401k before doing this, right? So, if you were unable to max out tax advantaged, this would not be something to consider?

Two 401ks at 18k and two Roths at 11k is $47,000/yr in tax advantaged savings. US median income is around $57,000, I think, so there would be very few people who would consider the EE bond annuity option, right? $67,000/yr in retirement savings is a very nice idea, but nigh impossible for most.
I am a bogleheader who read Mel's article and is currently building the EE Bond ladder like he described. Once you decide you may want an annuity in addition to your portfolio, the EEBond ladder Mel suggests sounded like a great option to me.

My purpose for setting up the annuity is different from the reason why I contribute to my portfolio. This EE Bond annuity will likely underperform my portfolio (in fact I sincerely hope it severely underperforms my portfolio!! :greedy ) .. Since I don't have access to a pension, I am interested in setting up a guaranteed income floor for myself until Social Security kicks in, or even after it kicks in.... Depending on how things look 20+ years from now, I may keep the interest but redeposit the principal and continue the ladder to provide myself with a perpetual base income stream. In my case, I am also buying an equivalent amount of I Bonds each year. If high inflation occurs in the next 20 years the EEBonds may become worthless but the I Bonds should retain todays value. So My "annuity" will have equal fixed and inflation indexed components to it. The I Bonds have the additional advantage of being liquid too.

Anyway, my point is you can learn from Mel's general technique and adapt it for yourself like I did. You don't have to put $20K into EE Bonds each year for 20 years to build a $400K annuity. You could for example do $6K or so each year and after 20 years have a $120K annuity that will generate $6K/year forever or a 20 year term annuity of $12K/year. $120K in an annuity built up over 20 years isn't that crazy or unheard of an amount. Also there is no reason for it to be equal amounts. It can be $5K one year, $8K the next.. it will just be a little more complicated for your planning purposes.
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Re: EE and I Bonds

Post by Kevin M »

bligh wrote:In my case, I am also buying an equivalent amount of I Bonds each year. If high inflation occurs in the next 20 years the EEBonds may become worthless but the I Bonds should retain todays value. So My "annuity" will have equal fixed and inflation indexed components to it.
Why would you plan on holding I Bonds at 0% real for 20 years with the 20-year TIPS yield at 0.77%? Daily Treasury Real Yield Curve Rates.

No, you can't actually buy a 20-year TIPS, but you can buy TIPS maturing in 2032 at 0.5% and in 2040 at 0.9%. Treasury Inflation-Protected Securities (TIPS) - Markets Data Center - WSJ.com.
The I Bonds have the additional advantage of being liquid too.
Yes, if you think there's a decent probability that you'll want to redeem your I Bonds five years or less, I Bonds are a good deal for the relatively small amounts you can buy, since the 5-year TIPS yield is only 0.06%. So perhaps good as part of an emergency fund, or if you plan on redeeming to invest in TIPS if we see higher real yields in a few years. But for 20-30 year horizons without betting on higher future real yields, TIPS make more sense.

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Re: EE and I Bonds

Post by aj76er »

Kevin M wrote:
bligh wrote:In my case, I am also buying an equivalent amount of I Bonds each year. If high inflation occurs in the next 20 years the EEBonds may become worthless but the I Bonds should retain todays value. So My "annuity" will have equal fixed and inflation indexed components to it.
Why would you plan on holding I Bonds at 0% real for 20 years with the 20-year TIPS yield at 0.77%? Daily Treasury Real Yield Curve Rates.

No, you can't actually buy a 20-year TIPS, but you can buy TIPS maturing in 2032 at 0.5% and in 2040 at 0.9%. Treasury Inflation-Protected Securities (TIPS) - Markets Data Center - WSJ.com.
The I Bonds have the additional advantage of being liquid too.
Yes, if you think there's a decent probability that you'll want to redeem your I Bonds five years or less, I Bonds are a good deal for the relatively small amounts you can buy, since the 5-year TIPS yield is only 0.06%. So perhaps good as part of an emergency fund, or if you plan on redeeming to invest in TIPS if we see higher real yields in a few years. But for 20-30 year horizons without betting on higher future real yields, TIPS make more sense.

Kevin
Based on yields alone, I would agree that long term TIPS are a better deal than I-bonds right now. However, for a true apples-to-apples, the TIPS must be held in tax advantaged space, which is generally limited for most folks. For TIPS held in tIRA or 401k, there's the issue of state and local taxes due upon withdrawal (in a high tax state this would narrow the spread). Furthermore, when I-bonds are used for education, the premium for TIPS all but disappears. Finally, there's the inconveniences of dealing with the interest-on-interest with TIPS.

When viewed as short-term or medium-term cash, nothing beats I-bonds, to my knowledge.

When viewed as long-term inflation indexed bonds, I still believe I-bonds are competitive, but you pay a small premium for the ability to extend your tax deferred space.
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Re: EE and I Bonds

Post by bligh »

Kevin M wrote: Yes, if you think there's a decent probability that you'll want to redeem your I Bonds five years or less, I Bonds are a good deal for the relatively small amounts you can buy, since the 5-year TIPS yield is only 0.06%. So perhaps good as part of an emergency fund, or if you plan on redeeming to invest in TIPS if we see higher real yields in a few years. But for 20-30 year horizons without betting on higher future real yields, TIPS make more sense.

