I don't understand the case for EE bonds

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Mel Lindauer
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Re: I don't understand the case for EE bonds

Post by Mel Lindauer »

Here's a Forbes column I wrote a number of years ago about using the EE Bonds' doubling-in-twenty-years feature to build an annuity in retirement.

https://www.forbes.com/sites/theboglehe ... 24cb6e7ba3
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

Mel Lindauer wrote: Sun Mar 31, 2019 1:19 pm Here's a Forbes column I wrote a number of years ago about using the EE Bonds' doubling-in-twenty-years feature to build an annuity in retirement.

https://www.forbes.com/sites/theboglehe ... 24cb6e7ba3
Thanks Mel.

By my way of thinking, a TIPS ladder would significantly reduce inflation risk compared to using EE bonds, although the current real yield of TIPS of any duration is less than the 3.53% of EE bonds. Using both might be better than either alone.
“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
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Re: I don't understand the case for EE bonds

Post by Mel Lindauer »

willthrill81 wrote: Sun Mar 31, 2019 4:23 pm
Mel Lindauer wrote: Sun Mar 31, 2019 1:19 pm Here's a Forbes column I wrote a number of years ago about using the EE Bonds' doubling-in-twenty-years feature to build an annuity in retirement.

https://www.forbes.com/sites/theboglehe ... 24cb6e7ba3
Thanks Mel.

By my way of thinking, a TIPS ladder would significantly reduce inflation risk compared to using EE bonds, although the current real yield of TIPS of any duration is less than the 3.53% of EE bonds. Using both might be better than either alone.
That would certainly work, too.
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Re: I don't understand the case for EE bonds

Post by SchruteB&B »

willthrill81 wrote: Fri Mar 29, 2019 3:55 pm Strictly out of curiosity, I wonder if anyone is currently buying EE bonds now that you can get a 5 year CD paying 3.51%. Yes, there is reinvestment risk, but it's far more liquid than EE bonds.
Just speaking for myself, buying CDs in an IRA has been a hassle. It takes way more micro managing than I care for. Lots and lots of phone calls, many of these credit unions offering these higher rates require a lot of follow up. Also, You are always at risk that in the 3 or 4 weeks to rollover the money that the rate will fall. Buying it in a taxable account is easier but brings a high tax rate eating a big chunk of the earnings. I find Treasury Direct okay to use and the tax deferral is valuable.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

SchruteB&B wrote: Sun Mar 31, 2019 4:54 pm
willthrill81 wrote: Fri Mar 29, 2019 3:55 pm Strictly out of curiosity, I wonder if anyone is currently buying EE bonds now that you can get a 5 year CD paying 3.51%. Yes, there is reinvestment risk, but it's far more liquid than EE bonds.
Just speaking for myself, buying CDs in an IRA has been a hassle. It takes way more micro managing than I care for. Lots and lots of phone calls, many of these credit unions offering these higher rates require a lot of follow up. Also, You are always at risk that in the 3 or 4 weeks to rollover the money that the rate will fall. Buying it in a taxable account is easier but brings a high tax rate eating a big chunk of the earnings. I find Treasury Direct okay to use and the tax deferral is valuable.
Certainly CDs are a bigger hassle than buying a bond fund or even an individual bond at Treasury Direct. Whether they're worth the effort is up to the potential buyer.
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Re: I don't understand the case for EE bonds

Post by VictoriaF »

willthrill81 wrote: Sun Mar 31, 2019 5:29 pm
SchruteB&B wrote: Sun Mar 31, 2019 4:54 pm
willthrill81 wrote: Fri Mar 29, 2019 3:55 pm Strictly out of curiosity, I wonder if anyone is currently buying EE bonds now that you can get a 5 year CD paying 3.51%. Yes, there is reinvestment risk, but it's far more liquid than EE bonds.
Just speaking for myself, buying CDs in an IRA has been a hassle. It takes way more micro managing than I care for. Lots and lots of phone calls, many of these credit unions offering these higher rates require a lot of follow up. Also, You are always at risk that in the 3 or 4 weeks to rollover the money that the rate will fall. Buying it in a taxable account is easier but brings a high tax rate eating a big chunk of the earnings. I find Treasury Direct okay to use and the tax deferral is valuable.
Certainly CDs are a bigger hassle than buying a bond fund or even an individual bond at Treasury Direct. Whether they're worth the effort is up to the potential buyer.
It depends on the CDs rates and durations. A few years ago, I parked some money at the Andrews FCU for 7 years at 3%. 3% seems small now, but at the time it was great. More importantly, I didn't have to manage this money for 7 years. More recently, I opened a 40-month IRA CD at Navy Fed at 3.75%. 40 months is on a shorter side, but the beauty of Navy Fed is that once you open a CD you can add money to it later.

As an opposite example, I decided to try brokerage CDs and opened some in Fidelity at 2.4% for 5 years. Today, 2.4% looks much smaller than when I've opened it, and the value of these accounts is lower than at the time of their opening. I will keep these brokerage CDs till maturity and will not lose any nominal dollars. But in the retrospect, I would have done better with a credit union CD and a little extra work.

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Re: I don't understand the case for EE bonds

Post by Mel Lindauer »

One thing that's important to remember is that EE Bonds are tax-deferred, so they expand the tax-deferred space for those who have maxed out their other options. And, because of this, they can also be used for tax-shifting from a high tax bracket in one's prime earning years to a lower tax bracket in retirement.

Finally, for those in HCOL states with high state income taxes, they're free of state and local taxation, so that's something else to consider.
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Re: I don't understand the case for EE bonds

Post by jwhitaker »

I've recently become more negative on EE bonds and I thought I would share my situation. I will stand to inherit some EE bonds sooner rather than later. It is a substantial sum (for which I am thankful) across bonds with years of issue from 1990 to 2005. There are big lumps in a few years in the early 90's. I am sort of scratching my head as to how to minimize taxes on these, and it is making me rethink the benefits. First, inheriting these does not escape any taxes, as I inherit only the cost, and all the accrued interest now becomes my ordinary income. I'm sure my tax rate now is higher than my parents would have been when they purchased these, so we inadvertently anti-arbitraged from a low to high tax bracket. Add to that missing out on stock gains that would have been passed on tax free essentially is pretty insulting.