Kevin
Honestly, I had very briefly thought about using TIPs but the "tax as you go" vs the "tax deferred" made me go with I Bonds. However, I didn't really put that much thought into it.

I am currently in a much higher tax bracket than I plan to be when I retire (I am hoping for an early retirement as well). I admit I don't understand TIPS too well, but I am going to list out my reasons below, if I am incorrect I would appreciate any corrections!

- TIPS inflation adjustment gets taxed each year that it occurs. So this acts as a drag on the ability of the instrument to keep up with inflation. If this is correct, are TIPS inflation adjustments taxed as income or as capital gains? If as capital gains, are they short term or long term? With I Bonds I can defer my taxes up to 30 years! (and possibly if everything else is looking great, choose to cash out the I Bonds tax free to pay for my kids education).

- TIPS can be adjusted down during deflation. IBonds will never lose value. Between the nominal value of EE Bonds and this property of I Bonds it really makes me sleep better when considering the (hopefully unlikely) scenario of deflation. Especially since my stock heavy portfolio will likely suffer in such an environment. In other words, it is precisely when my portfolio is doing worse that my annuity will be doing better.

- Less importantly, Rising interest rates can push down the value of my TIPS .. once again making my "annuity" a little less predictable.

Now it is a matter of making some assumptions and quick calculation to see if the 0.77% taxed at my current marginal tax rate each year is enough to offset the tax drag over the next 20 years.
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Re: EE and I Bonds

Post by Call_Me_Op »

I see buying EE bonds as a form of diversification, since they act quite differently from most other securities.
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Re: EE and I Bonds

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My recommendation is simply one possible leg of a multi-leg retirement plan. Use it if you see it as useful; ignore it if you don't.
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Re: EE and I Bonds

Post by Kevin M »

bligh wrote: - TIPS inflation adjustment gets taxed each year that it occurs. So this acts as a drag on the ability of the instrument to keep up with inflation. If this is correct, are TIPS inflation adjustments taxed as income or as capital gains? If as capital gains, are they short term or long term? With I Bonds I can defer my taxes up to 30 years!
The inflation adjustments are taxed as ordinary income. The tax deferral of I Bonds can be a benefit, but it may not be enough to overcome the gap in real return rate. Assuming a constant 25% marginal tax rate and average inflation of 2%, $10K in TIPS at 1% real in taxable grows to 19,580 in 30 years, while $10K in I Bonds at 0% grows to 16,085.

Even if your tax rate drops to 15% when you redeem your I Bond, you net 16,897, so still less than the TIPS in taxable.

If you have any IRA space, you can hold your TIPs there so the return is tax free (either 100% of Roth, or "your share" of tax-deferred).
(and possibly if everything else is looking great, choose to cash out the I Bonds tax free to pay for my kids education).
You probably won't be paying for kids' education in 30 years, but even if so (or maybe grandkids), even at 0% tax rate the I Bond grows to 18,114, so the TIPS still wins!

Also, even if your income doesn't exceed the threshold to be able to take advantage of the education deduction, whatever qualified expenses count toward education tax credits cannot be counted toward excluding I Bond income from taxation. That hit us last year, and we ended up being able to exclude something like 5% of our I Bond income from federal taxation. So it's trickier than you might think unless you've looked into all the angles.
- Less importantly, Rising interest rates can push down the value of my TIPS .. once again making my "annuity" a little less predictable.
First, if you hold TIPS to maturity, then any market value declines are only temporary, so if you hold a TIPS ladder to meet future real liabilities, what happens to the value of your TIPS before maturity doesn't matter. So a TIPS ladder used this way is just as predictable as I Bonds, but with higher returns.

Second, rising real yields make I Bonds at 0% even less attractive. This is why I said that I Bonds were attractive if you plan to redeem them to take advantage of higher real yields if we see them in the next five years or so, since I Bonds earn about the same as a 5-year TIPS, but without the term risk. Of course to do this, you give up the supposedly "tax-advantaged space" of the I Bonds, and must move into TIPS at that point.

About 1.5 years ago, the 5-year TIPS yield was about 0.5%, and I was posting that people should be considering 5-year TIPS in preference to I bonds. I should have taken my own advice and sold my 0% I Bonds to buy 5-year TIPS then, but I was waiting for even higher real yields (one problem with this game--at what point do you jump from 0% to a higher yield?).
Now it is a matter of making some assumptions and quick calculation to see if the 0.77% taxed at my current marginal tax rate each year is enough to offset the tax drag over the next 20 years.
Yes, you should do that. I have a spreadsheet set up to do it, since this comes up so much here. Let me know what you come up with, and we can compare results.

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Re: EE and I Bonds

Post by bligh »

Kevin M wrote: Yes, you should do that. I have a spreadsheet set up to do it, since this comes up so much here. Let me know what you come up with, and we can compare results.

Kevin
Alright. You made me do it. :)

So looks like you are right. If I assume a 2% inflation rate, and a TIPS yield of 0.77%.. TIPS come out on top despite the tax drag of a 33% tax rate and an expected 15% tax rate in retirement. The gap narrows around a 4% inflation rate where the tax drag gets big enough to undo the yield advantage.

After 20 years 10K in TIPS @ 2% inflation and a 0.77% yield being taxed at 33% all the way.. would net me ~ 14166.
After 20 years 10K in I Bonds @ 2% inflation tax deferred would net me : 13882 (ie. ~14568 pre tax but I'd pay 15% tax on the interest)

At a 3% inflation though, the numbers come out to 16045 with TIPS but 16404 with I-Bonds.

So if Inflation stays at or below 2% TIPS win by a little, if inflation rises up to 3% or higher, I Bonds win by a little. As inflation goes higher, I Bonds do better. So funnily enough, the I Bonds would perform better exactly in the kind of high inflation scenario I am buying them for. For the low inflation scenario I still have my EE Bonds.

Complicating factors,
1) There is no guarantee I will remain in my current tax bracket the whole time till I get to the 20 year maturity date. Infact, once I retire, my TIPS ladder is also going to see its interest taxed at a lower rate. (TIPS win)
2) Future TIPS purchased over the 20 years could have higher real yields (but then so could the future I Bonds.) (Draw?)
3) Deflation, the I Bonds still have the advantage in terms of deflation or if we get negative real rates. (I Bonds win)

Now I am confused. :oops:

(1) is pretty important, since a lower tax bracket changes things significantly. Perhaps I do I Bonds for the first 5 years of the 20 year annuity, and TIPS for the remaining 15 years.
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Re: EE and I Bonds

Post by Kevin M »

bligh wrote:
Kevin M wrote: Yes, you should do that. I have a spreadsheet set up to do it, since this comes up so much here. Let me know what you come up with, and we can compare results.
Alright. You made me do it. :)
Your numbers are a bit off from mine, but the conclusions are the same. If the tax differential really is that big, and inflation is high enough, I Bonds can win over TIPS in taxable.
After 20 years 10K in TIPS @ 2% inflation and a 0.77% yield being taxed at 33% all the way.. would net me ~ 14166.
After 20 years 10K in I Bonds @ 2% inflation tax deferred would net me : 13882 (ie. ~14568 pre tax but I'd pay 15% tax on the interest)
I get 14,475 for for TIPS and 14,131 for I Bonds. Assuming we're talking about 0% I Bonds, here's an easy check: 1.02^20 = 1.4859, not 1.4568.
As inflation goes higher, I Bonds do better. So funnily enough, the I Bonds would perform better exactly in the kind of high inflation scenario I am buying them for.

Good point. So you don't have any tax-advantaged space in which you could hold TIPS?
3) Deflation, the I Bonds still have the advantage in terms of deflation or if we get negative real rates. (I Bonds win)
Maybe. But negative real rates for 20 years? There was some analysis for shorter periods of deflation in another recent thread--maybe the one linked to earlier.
(1) is pretty important, since a lower tax bracket changes things significantly. Perhaps I do I Bonds for the first 5 years of the 20 year annuity, and TIPS for the remaining 15 years.
Are you really going to continue holding I Bonds at 0% if the 5-year TIPS yield hits 1% or the 20-year TIPS yield hits 2%? Or maybe I should say if the 15-year TIPS yield hits 1.5% in five years. I'm just suggesting that planning on holding I Bonds at 0% real for 20 or 30 years regardless of future real yields may not be the most rational strategy.

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Re: EE and I Bonds

Post by bligh »

Kevin M wrote: I get 14,475 for for TIPS and 14,131 for I Bonds. Assuming we're talking about 0% I Bonds, here's an easy check: 1.02^20 = 1.4859, not 1.4568.
Ah, I know the reason for the difference. I was counting the balance on the 20th year. So I wasn't including the interest for that last year. In other words I was using 1.02^19 = 1.4568. But anyway, that is a minor difference in assumption. The technique is equivalent.
Kevin M wrote: Good point. So you don't have any tax-advantaged space in which you could hold TIPS?
I am maxing out my tax-advantaged space (at least the last few years), so I wouldn't be able to do it without sacrificing on the size of my retirement portfolio. The hope was to have this sit in addition the portfolio as an annuity. If I wasn't maxing out my tax advantaged space, you are right. Then it is a no brainer to go with the TIPS in Tax advantaged before going with I Bonds.
Kevin M wrote: Maybe. But negative real rates for 20 years? There was some analysis for shorter periods of deflation in another recent thread--maybe the one linked to earlier.
Wouldn't have to be for 20 years, the advantage would show up even if there were a few years of it. Imagine 5 years of negative yield eating away at the TIPS portfolio while your I Bonds hold steady.
Kevin M wrote: Are you really going to continue holding I Bonds at 0% if the 5-year TIPS yield hits 1% or the 20-year TIPS yield hits 2%? Or maybe I should say if the 15-year TIPS yield hits 1.5% in five years. I'm just suggesting that planning on holding I Bonds at 0% real for 20 or 30 years regardless of future real yields may not be the most rational strategy.
To be honest, I hadn't really thought about it. I am glad you pointed that out! I guess, I am "prepared" to hold them for the full 20 to 30 years, but it does make sense to jump out of them if I saw a better deal elsewhere. Their liquidity plus the fact that I don't have to hold them to term in a rising rate environment to avoid loss in principal is one of their advantages. I would have to weigh the tax impact of course. So If I saw a spike in TIPS yield over the next few years I would want to take advantage of that switch my current 0% I Bonds to TIPS with the appropriate maturity.
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Re: EE and I Bonds

Post by aj76er »

If you ever decide to hold TIPS in taxable, I've seen comments in which the tax prep is really complicated. It has something to do with the inflation adjustment and how it's reported.