At least with the really old bonds, you got some type of reasonable return (2-4%) from the extended maturity, the year it magically doubles until the end of 30 years. So it gave you some optionality as to when you cash them in. Might have been a good idea for us to cash in a bunch some years ago when my income was lower, or my income was low enough to use for education tax free (more below), but that ship has sailed. Anyway, today's bonds will yield 0% or something close to that for years 20 to 30, making it necessary to cash in year 20, thus eliminating the optionality and whatever value it had.

The only way I can see further deferring or reducing taxes on this in my situation is for my parents to cash them and put into a 529 in my child's name (they will qualify for the exemption), but her education will be vastly overfunded at that point.

As for the education expense, there is an income limit on using bond proceeds. It's similar to the Roth IRA cutoff of $150k or so for married filing jointly. One of the arguments I liked for investing in these bonds was the increase in after tax space, but if you are out of 401k, IRA and Roth room, you probably have a high income and you will likely not qualify for the exemption unless you are already retired, in which case if you are like most people your kids are already out of college, so you're basically talking about funding your grandchildren's education. Still a worthy goal, but I don't consider myself that rich as to be worried about things that far out. I think for funding your own children's education, a balanced portfolio including stocks in a 529 is a way better idea.

Honestly my course of action will probably be just to cash these in as they hit 30 years, take the tax hit, continue to fund my 529 as normal and stop or at least think very hard before buying any more EE's for myself.
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Re: I don't understand the case for EE bonds

Post by bearcub »

I entered the savings bond program years ago after maxing out my 401k. Every two weeks they would take out for a bond + mail it to me. The less money I touched the better. Would I do it today considering what I know now? Probably not. I do not consider it a bad mistake though. They are now at maturity, so I can cash them in + do what I want with the cash. Best wishes.
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Re: I don't understand the case for EE bonds

Post by fujiters »

jwhitaker wrote: Tue Apr 23, 2019 12:34 pm I've recently become more negative on EE bonds and I thought I would share my situation. I will stand to inherit some EE bonds sooner rather than later. It is a substantial sum (for which I am thankful) across bonds with years of issue from 1990 to 2005. There are big lumps in a few years in the early 90's. I am sort of scratching my head as to how to minimize taxes on these, and it is making me rethink the benefits. First, inheriting these does not escape any taxes, as I inherit only the cost, and all the accrued interest now becomes my ordinary income. I'm sure my tax rate now is higher than my parents would have been when they purchased these, so we inadvertently anti-arbitraged from a low to high tax bracket. Add to that missing out on stock gains that would have been passed on tax free essentially is pretty insulting.

At least with the really old bonds, you got some type of reasonable return (2-4%) from the extended maturity, the year it magically doubles until the end of 30 years. So it gave you some optionality as to when you cash them in. Might have been a good idea for us to cash in a bunch some years ago when my income was lower, or my income was low enough to use for education tax free (more below), but that ship has sailed. Anyway, today's bonds will yield 0% or something close to that for years 20 to 30, making it necessary to cash in year 20, thus eliminating the optionality and whatever value it had.

The only way I can see further deferring or reducing taxes on this in my situation is for my parents to cash them and put into a 529 in my child's name (they will qualify for the exemption), but her education will be vastly overfunded at that point.

As for the education expense, there is an income limit on using bond proceeds. It's similar to the Roth IRA cutoff of $150k or so for married filing jointly. One of the arguments I liked for investing in these bonds was the increase in after tax space, but if you are out of 401k, IRA and Roth room, you probably have a high income and you will likely not qualify for the exemption unless you are already retired, in which case if you are like most people your kids are already out of college, so you're basically talking about funding your grandchildren's education. Still a worthy goal, but I don't consider myself that rich as to be worried about things that far out. I think for funding your own children's education, a balanced portfolio including stocks in a 529 is a way better idea.

Honestly my course of action will probably be just to cash these in as they hit 30 years, take the tax hit, continue to fund my 529 as normal and stop or at least think very hard before buying any more EE's for myself.
Why are you continuing to fund 529 after deciding that your parents shouldn't cash in the bonds to put into a 529 because the education will be vastly over funded?
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Re: I don't understand the case for EE bonds

Post by leftcoaster »

I have bought them for a very specific purpose:


I am currently in the highest tax bracket federally and in my state. At my marginal rate I keep only half (actually less) of interest income, so the benefit of tax deferral is huge.

I plan to retire early and will draw down on a NQDC plan for the first “phase.” I will be in a much lower bracket then.

The NQDC plan will run out five years before I start taking SS at 70 and I will have zero income coming in. That is when the EE bonds will hit the 20y mark, with minimal federal and zero state tax. Perhaps I will use them to fund Roth conversions.

So, it’s all about tax arbitrage. California munis could play a similar role, but if I leave CA I would have to sell them for a different investment that would avoid state tax wherever I wind up. In any case, it’s not an either/or matter - you can buy both and diversify!
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Re: I don't understand the case for EE bonds

Post by bligh »

As long as your plan is to hold to maturity, they are an absolute "free lunch" when compared to 20 year Treasuries.

In my case I have been buying my max allotment of EE and I Bonds for the past 4 years and will continue to buy them for the next couple of years at least. Mel Lindauer's article on using them to build your own annuity really changed the way I think about them now. I do not even consider them part of my portfolio, but instead I think of them as annuity payouts. Starting 16 years form now I can expect $20K in income to start rolling in. Granted, I have no way of knowing what the purchasing power of those $20K will be, but I have no way of knowing how my stock/bond portfolio will perform either. Nor do I really know if I will be alive.

Right now, I am happy earning almost 0.90% more yield on my money than its closest alternative - the 20 year treasury. That is a free lunch. Sure it is less liquid, but that makes no difference to me if I intend to hold to maturity anyway. Also, if yields were to shoot up, wouldn't the value of my 20 year treasuries fall by an amount that would equal the additional earnings I could get by swapping my treasuries with newer higher yielding ones?