I don't know all the details, but just something to consider. You can probably get more info by searching old forum threads.
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Re: EE and I Bonds

Post by Elena »

Mel Lindauer wrote:My recommendation is simply one possible leg of a multi-leg retirement plan. Use it if you see it as useful; ignore it if you don't.
Exactly. Thank you for giving me options and putting ideas in my head. Knowledge is power, and food for the brain! Many thanks.
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Re: EE and I Bonds

Post by Kevin M »

bligh wrote:
Kevin M wrote: <snip> So you don't have any tax-advantaged space in which you could hold TIPS?
I am maxing out my tax-advantaged space (at least the last few years), so I wouldn't be able to do it without sacrificing on the size of my retirement portfolio. The hope was to have this sit in addition the portfolio as an annuity. If I wasn't maxing out my tax advantaged space, you are right. Then it is a no brainer to go with the TIPS in Tax advantaged before going with I Bonds.
I don't understand this. Why would holding TIPS in tax-advantaged sacrifice the size of your retirement portfolio?

The most effective approach is to think about all assets that will be used in retirement as your retirement portfolio, regardless of location. This enables you to maximize tax efficiency, and take advantage of the best investments available in each location.

So if you are holding stocks in an IRA, you could switch into TIPS in the IRA, and hold stocks in taxable (instead of I Bonds).
bligh wrote:
Kevin M wrote: Maybe. But negative real rates for 20 years? There was some analysis for shorter periods of deflation in another recent thread--maybe the one linked to earlier.
Wouldn't have to be for 20 years, the advantage would show up even if there were a few years of it. Imagine 5 years of negative yield eating away at the TIPS portfolio while your I Bonds hold steady.
Sure, this could add a few basis points to the I Bond return compared to the TIPS return, but you should consider the likelihood of this as well as the possible magnitude. Here is the thread I was thinking of, in which there is a good discussion of this: LMP-3: Roll your own pension- Build a tips ladder! - Bogleheads.org; specifically, here and here.
Their liquidity plus the fact that I don't have to hold them to term in a rising rate environment to avoid loss in principal is one of their advantages.
I think you're starting to see that in the context of a liability matching strategy (or "annuity" as it's being called by some here), the avoidance of principal loss in a rising real rate scenario only is valuable if you redeem the I Bonds to reinvest in TIPS at higher yields. Again, with a liability matching TIPS ladder, loss in market value before maturity is irrelevant.

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Re: EE and I Bonds

Post by Kevin M »

aj76er wrote:If you ever decide to hold TIPS in taxable, I've seen comments in which the tax prep is really complicated. It has something to do with the inflation adjustment and how it's reported.

I don't know all the details, but just something to consider. You can probably get more info by searching old forum threads.
There is a good discussion of this in the thread I linked to in the previous reply. With the current tax reporting requirements for brokers, it should be much less complex than it used to be, but apparently there still can be some complexities, especially at maturity. See this reply in that thread.

Kevin
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Re: EE and I Bonds

Post by sandramjet »

Kevin M wrote: Why would you plan on holding I Bonds at 0% real for 20 years with the 20-year TIPS yield at 0.77%? Daily Treasury Real Yield Curve Rates.
Kevin
That's why I'm not buying iBonds ... I'm spoiled by the ones I have that are paying from about 1 to 3 percent fixed + adjustment.... Of course, those have less than 20 years to go...
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Re: EE and I Bonds

Post by Kevin M »

sandramjet wrote:
Kevin M wrote: Why would you plan on holding I Bonds at 0% real for 20 years with the 20-year TIPS yield at 0.77%? Daily Treasury Real Yield Curve Rates.
Kevin
That's why I'm not buying iBonds ... I'm spoiled by the ones I have that are paying from about 1 to 3 percent fixed + adjustment.... Of course, those have less than 20 years to go...
OK, but 20-year or 30-year TIPS also had even better yields when I Bond rates were in the 1%+ ballpark. However, I Bonds in the 3%+ ballpark were generally a great deal compared to TIPS yields at the time.

I Bond fixed rates were in the 1%+ ballpark from May 2003 - May 2008. Individual - Series I Savings Bonds Rates & Terms During that period the yield on the TIPS maturing 4/15/2028 ranged from about 1.8% to 2.8%. https://fred.stlouisfed.org/graph/?g=dU8p. Someone really looking for a liability matching strategy with a 20+ year time horizon would have been better off with TIPS.

I Bond fixed rates were in the 3%+ ballpark from September 1998 - November 2001. During that time the yield on the TIPS maturing 4/15/2028 ranged from about 3.4% to 4.3%. So there were times when you could get a yield premium of about 1 percentage point with the TIPS, but other times when the I Bond fixed rate was about the same as the TIPS yield. https://fred.stlouisfed.org/graph/?g=dU8T. Given that I Bonds have essentially no term risk, this was indeed the golden era for I Bonds.