Lastly, the zero coupon nature helps expand my tax deferred space.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

bligh wrote: Tue May 21, 2019 2:55 pm As long as your plan is to hold to maturity, they are an absolute "free lunch" when compared to 20 year Treasuries.

In my case I have been buying my max allotment of EE and I Bonds for the past 4 years and will continue to buy them for the next couple of years at least. Mel Lindauer's article on using them to build your own annuity really changed the way I think about them now. I do not even consider them part of my portfolio, but instead I think of them as annuity payouts. Starting 16 years form now I can expect $20K in income to start rolling in. Granted, I have no way of knowing what the purchasing power of those $20K will be, but I have no way of knowing how my stock/bond portfolio will perform either. Nor do I really know if I will be alive.

Right now, I am happy earning almost 0.90% more yield on my money than its closest alternative - the 20 year treasury. That is a free lunch. Sure it is less liquid, but that makes no difference to me if I intend to hold to maturity anyway. Also, if yields were to shoot up, wouldn't the value of my 20 year treasuries fall by an amount that would equal the additional earnings I could get by swapping my treasuries with newer higher yielding ones?

Lastly, the zero coupon nature helps expand my tax deferred space.
It's definitely not a "free lunch." You are buying the added yield by sacrificing liquidity for 20 years. That doesn't make it a bad choice, but you are giving something up in return.
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Re: I don't understand the case for EE bonds

Post by G12 »

jwhitaker wrote: Tue Apr 23, 2019 12:34 pm I've recently become more negative on EE bonds and I thought I would share my situation. I will stand to inherit some EE bonds sooner rather than later. It is a substantial sum (for which I am thankful) across bonds with years of issue from 1990 to 2005. There are big lumps in a few years in the early 90's. I am sort of scratching my head as to how to minimize taxes on these, and it is making me rethink the benefits. First, inheriting these does not escape any taxes, as I inherit only the cost, and all the accrued interest now becomes my ordinary income. I'm sure my tax rate now is higher than my parents would have been when they purchased these, so we inadvertently anti-arbitraged from a low to high tax bracket. Add to that missing out on stock gains that would have been passed on tax free essentially is pretty insulting.
I don't know about "insulting" but through experience when one has significant amounts of EE's from the mid-80's forward it absolutely is a tax management challenge at maturity if you have other significant taxable income streams at the time. My wife's father was super financially conservative and equity investing would never have fit his comfort level. He left my wife a good bit of EE's as they were his primary saving plan, resulting in $35-$40k annual income spikes the past few years as he let federal tax accrue until maturity. My take is that people that buy savings bonds consider paying taxes annually on accruing interest instead of lump sum at maturity. The current yields are low, yet one never knows what tax situation they will find themselves in 20 - 30 years.
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Re: I don't understand the case for EE bonds

Post by bligh »

willthrill81 wrote: Wed May 22, 2019 6:24 pm
bligh wrote: Tue May 21, 2019 2:55 pm ...

Right now, I am happy earning almost 0.90% more yield on my money than its closest alternative - the 20 year treasury. That is a free lunch. Sure it is less liquid, but that makes no difference to me if I intend to hold to maturity anyway.

...
It's definitely not a "free lunch." You are buying the added yield by sacrificing liquidity for 20 years. That doesn't make it a bad choice, but you are giving something up in return.
Agreed, but I am giving up something that is essentially of no value to me (the liquidity). If someone were giving me lunch for handing over something I do not value anyway, or for doing something I was planning on doing anyway, I call that a free lunch. :happy

If I ever am in a position where I am forced to liquidate my EE Bonds prematurely, the lost yield on them will be the least of my worries.
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Re: I don't understand the case for EE bonds

Post by Bongleur »

G12 wrote: Wed May 22, 2019 7:23 pm He left my wife a good bit of EE's as they were his primary saving plan, resulting in $35-$40k annual income spikes the past few years as he let federal tax accrue until maturity. My take is that people that buy savings bonds consider paying taxes annually on accruing interest instead of lump sum at maturity.
How do you do that? Is there a form for reporting that you own this serial number and are paying that much tax this year? How do you figure the accrued amount subject to tax? -- is there a simple table to use? Do you add it to "interest" even though you didn't really get anything & it just increases Taxable Income? Might get awfully complicated if you don't remember to do it _every_ year.

At least State & Local taxes are exempt.

I had to switch safe deposit boxes recently & took out a big stack of ancient EEs to see which ones have ceased accruing interest.
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Re: I don't understand the case for EE bonds

Post by leftcoaster »

As others have said:
  • totally safe, guaranteed return at 20y
  • federal tax deferral during high income years
  • no state taxes, ever
  • AND, for my plan: I will use EE bonds to bridge from 65 -> 70 so that I can defer social security until the max benefit.
Expanding on that last:

age 45-50, purchase $30K/year EE bonds -- 10 self + 10 spouse + 10 trust
age 55-65, FIRE and draw down NQDC over 10 years
age 65-70, take social security

Some sequence of risk benefit in here as well.
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Re: I don't understand the case for EE bonds

Post by Kevin M »

leftcoaster wrote: Sun Jun 02, 2019 10:38 am As others have said:
  • totally safe, guaranteed return at 20y
    <snip>
Just rehashing what's already been discussed, but the return is not "totally safe" in terms of purchasing power after 20 years, which is what matters unless you are matching a nominal 20-year liability with the EE bonds. Most living expenses will increase with inflation over 20 years, so high unexpected inflation is the biggest risk to EE bonds.

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Re: I don't understand the case for EE bonds

Post by Grt2bOutdoors »

Kevin M wrote: Sun Jun 02, 2019 1:06 pm
leftcoaster wrote: Sun Jun 02, 2019 10:38 am As others have said:
  • totally safe, guaranteed return at 20y
    <snip>
Just rehashing what's already been discussed, but the return is not "totally safe" in terms of purchasing power after 20 years, which is what matters unless you are matching a nominal 20-year liability with the EE bonds. Most living expenses will increase with inflation over 20 years, so high unexpected inflation is the biggest risk to EE bonds.

Kevin
Demographics suggest inflation will remain muted. Just look at Japan.
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Re: I don't understand the case for EE bonds

Post by Kevin M »

Grt2bOutdoors wrote: Sun Jun 02, 2019 4:31 pm
Kevin M wrote: Sun Jun 02, 2019 1:06 pm
leftcoaster wrote: Sun Jun 02, 2019 10:38 am As others have said:
  • totally safe, guaranteed return at 20y
    <snip>
Just rehashing what's already been discussed, but the return is not "totally safe" in terms of purchasing power after 20 years, which is what matters unless you are matching a nominal 20-year liability with the EE bonds. Most living expenses will increase with inflation over 20 years, so high unexpected inflation is the biggest risk to EE bonds.
Demographics suggest inflation will remain muted. Just look at Japan.
There's a big difference between "totally safe" and "I don't think there's much risk". It's the "unexpected" part of "unexpected inflation" that is the risk.

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Re: I don't understand the case for EE bonds

Post by dodecahedron »

jwhitaker wrote: Tue Apr 23, 2019 12:34 pm The only way I can see further deferring or reducing taxes on this in my situation is for my parents to cash them and put into a 529 in my child's name (they will qualify for the exemption), but her education will be vastly overfunded at that point.
That won´t work unless your child is THEIR dependent. Qualified Higher Education Expenses (QHEE), which include contributions to 529 plans, only count for the exemption if the QHEE are for the bond´s owner, their spouse, or their dependents.

https://www.irs.gov/publications/p970#e ... 1000178602

Unless the grandparents have custody and the grandchild lives with them, which seems not to be the case here, it is rare for grandparents to be able to claim a grandchild as their dependent.
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Re: I don't understand the case for EE bonds

Post by HockeyFan99 »

Mel Lindauer wrote: Sun Mar 31, 2019 4:45 pm
willthrill81 wrote: Sun Mar 31, 2019 4:23 pm
Mel Lindauer wrote: Sun Mar 31, 2019 1:19 pm Here's a Forbes column I wrote a number of years ago about using the EE Bonds' doubling-in-twenty-years feature to build an annuity in retirement.

https://www.forbes.com/sites/theboglehe ... 24cb6e7ba3
Thanks Mel.

By my way of thinking, a TIPS ladder would significantly reduce inflation risk compared to using EE bonds, although the current real yield of TIPS of any duration is less than the 3.53% of EE bonds. Using both might be better than either alone.
That would certainly work, too.
I’m curious whether there is anyone who is doing what Mel suggested above, i.e., using EE or EE/TIPS to build an annuity.

With falling interest rates I couldn’t help looking at EE bonds again, and was again intrigued by Mel’s idea.

It seems like given the very low coupon on EE bonds you need to plan on redeeming them right at the 20 year mark (unless, I guess, interest rates are negative and then you have a place to store money for 10 more years!).

In 20 years my spouse and I will be almost 60 and, more importantly, newly empty nesters (we hope!), and we’ve considered that if early retirement is an option that is when we would target it.

So building an EE ladder holds some appeal, but I’m just not sure how effective it would be. We could probably afford to put in $20K/year of EE bonds, and the state tax exemption (we are in a high tax state) and federal deferral are valuable.

But I do worry about inflation, as Will has pointed out so many times in this thread, and I’m not sure if we could or would want to divert $40K/year if we matched EE with 20 year TIPS to try to address inflation.

And while $20K/year would help set a floor in pre-SS early retirement, we would still certainly need supplemental income from our retirement portfolio.

So would the money just be better off going into VTAX in our taxable brokerage account?

I’m realizing that accumulation is conceptually easy, but as we start to think about retirement - even 2-3 decades off - everything suddenly is more complicated. No shocker, I know, but would appreciate hearing from anybody else who is thinking about this particular path.
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Re: I don't understand the case for EE bonds

Post by leftcoaster »

HockeyFan99 wrote: Fri Aug 16, 2019 5:22 am
Mel Lindauer wrote: Sun Mar 31, 2019 4:45 pm
willthrill81 wrote: Sun Mar 31, 2019 4:23 pm
Mel Lindauer wrote: Sun Mar 31, 2019 1:19 pm Here's a Forbes column I wrote a number of years ago about using the EE Bonds' doubling-in-twenty-years feature to build an annuity in retirement.

https://www.forbes.com/sites/theboglehe ... 24cb6e7ba3
Thanks Mel.

By my way of thinking, a TIPS ladder would significantly reduce inflation risk compared to using EE bonds, although the current real yield of TIPS of any duration is less than the 3.53% of EE bonds. Using both might be better than either alone.
That would certainly work, too.
I’m curious whether there is anyone who is doing what Mel suggested above, i.e., using EE or EE/TIPS to build an annuity.

With falling interest rates I couldn’t help looking at EE bonds again, and was again intrigued by Mel’s idea.

It seems like given the very low coupon on EE bonds you need to plan on redeeming them right at the 20 year mark (unless, I guess, interest rates are negative and then you have a place to store money for 10 more years!).

In 20 years my spouse and I will be almost 60 and, more importantly, newly empty nesters (we hope!), and we’ve considered that if early retirement is an option that is when we would target it.

So building an EE ladder holds some appeal, but I’m just not sure how effective it would be. We could probably afford to put in $20K/year of EE bonds, and the state tax exemption (we are in a high tax state) and federal deferral are valuable.

But I do worry about inflation, as Will has pointed out so many times in this thread, and I’m not sure if we could or would want to divert $40K/year if we matched EE with 20 year TIPS to try to address inflation.

And while $20K/year would help set a floor in pre-SS early retirement, we would still certainly need supplemental income from our retirement portfolio.

So would the money just be better off going into VTAX in our taxable brokerage account?

I’m realizing that accumulation is conceptually easy, but as we start to think about retirement - even 2-3 decades off - everything suddenly is more complicated. No shocker, I know, but would appreciate hearing from anybody else who is thinking about this particular path.
More than thinking about -- actively executing.