The low term risk of I Bonds would have paid off if real yields had increased, and you had redeemed your I Bonds to reinvest at higher real yields. Of course that didn't happen, and you would have earned even higher returns from selling TIPS after yields had declined and prices had increased (the price of the 4/15/2028 TIPS is about 132, so that's a 32% cumulative price return if bought at auction, on top of the 3 5/8% annual coupon return: Treasury Inflation-Protected Securities (TIPS) - Markets Data Center - WSJ.com.

Kevin
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bligh
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Re: EE and I Bonds

Post by bligh »

Kevin M wrote: So if you are holding stocks in an IRA, you could switch into TIPS in the IRA, and hold stocks in taxable (instead of I Bonds).
That is a good point. However then I do have the loss of liquidity in that I cannot start pulling those funds before 59.5 without a penalty. Though I admit that isn't a huge deal breaker for me. I could just buy TIPS with maturity dates at age 60, 61, and so on.. It would have some implication to my Roth conversion plan too during those years though.

Anyway, how would I go about buying individual TIPS in my IRA? Should I just call up my vanguard rep and have him walk me through it, or is there some other special way of going about it.
Kevin M wrote: Sure, this could add a few basis points to the I Bond return compared to the TIPS return, but you should consider the likelihood of this as well as the possible magnitude. Here is the thread I was thinking of, in which there is a good discussion of this: LMP-3: Roll your own pension- Build a tips ladder! - Bogleheads.org; specifically, here and here.
Thanks for the links to those threads. I will read up on them some more. I am now interested in TIPS thanks to you, but need to understand how they work. If nothing else I would add them as a supplement to my existing I Bonds, but also keep an eye on yields to find an opportune moment to swap them out. I will also need to understand how much more complicated my taxes will be.

By the way, how does the compounding of the interest work with TIPS? Am I right in understanding that while the inflation indexed adjustments apply cumulatively, the interest given off needs to be "manually" reinvested some how?
Kevin M wrote: I think you're starting to see that in the context of a liability matching strategy (or "annuity" as it's being called by some here), the avoidance of principal loss in a rising real rate scenario only is valuable if you redeem the I Bonds to reinvest in TIPS at higher yields. Again, with a liability matching TIPS ladder, loss in market value before maturity is irrelevant.
Thanks for your help Kevin. This is forum is the only place I know where I can have this type of conversation. In all honesty, I would look to hold TIPS in taxable. I would use them as "non tax deferred I Bonds plus interest".
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Re: EE and I Bonds

Post by flamesabers »

thefoggycity wrote:Could someone clarify, is it possible to buy $10,000 per calendar year of I Bonds AND EE bonds for a total of 20k per year?
That's correct. You can also buy up to $5k in paper I-Bonds (in addition to the $10k of electronic I-Bonds) with your tax refund every year.
thefoggycity wrote:Also, if we are 20 or so years away from retirement, are EE bonds a wise choice to supplement an early retirement?
I think it depends on a number of factors such as your tax bracket, your asset allocation, and the size of your overall portfolio. Hypothetically if you're in a higher tax bracket and you're wanting to invest in fixed-income securities, I don't think EE bonds would be a bad choice. If on the other hand you're in a low tax bracket and don't have much invested in the market, I think equities would be a better choice then EE bonds.
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Re: EE and I Bonds

Post by NiceUnparticularMan »

So for fun, I tried building a deferred annuity ladder instead of an EE bond ladder, using the same funding schedule. We're investing $20,000 per year for 20 years, so to keep this simple I will invest $104,000 every 5 years (the extra $4000 is for interest as it sits waiting to get to $100,000), deferred out to 65, starting five years after 20 years before 65--meaning the first $104,000 goes in at age 50, deferred for 15 years, and the last $104,000 goes in at 65, no deferral. I'm going to use a single male in PA and quotes from Immediate Annuities.

I get $1044 in monthly income for the first installment, $862 for the second, $696 for the third, $570 for the third. That's $38064 annually. Not far off from the $40000.

Of course that is somewhat apples to oranges . . . you get the $40000 for 20 years, you get the $38064 for life, and one or the other could work out better. But I believe the life expectancy of a male annuitant at 65 is right around 20 years anyway.

So, long story short--this plan appears to get you roughly the same sort of return on your investment as insurance companies are providing on their deferred annuities. Whether you view that as attractive or not depends on your assumptions about your alternatives (personally, I tend to think I can do better, and I would also rather have the liquidity on top).
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Re: EE and I Bonds

Post by dodecahedron »

NiceUnparticularMan wrote:So for fun, I tried building a deferred annuity ladder instead of an EE bond ladder, using the same funding schedule. We're investing $20,000 per year for 20 years, so to keep this simple I will invest $104,000 every 5 years (the extra $4000 is for interest as it sits waiting to get to $100,000), deferred out to 65, starting five years after 20 years before 65--meaning the first $104,000 goes in at age 50, deferred for 15 years, and the last $104,000 goes in at 65, no deferral. I'm going to use a single male in PA and quotes from Immediate Annuities.

I get $1044 in monthly income for the first installment, $862 for the second, $696 for the third, $570 for the third. That's $38064 annually. Not far off from the $40000.