I'm building an annuity of EE and I bonds. I realize not everyone can afford this, but for clarity, you can buy a total of $75K of these: 30 EE and 35 I bonds. That's spouse + spouse + trust for EE bonds, and spouse + spouse + trust + tax refund for I bonds.

Inflation is pretty much the only risk with these and for an annuity whose purpose is to cover basics -- food, utilities, housing -- I want minimum risk. Property taxes are a good chunk of housing costs and as I live in California, where those are constrained, EE bonds are a good way to "prepay" for that expense.

Again, that's easy to say if the decision is whether to have stocks AND savings bonds. If it's stocks OR savings bonds, then we're back to everyone's favorite topic -- what allocation lets you sleep at night and still achieve your goals. If there isn't one, then you'll need a blend of "save more" and "work longer."
Walkure
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Re: I don't understand the case for EE bonds

Post by Walkure »

Bongleur wrote: Sun Jun 02, 2019 3:04 am
G12 wrote: Wed May 22, 2019 7:23 pm He left my wife a good bit of EE's as they were his primary saving plan, resulting in $35-$40k annual income spikes the past few years as he let federal tax accrue until maturity. My take is that people that buy savings bonds consider paying taxes annually on accruing interest instead of lump sum at maturity.
How do you do that? Is there a form for reporting that you own this serial number and are paying that much tax this year? How do you figure the accrued amount subject to tax? -- is there a simple table to use? Do you add it to "interest" even though you didn't really get anything & it just increases Taxable Income? Might get awfully complicated if you don't remember to do it _every_ year.

At least State & Local taxes are exempt.

I had to switch safe deposit boxes recently & took out a big stack of ancient EEs to see which ones have ceased accruing interest.
If you were to pay accrued interest each year instead of waiting to maturity, do you claim 1/20 of the maturity interest, or the actual rate paid on years 1-19? Because "pre-paying" 0.5% or whatever for 19 years and then having it magically double at maturity doesn't do much at all to mitigate the tax hit in the year it matures.
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Re: I don't understand the case for EE bonds

Post by leftcoaster »

Bongleur wrote: Sun Jun 02, 2019 3:04 am
G12 wrote: Wed May 22, 2019 7:23 pm He left my wife a good bit of EE's as they were his primary saving plan, resulting in $35-$40k annual income spikes the past few years as he let federal tax accrue until maturity. My take is that people that buy savings bonds consider paying taxes annually on accruing interest instead of lump sum at maturity.
How do you do that? Is there a form for reporting that you own this serial number and are paying that much tax this year? How do you figure the accrued amount subject to tax? -- is there a simple table to use? Do you add it to "interest" even though you didn't really get anything & it just increases Taxable Income? Might get awfully complicated if you don't remember to do it _every_ year.

At least State & Local taxes are exempt.

I had to switch safe deposit boxes recently & took out a big stack of ancient EEs to see which ones have ceased accruing interest.
You could convert those to electronic and let TD handle the bookkeeping. You can also use their calculator to get annual interest figures.

But for EE bonds, I don't see much point in pay-as-you-go on the interest because there basically is none these days. All of the return shows up at the 20y anniversary.
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Re: I don't understand the case for EE bonds

Post by HockeyFan99 »

leftcoaster wrote: Fri Aug 16, 2019 8:44 am
HockeyFan99 wrote: Fri Aug 16, 2019 5:22 am
Mel Lindauer wrote: Sun Mar 31, 2019 4:45 pm
willthrill81 wrote: Sun Mar 31, 2019 4:23 pm
Mel Lindauer wrote: Sun Mar 31, 2019 1:19 pm Here's a Forbes column I wrote a number of years ago about using the EE Bonds' doubling-in-twenty-years feature to build an annuity in retirement.

https://www.forbes.com/sites/theboglehe ... 24cb6e7ba3
Thanks Mel.

By my way of thinking, a TIPS ladder would significantly reduce inflation risk compared to using EE bonds, although the current real yield of TIPS of any duration is less than the 3.53% of EE bonds. Using both might be better than either alone.
That would certainly work, too.
I’m curious whether there is anyone who is doing what Mel suggested above, i.e., using EE or EE/TIPS to build an annuity.

With falling interest rates I couldn’t help looking at EE bonds again, and was again intrigued by Mel’s idea.

It seems like given the very low coupon on EE bonds you need to plan on redeeming them right at the 20 year mark (unless, I guess, interest rates are negative and then you have a place to store money for 10 more years!).

In 20 years my spouse and I will be almost 60 and, more importantly, newly empty nesters (we hope!), and we’ve considered that if early retirement is an option that is when we would target it.

So building an EE ladder holds some appeal, but I’m just not sure how effective it would be. We could probably afford to put in $20K/year of EE bonds, and the state tax exemption (we are in a high tax state) and federal deferral are valuable.

But I do worry about inflation, as Will has pointed out so many times in this thread, and I’m not sure if we could or would want to divert $40K/year if we matched EE with 20 year TIPS to try to address inflation.

And while $20K/year would help set a floor in pre-SS early retirement, we would still certainly need supplemental income from our retirement portfolio.

So would the money just be better off going into VTAX in our taxable brokerage account?

I’m realizing that accumulation is conceptually easy, but as we start to think about retirement - even 2-3 decades off - everything suddenly is more complicated. No shocker, I know, but would appreciate hearing from anybody else who is thinking about this particular path.
More than thinking about -- actively executing.

I'm building an annuity of EE and I bonds. I realize not everyone can afford this, but for clarity, you can buy a total of $75K of these: 30 EE and 35 I bonds. That's spouse + spouse + trust for EE bonds, and spouse + spouse + trust + tax refund for I bonds.

Inflation is pretty much the only risk with these and for an annuity whose purpose is to cover basics -- food, utilities, housing -- I want minimum risk. Property taxes are a good chunk of housing costs and as I live in California, where those are constrained, EE bonds are a good way to "prepay" for that expense.

Again, that's easy to say if the decision is whether to have stocks AND savings bonds. If it's stocks OR savings bonds, then we're back to everyone's favorite topic -- what allocation lets you sleep at night and still achieve your goals. If there isn't one, then you'll need a blend of "save more" and "work longer."
That's an interesting point about property taxes being inflation limited. Unfortunately it does not apply to us, as we are currently HCOL renters.

Are you also planning the bond "annuity" for early retirement, to be supplemented from withdrawals from taxable?

For us, at it seems for you, the choice is not "stocks OR savings bonds" but "MORE stocks OR savings bonds" - and I still have no idea what the better route is. (FWIW, we are already doing the I bonds piece, at $20K per year, and those currently form part of our emergency fund but, if not needed for that, will be available at around the same time.)
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Re: I don't understand the case for EE bonds

Post by leftcoaster »

HockeyFan99 wrote: Fri Aug 16, 2019 9:54 am
leftcoaster wrote: Fri Aug 16, 2019 8:44 am
HockeyFan99 wrote: Fri Aug 16, 2019 5:22 am
Mel Lindauer wrote: Sun Mar 31, 2019 4:45 pm
willthrill81 wrote: Sun Mar 31, 2019 4:23 pm

Thanks Mel.

By my way of thinking, a TIPS ladder would significantly reduce inflation risk compared to using EE bonds, although the current real yield of TIPS of any duration is less than the 3.53% of EE bonds. Using both might be better than either alone.
That would certainly work, too.
I’m curious whether there is anyone who is doing what Mel suggested above, i.e., using EE or EE/TIPS to build an annuity.

With falling interest rates I couldn’t help looking at EE bonds again, and was again intrigued by Mel’s idea.

It seems like given the very low coupon on EE bonds you need to plan on redeeming them right at the 20 year mark (unless, I guess, interest rates are negative and then you have a place to store money for 10 more years!).

In 20 years my spouse and I will be almost 60 and, more importantly, newly empty nesters (we hope!), and we’ve considered that if early retirement is an option that is when we would target it.

So building an EE ladder holds some appeal, but I’m just not sure how effective it would be. We could probably afford to put in $20K/year of EE bonds, and the state tax exemption (we are in a high tax state) and federal deferral are valuable.

But I do worry about inflation, as Will has pointed out so many times in this thread, and I’m not sure if we could or would want to divert $40K/year if we matched EE with 20 year TIPS to try to address inflation.

And while $20K/year would help set a floor in pre-SS early retirement, we would still certainly need supplemental income from our retirement portfolio.

So would the money just be better off going into VTAX in our taxable brokerage account?

I’m realizing that accumulation is conceptually easy, but as we start to think about retirement - even 2-3 decades off - everything suddenly is more complicated. No shocker, I know, but would appreciate hearing from anybody else who is thinking about this particular path.
More than thinking about -- actively executing.

I'm building an annuity of EE and I bonds. I realize not everyone can afford this, but for clarity, you can buy a total of $75K of these: 30 EE and 35 I bonds. That's spouse + spouse + trust for EE bonds, and spouse + spouse + trust + tax refund for I bonds.

Inflation is pretty much the only risk with these and for an annuity whose purpose is to cover basics -- food, utilities, housing -- I want minimum risk. Property taxes are a good chunk of housing costs and as I live in California, where those are constrained, EE bonds are a good way to "prepay" for that expense.

Again, that's easy to say if the decision is whether to have stocks AND savings bonds. If it's stocks OR savings bonds, then we're back to everyone's favorite topic -- what allocation lets you sleep at night and still achieve your goals. If there isn't one, then you'll need a blend of "save more" and "work longer."
That's an interesting point about property taxes being inflation limited. Unfortunately it does not apply to us, as we are currently HCOL renters.

Are you also planning the bond "annuity" for early retirement, to be supplemented from withdrawals from taxable?

For us, at it seems for you, the choice is not "stocks OR savings bonds" but "MORE stocks OR savings bonds" - and I still have no idea what the better route is. (FWIW, we are already doing the I bonds piece, at $20K per year, and those currently form part of our emergency fund but, if not needed for that, will be available at around the same time.)
The EE savings bond annuity is timed to kick in between age 65 and 70, when I reach maximum payout age for Social Security. In my mind, it has the same risk profile and purpose as social security itself. Under current conditions, my plan is to continue buying EE savings bonds and so extend the annuity beyond that age. That wasn’t the original plan, but the low yield environment in which we find ourselves has caused me to re-examine. I don’t need the additional risk of more stocks, and I will be buying more stocks anyway to maintain my allocation, as my incoming investable assets exceed my need for fixed income.

I have no plans to sell I bonds. The annuity I am talking about is really about the EE bonds with their magical 20 years step up.

For the early retirement period, I am looking to my nonqualified deferred compensation plan as the primary source of income, with some supplement from taxable holdings. Depending on returns I may not need to touch taxable holdings much. I am also hanging on to employee stock purchase plan shares, as I will get better taxation rates on the income portion post employment and also a lower capital gains rate at that time.

In the nonqualified deferred compensation plan, I am using a target date fund with the glidepath for the expected start date. This amounts to a “bond tent“ as the drawdown on that will reduce my overall bond allocation over the 10 years in which the plan pays out.

I should add that my portfolio allocation does not count the balance or allocation of the nonqualified plan. That is, I don’t consider it when looking at my total portfolio or at my rebalancing thresholds. It is an out of sight out of mind account with a very targeted purpose and a separate risk profile on top of a base “can I sleep at night” allocation. And that is exactly what a bond tent is supposed to provide. This is how I am dealing with sequence of return risk.