Of course that is somewhat apples to oranges . . . you get the $40000 for 20 years, you get the $38064 for life, and one or the other could work out better. But I believe the life expectancy of a male annuitant at 65 is right around 20 years anyway.

So, long story short--this plan appears to get you roughly the same sort of return on your investment as insurance companies are providing on their deferred annuities. Whether you view that as attractive or not depends on your assumptions about your alternatives (personally, I tend to think I can do better, and I would also rather have the liquidity on top).
Interesting comparison. Other differences between the two options you are comparing:
  • federal tax treatment of EE bond cash flows vs annuity cash flows favors annuity
  • state tax treatment of EE bond cash flows vs annuity cash flows favors EE bonds
  • US Treasury backing the EE flow vs. insurance company backing annuity favors EE bonds
If the insurance company is pretty solid (a big IF) and if state tax treatment doesn't matter (e.g., in state with no income tax), then the federal tax treatment differences would weigh heavily in favor of the annuity, since most of the early year annuity flows would be treated as recovery of the annuity's basis. (Forgoing statement assumes that funds are not being used for qualifying higher education expenses for the taxpayer, spouse, or a dependent.)
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Re: EE and I Bonds

Post by RVdreamin »

Folks:
Great discussion on strategies and whether or not TIPS might be a better alternative but evidently (obviously?!) I'm the thick headed one in the group...how do you do the "quick" calculations to compare I-bonds to TIPS (that Kevin and Bligh) discuss above?

Anyone willing to share Excel spreadsheets for these calculations? FYI, I looked at TreasuryDirect and wiki and didn't see anything...

Thanks in advance.
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Re: EE and I Bonds

Post by Kevin M »

bligh wrote:
Kevin M wrote: So if you are holding stocks in an IRA, you could switch into TIPS in the IRA, and hold stocks in taxable (instead of I Bonds).
That is a good point. However then I do have the loss of liquidity in that I cannot start pulling those funds before 59.5 without a penalty. Though I admit that isn't a huge deal breaker for me. I could just buy TIPS with maturity dates at age 60, 61, and so on.. It would have some implication to my Roth conversion plan too during those years though.
You could pull from stocks in taxable, and use maturing TIPS to replace the stocks in the IRA at the same time. You could also hold some of your nominal bond allocation in taxable if concerned that stocks might have dropped too much when you need the money.
Anyway, how would I go about buying individual TIPS in my IRA? Should I just call up my vanguard rep and have him walk me through it, or is there some other special way of going about it.
That would work. You can buy at auction at no cost, or buy on secondary market for a small commission and bid/ask spread. Some forum members buy 30-year TIPS at each auction. #Cruncher is a good resource for more details on TIPS.
By the way, how does the compounding of the interest work with TIPS? Am I right in understanding that while the inflation indexed adjustments apply cumulatively, the interest given off needs to be "manually" reinvested some how?
Yes, coupon payments should be reinvested, but as #Cruncher has pointed out in another thread, coupon payments are small enough that reinvesting them doesn't make much difference. You could reinvest them in a TIPS fund until you accumulate enough to buy another individual TIPS, or just leave them in the fund.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: EE and I Bonds

Post by PandaBear »

kjvmartin wrote:
thefoggycity wrote:Could someone clarify, is it possible to buy $10,000 per calendar year of I Bonds AND EE bonds for a total of 20k per year?

Also, if we are 20 or so years away from retirement, are EE bonds a wise choice to supplement an early retirement?

Thank you!
EE bonds would be the last thing I invest in after maxing all 401k, IRA, 529, and a healthy emergency fund.
Don't forget your HSA.
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Re: EE and I Bonds

Post by NiceUnparticularMan »

dodecahedron wrote:
NiceUnparticularMan wrote:So for fun, I tried building a deferred annuity ladder instead of an EE bond ladder, using the same funding schedule. We're investing $20,000 per year for 20 years, so to keep this simple I will invest $104,000 every 5 years (the extra $4000 is for interest as it sits waiting to get to $100,000), deferred out to 65, starting five years after 20 years before 65--meaning the first $104,000 goes in at age 50, deferred for 15 years, and the last $104,000 goes in at 65, no deferral. I'm going to use a single male in PA and quotes from Immediate Annuities.

I get $1044 in monthly income for the first installment, $862 for the second, $696 for the third, $570 for the third. That's $38064 annually. Not far off from the $40000.

Of course that is somewhat apples to oranges . . . you get the $40000 for 20 years, you get the $38064 for life, and one or the other could work out better. But I believe the life expectancy of a male annuitant at 65 is right around 20 years anyway.

So, long story short--this plan appears to get you roughly the same sort of return on your investment as insurance companies are providing on their deferred annuities. Whether you view that as attractive or not depends on your assumptions about your alternatives (personally, I tend to think I can do better, and I would also rather have the liquidity on top).
Interesting comparison. Other differences between the two options you are comparing:
  • federal tax treatment of EE bond cash flows vs annuity cash flows favors annuity
  • state tax treatment of EE bond cash flows vs annuity cash flows favors EE bonds
  • US Treasury backing the EE flow vs. insurance company backing annuity favors EE bonds
If the insurance company is pretty solid (a big IF) and if state tax treatment doesn't matter (e.g., in state with no income tax), then the federal tax treatment differences would weigh heavily in favor of the annuity, since most of the early year annuity flows would be treated as recovery of the annuity's basis. (Forgoing statement assumes that funds are not being used for qualifying higher education expenses for the taxpayer, spouse, or a dependent.)
Good points all.

Fortunately, we are necessarily buying pretty small annuities--hopefully the state guarantee would cover a lot of it, plus you could spread them around to diversify risk.
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Re: EE and I Bonds

Post by Mel Lindauer »

Remember, only the accumulated interest is taxable upon redemption of Savings Bonds. In the case of EE Bonds that have doubled, one half of each redemption would be taxable at the federal level, but not at the state level, and one half would be a non-taxable return of principal.
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Re: EE and I Bonds

Post by Devil's Advocate »

After maxing out all tax-advantaged accounts and hoping for a 60/40 equity/bond split in a taxable account for funds to be used within 5 to 10 years would I bonds be an attractive option?

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Re: EE and I Bonds

Post by dodecahedron »

Mel Lindauer wrote:Remember, only the accumulated interest is taxable upon redemption of Savings Bonds. In the case of EE Bonds that have doubled, one half of each redemption would be taxable at the federal level, but not at the state level, and one half would be a non-taxable return of principal.
Yes, I took that into account in my comparison. By contrast, I believe somewhat more than half the annuity payments would be nontaxable recovery of basis in the early years of the annuity given the way the IRS annuity exclusion formula works for a 65 year old. So the recovery of basis is somewhat faster with an annuity than with the EE bonds. Eventually, of course, the annuity will be fully taxable but by that time the EE annuity-substitute would already have stopped paying entirely.

Of course other factors, including state tax treatment and insurance company strength are also relevant. Other issues that now occur to me:
  • creditor protection may favor annuities over EE bonds depending on state law
  • Medicaid laws applying to the "community spouse" probably favor annuities over EE bonds
In fact, come to think of it, either a creditor or Medicaid constraints could force an investor to cash EE bonds prematurely before the 20 years are up.
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Re: EE and I Bonds

Post by sport »

Those who plan to fund their retirement with EE or I bonds should remember that they will be required to deal with Treasury Direct when it comes time to withdraw the money. I just think about someone in a nursing home who needs to be fed, with an investing illiterate spouse. There may not be anyone who is aware that the asset exists.
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Re: EE and I Bonds

Post by Mel Lindauer »

sport wrote:Those who plan to fund their retirement with EE or I bonds should remember that they will be required to deal with Treasury Direct when it comes time to withdraw the money. I just think about someone in a nursing home who needs to be fed, with an investing illiterate spouse. There may not be anyone who is aware that the asset exists.
That's certainly something one needs to consider. But in that situation, the same problems could occur with an annuity that hasn't yet been annuitized by the "out-of-it" nursing home resident with the illiterate spouse.

So perhaps the lesson here is to redeem the I Bonds or annuitize the annuity while still in a sound state of mind or you could have problems with either or both. Or better yet, make sure someone has the power of attorney to do it for you when you're no longer able to do so.
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Re: EE and I Bonds

Post by Grt2bOutdoors »

NiceUnparticularMan wrote:
dodecahedron wrote:
NiceUnparticularMan wrote:So for fun, I tried building a deferred annuity ladder instead of an EE bond ladder, using the same funding schedule. We're investing $20,000 per year for 20 years, so to keep this simple I will invest $104,000 every 5 years (the extra $4000 is for interest as it sits waiting to get to $100,000), deferred out to 65, starting five years after 20 years before 65--meaning the first $104,000 goes in at age 50, deferred for 15 years, and the last $104,000 goes in at 65, no deferral. I'm going to use a single male in PA and quotes from Immediate Annuities.

I get $1044 in monthly income for the first installment, $862 for the second, $696 for the third, $570 for the third. That's $38064 annually. Not far off from the $40000.

Of course that is somewhat apples to oranges . . . you get the $40000 for 20 years, you get the $38064 for life, and one or the other could work out better. But I believe the life expectancy of a male annuitant at 65 is right around 20 years anyway.

So, long story short--this plan appears to get you roughly the same sort of return on your investment as insurance companies are providing on their deferred annuities. Whether you view that as attractive or not depends on your assumptions about your alternatives (personally, I tend to think I can do better, and I would also rather have the liquidity on top).
Interesting comparison. Other differences between the two options you are comparing:
  • federal tax treatment of EE bond cash flows vs annuity cash flows favors annuity
  • state tax treatment of EE bond cash flows vs annuity cash flows favors EE bonds
  • US Treasury backing the EE flow vs. insurance company backing annuity favors EE bonds
If the insurance company is pretty solid (a big IF) and if state tax treatment doesn't matter (e.g., in state with no income tax), then the federal tax treatment differences would weigh heavily in favor of the annuity, since most of the early year annuity flows would be treated as recovery of the annuity's basis. (Forgoing statement assumes that funds are not being used for qualifying higher education expenses for the taxpayer, spouse, or a dependent.)
Good points all.