Part of me does wonder if savings bonds were really intended for people like us. Folks who are actually small savers really do need better returns than they provide. Someone who is Earning below the limits that allow them to be used for Education, for example, really does need to save more and at a higher rate of return to deal with retirement costs on the horizon.
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Re: I don't understand the case for EE bonds

Post by leftcoaster »

Adding: the EE savings bond annuity is timed to kick in in the year when the nonqualified plan stops paying out.
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Re: I don't understand the case for EE bonds

Post by Wrench »

So it is pretty simple to model this approach to understand the effect of inflation. Assuming the EE bonds continue to get ~3.5% they double every 20 years (or close enough). So, one will get $40K (nominal) after 20 years from a $20K investment. What is the real income? Obviously it depends on inflation. So let's take a look at how much one would have gotten using actual historical inflation if one had invested $20K in any given year (same approach as Trinity study, but now return is fixed). I found annual inflation data from 1871 - 2018, then calculated the real income for each twenty year period of a nominal $40K. The max real income was ~$64K in 1890 because the last few decades of the 19th century saw an extended period of high deflation. If the future brings this type of inflation/deflation environment anyone who follows this approach will look like a genius! The lowest real income occurred in 1985, ~$11.6K, obviously because of the double digit inflation of the late '70s and early '80s. If history repeats itself with these inflation values, our investor will look like a goat! Statistically, over the 129 years, 69% returned real income greater than the initial investment of $20K. 14% returned real income greater than the nominal $40K. Of course, past performance is no guarantee of future results - results could be better or worse. But, at least one can get a sense of what might happen using actual inflation sequences from over more than a century.
So, is this approach for building an income stream good or bad? Neither. It depends on the risk tolerance of the investor (if you want to get at least $20K real income, is 69% "probability" of getting it good enough for you?), how they feel about the future prospects for inflation vs. deflation, how important the income stream is to them (maybe $11K/year real is all that is required and anything more is gravy), how important is a legacy, etc. As long as one goes in with eyes wide open to all outcomes, and understands potential outcomes and can live with any of them, no choice is a bad one.

For me, I don't like the odds, AND I think we may get rampant inflation if modern monetary theory takes hold. (Plus, I lived through the period of double digit inflation so I know how painful it can be to someone on a fixed, non-inflation adjusted income). So I will stick with inflation protected investments to supplement (my maximized) social security, using TIPS, i-bonds and inflation protected annuities. But, I'm a conservative old goat who is satisfied to trade lower returns for minimal risk with a substantial fraction of my retirement monies. :-) I am fortunate (by planning and some luck) that I have sufficient savings so I can make that trade-off and still live a good life in retirement.
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Re: I don't understand the case for EE bonds

Post by Grt2bOutdoors »

Wrench wrote: Fri Oct 18, 2019 3:06 pm

For me, I don't like the odds, AND I think we may get rampant inflation if modern monetary theory takes hold. (Plus, I lived through the period of double digit inflation so I know how painful it can be to someone on a fixed, non-inflation adjusted income). So I will stick with inflation protected investments to supplement (my maximized) social security, using TIPS, i-bonds and inflation protected annuities. But, I'm a conservative old goat who is satisfied to trade lower returns for minimal risk with a substantial fraction of my retirement monies. :-) I am fortunate (by planning and some luck) that I have sufficient savings so I can make that trade-off and still live a good life in retirement.
Good analysis, I can't say I like deferred annuities much either. At least with the EE bond, you can regret the purchase and redeem at any time, you can't with an annuity. Once they cash the check, you are locked in.
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Re: I don't understand the case for EE bonds

Post by Wrench »

Yes, I appreciate the concern of losing control over the money spent on an annuity. I overcame my anxiety in that regard by (1) only spending <10% of my net worth on the annuity; (2) recognizing that an annuity is NOT an investment, but an insurance product, where one is insuring against the risk of either you or you spouse living a very long time, and (3) feeling good that I am diversifying my inflation protected income among many alternatives thus reducing my interest rate risk of any one of them going bad.
Relative to #2, it is interesting to me that homeowners, even those who have paid off their mortgage, almost never go without homeowners insurance. Almost no one is willing to take the risk of total loss of their home. But, not to many folks want to insure against longevity. For my wife and I with our ages, there is a 50% probability that one of us will live to 90, a 25% probability that one of us will live to 95, and nearly 10% probability that one of us will be alive when I am (would be) 100. With those odds I feel much better giving up control of that money to insure a guaranteed inflation protected income stream for nearly 40 years and beyond.

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Re: I don't understand the case for EE bonds

Post by willthrill81 »

While I still have serious issues with the illiquidity of EE bonds, I must say that the 3.53% yield is probably quite attractive to a lot of folks right now. To be honest, I'm surprised that there is so little mention of them. 20 year Treasuries are only yielding 1.60% right now.
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Re: I don't understand the case for EE bonds

Post by james22 »

Have to believe the risk of inflation has increased with the stimulus.
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Re: I don't understand the case for EE bonds

Post by Noobvestor »

willthrill81 wrote: Wed Mar 18, 2020 10:42 pm While I still have serious issues with the illiquidity of EE bonds, I must say that the 3.53% yield is probably quite attractive to a lot of folks right now. To be honest, I'm surprised that there is so little mention of them. 20 year Treasuries are only yielding 1.60% right now.
20 year Treasuries have been mostly below the EE-bonds rate for years now, and I've been advocating EE bonds for years. They're useful in padding out taxable space (tax-deferred) and pair nicely with I bonds which provide inflation protection. I haven't charted it out specifically, but between those and my I Bonds and my Intermediate-Term Treasuries and TIPS funds, I suspect my EE bonds have been my best bond buy this decade*

*(with the obvious caveat that I am holding them until they double to get that 3.53% yield).
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Re: I don't understand the case for EE bonds

Post by market timer »

james22 wrote: Thu Mar 19, 2020 1:02 am Have to believe the risk of inflation has increased with the stimulus.
Here is what the market thinks:

Image
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Re: I don't understand the case for EE bonds

Post by james22 »

market timer wrote: Thu Mar 19, 2020 1:23 am
james22 wrote: Thu Mar 19, 2020 1:02 am Have to believe the risk of inflation has increased with the stimulus.
Here is what the market thinks:

Image
Short-term, sure.

Twenty year out?
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Re: I don't understand the case for EE bonds

Post by thx1138 »

james22 wrote: Thu Mar 19, 2020 3:21 am
market timer wrote: Thu Mar 19, 2020 1:23 am
james22 wrote: Thu Mar 19, 2020 1:02 am Have to believe the risk of inflation has increased with the stimulus.
Here is what the market thinks:

Image
Short-term, sure.

Twenty year out?
When did ten years become “short term”?
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Re: I don't understand the case for EE bonds

Post by james22 »

1. When you're talking EE bonds.
2. Look at the chart - what the market thinks has changed within a month.
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Re: I don't understand the case for EE bonds

Post by market timer »

james22 wrote: Thu Mar 19, 2020 3:21 am
market timer wrote: Thu Mar 19, 2020 1:23 am
james22 wrote: Thu Mar 19, 2020 1:02 am Have to believe the risk of inflation has increased with the stimulus.
Here is what the market thinks:

Image
Short-term, sure.

Twenty year out?
Currently around 0.7%. The market thinks we are Japan. EE bonds offering 2.8% real.
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Re: I don't understand the case for EE bonds

Post by james22 »

I understand that, mt. I just don't believe it likely.
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Re: I don't understand the case for EE bonds

Post by jdilla1107 »

I have been maxing my EE bond purchases for the last 10 years and advocating for them along the way. I wrote down that I should stop buying them 2 years ago, but haven't been able to stop due to how attractive they now look.

- Much higher yield than a 20 year treasury (3.53% vs 1.60%)
- Free put option if interest rates spike. (This greatly reduces risk from interest rate increases compared to a 20 year treasury.)
- Tax deferred (allows me to shift income from high working years to lower retirement years)
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

james22 wrote: Thu Mar 19, 2020 8:29 am I understand that, mt. I just don't believe it likely.
There's a lot more to inflation than monetary supply. Just look at how much new money has been added to the system over the last 11 years but how low inflation has been.

That said, I've said very often that I think that TIPS are good deal right now.
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Re: I don't understand the case for EE bonds

Post by james22 »

I'm not willing to make a twenty-year bet either way.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

james22 wrote: Thu Mar 19, 2020 9:55 am I'm not willing to make a twenty-year bet either way.
So you're not buying any fixed income?
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Re: I don't understand the case for EE bonds

Post by james22 »

How does that follow? EE bonds are unlike other forms of fixed income.

Today I'm hoping to sell my fixed income. At some point in the future I'll buy again.

But here I'm just arguing against EE bonds as being any kind of free lunch. They assume significant inflation risk that cannot be waved away because of today's estimate of inflation.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

james22 wrote: Thu Mar 19, 2020 10:09 am How does that follow? EE bonds are unlike other forms of fixed income.

Today I'm hoping to sell my fixed income. At some point in the future I'll buy again.

But here I'm just arguing against EE bonds as being any kind of free lunch. They assume significant inflation risk that cannot be waved away because of today's estimate of inflation.
I strongly agree with you that there is significant risk with EE bonds, and the inability to use them for rebalancing purposes is substantial.

You say that you're unwilling to 'make a bet either way', which seems to me that you don't like EE bonds or TIPS given my prior post. Do you prefer Treasuries? If so, why?
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Re: I don't understand the case for EE bonds

Post by james22 »

Ah, sorry. I wasn't referring to TIPS at all.

I thought you were suggesting EE bonds weren't risky.

I meant only that I'm not willing to make a twenty-year bet on inflation or deflation. It'd be as questionable to assume inflation based on monetary supply as deflation (or near) based on current market thinking.

I've no problem with TIPS.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

james22 wrote: Thu Mar 19, 2020 10:24 am Ah, sorry. I wasn't referring to TIPS at all.

I thought you were suggesting EE bonds weren't risky.

I meant only that I'm not willing to make a twenty-year bet on inflation or deflation. It'd be as questionable to assume inflation based on monetary supply as deflation (or near) based on current market thinking.

I've no problem with TIPS.
Gotcha. Thanks for clarifying.
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Re: I don't understand the case for EE bonds

Post by bligh »

james22 wrote: Thu Mar 19, 2020 10:09 am But here I'm just arguing against EE bonds as being any kind of free lunch. They assume significant inflation risk that cannot be waved away because of today's estimate of inflation.
The inability to re-balance is a legitimate issue with EE Bonds, though it can be mitigated by holding regular bond funds outside of EE Bonds. For example.

Imagine a 70/30 portfolio.

$700,000 VTI + $200,000 BND + $100,000 EE Bonds. = $1 million

Now imagine the market falls by 50%:

$350,000 VTI + $200,000 BND + $100,000 EE Bonds. = $650 K

Time to rebalance! Put in a sell order for $100K of BND and buy some VTI.

$450,000 VTI + $100,000 BND + $100,000 EE Bonds. = $650K

-------

The significant inflation risk that you mention, however, is not unique to EE Bonds. It has to do with long duration bonds in general. The point is, once you have decided you are okay having some portion of your fixed income in long duration bonds, it is extremely hard to beat EE Bonds, provided you can be sure you do not need to touch those funds for that duration. The additional yield over 20 year treasuries is indeed a free lunch. The increase in your tax deferred space, is also a free lunch. The free put option it gives you to deal with a spike in inflation and interest rates, is also a free lunch.
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Re: I don't understand the case for EE bonds

Post by tim1999 »

willthrill81 wrote: Wed Mar 18, 2020 10:42 pm While I still have serious issues with the illiquidity of EE bonds, I must say that the 3.53% yield is probably quite attractive to a lot of folks right now. To be honest, I'm surprised that there is so little mention of them. 20 year Treasuries are only yielding 1.60% right now.
Am I missing something regarding the interest rate/yield?
This is copied directly from the treasury direct site:

Current rate:
0.10% for bonds issued November 2019-April 2020
Minimum purchase:
$25
Maximum purchase
(per calendar year):
$10,000
Denominations:
$25 and above, in penny increments
Issue method:
Electronic, in TreasuryDirect

I haven't owned EE bonds in 10+ years after I cashed in the mature EE bonds I received as a baby. Folks are talking about 3.5% yields but I'm not seeing it? I'd be interested in these bonds, but if the rate is really .10%, I might as well just leave the money in my interest bearing checking account.
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