Fortunately, we are necessarily buying pretty small annuities--hopefully the state guarantee would cover a lot of it, plus you could spread them around to diversify risk.
Diversify? Ha, all of the insurance companies are pretty much tied at the hip; invest in same securities, reinsure with each other, and if there ever is a run, you can pretty much join the line in collecting with everyone else.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: EE and I Bonds

Post by NiceUnparticularMan »

Grt2bOutdoors wrote:
NiceUnparticularMan wrote:
dodecahedron wrote:
NiceUnparticularMan wrote:So for fun, I tried building a deferred annuity ladder instead of an EE bond ladder, using the same funding schedule. We're investing $20,000 per year for 20 years, so to keep this simple I will invest $104,000 every 5 years (the extra $4000 is for interest as it sits waiting to get to $100,000), deferred out to 65, starting five years after 20 years before 65--meaning the first $104,000 goes in at age 50, deferred for 15 years, and the last $104,000 goes in at 65, no deferral. I'm going to use a single male in PA and quotes from Immediate Annuities.

I get $1044 in monthly income for the first installment, $862 for the second, $696 for the third, $570 for the third. That's $38064 annually. Not far off from the $40000.

Of course that is somewhat apples to oranges . . . you get the $40000 for 20 years, you get the $38064 for life, and one or the other could work out better. But I believe the life expectancy of a male annuitant at 65 is right around 20 years anyway.

So, long story short--this plan appears to get you roughly the same sort of return on your investment as insurance companies are providing on their deferred annuities. Whether you view that as attractive or not depends on your assumptions about your alternatives (personally, I tend to think I can do better, and I would also rather have the liquidity on top).
Interesting comparison. Other differences between the two options you are comparing:
  • federal tax treatment of EE bond cash flows vs annuity cash flows favors annuity
  • state tax treatment of EE bond cash flows vs annuity cash flows favors EE bonds
  • US Treasury backing the EE flow vs. insurance company backing annuity favors EE bonds
If the insurance company is pretty solid (a big IF) and if state tax treatment doesn't matter (e.g., in state with no income tax), then the federal tax treatment differences would weigh heavily in favor of the annuity, since most of the early year annuity flows would be treated as recovery of the annuity's basis. (Forgoing statement assumes that funds are not being used for qualifying higher education expenses for the taxpayer, spouse, or a dependent.)
Good points all.

Fortunately, we are necessarily buying pretty small annuities--hopefully the state guarantee would cover a lot of it, plus you could spread them around to diversify risk.
Diversify? Ha, all of the insurance companies are pretty much tied at the hip; invest in same securities, reinsure with each other, and if there ever is a run, you can pretty much join the line in collecting with everyone else.
That's what diversifying means--to get rid of idiosyncratic risk. You can't diversify away common risks.
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Re: EE and I Bonds

Post by Mel Lindauer »

One thing that hasn't been mentioned (or at least I didn't see it) is that, if one dies after annuitizing (or the second-to-die in the case of a lower-paying joint annuity), there is nothing for their heirs, whereas any remaining EE Bonds in the ladder go to the heirs.
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Re: EE and I Bonds

Post by dodecahedron »

Mel Lindauer wrote:One thing that hasn't been mentioned (or at least I didn't see it) is that, if one dies after annuitizing (or the second-to-die in the case of a lower-paying joint annuity), there is nothing for their heirs, whereas any remaining EE Bonds in the ladder go to the heirs.
Actually NiceUnparticularMan addressed this in his first post above dealing with his comparison to annuities:
NiceUnparticularMan wrote:Of course that is somewhat apples to oranges . . . you get the $40000 for 20 years, you get the $38064 for life, and one or the other could work out better. But I believe the life expectancy of a male annuitant at 65 is right around 20 years anyway.
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Re: EE and I Bonds

Post by NiceUnparticularMan »

dodecahedron wrote:
Mel Lindauer wrote:One thing that hasn't been mentioned (or at least I didn't see it) is that, if one dies after annuitizing (or the second-to-die in the case of a lower-paying joint annuity), there is nothing for their heirs, whereas any remaining EE Bonds in the ladder go to the heirs.
Actually NiceUnparticularMan addressed this in his first post above dealing with his comparison to annuities:
NiceUnparticularMan wrote:Of course that is somewhat apples to oranges . . . you get the $40000 for 20 years, you get the $38064 for life, and one or the other could work out better. But I believe the life expectancy of a male annuitant at 65 is right around 20 years anyway.
Although to be fair, there is also a chance you might die before 65. I didn't account for that, in part because it would be complicated, since the earlier you died the less you would have annuitized and therefore the less premiums you would lose.

For what it is worth, that first annuity I reported at $1044 goes down to $959 with a cash refund. That's not quite the same as the EE ladder because it won't double, it will just get you your premium back. But if it happens early enough, maybe your heirs would prefer the premium. And then it also has gradually declining value the first 9 or so years after 65, since you will get some premium return up to that point.

I'm hoping all this means it really doesn't make much difference to the analysis how you do this, once you adjust for the mortality distribution and avoided premiums. Because honestly, I don't want to try to figure all this out in detail. I just wanted a rough sense of how the rate of return compared during the deferral period, and I am satisfied that as these things go, and in light of the long period, it is apparently pretty close.
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