I don't understand the case for EE bonds

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willthrill81
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

tim1999 wrote: Thu Mar 19, 2020 11:21 am
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.
You're missing the fact that EE bonds double in nominal value after being held for 20 years. The rate paid between purchase and the 20 year anniversary is indeed .1%.
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jdilla1107
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Re: I don't understand the case for EE bonds

Post by jdilla1107 »

james22 wrote: Thu Mar 19, 2020 10:09 am They assume significant inflation risk that cannot be waved away because of today's estimate of inflation.
Try to come up with an example that would result in large real losses with EE bonds. Since you can cash them in at any time for their face value, you always have the option of exiting early.

- If high inflation presents itself in the first 5-7 years, long term bonds will be crushed. For EE bonds you would just cash them in early, resulting in an opportunity cost loss of like 1% a year. (A small real loss and no nominal loss)

- If you make it to year 15 without high inflation, then you have very likely won the game. Inflation would need to be like over 20% each year to result in a real loss. You are now holding a 5 year bond which is not high risk.

- Inflation in the middle is where you could experience the most opportunity cost. But at year 10, you essentially would need inflation to be 6%+, to result in a real loss.
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bligh
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Re: I don't understand the case for EE bonds

Post by bligh »

tim1999 wrote: Thu Mar 19, 2020 11:21 am
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.
EE Bonds are garuanteed to double in 20 years. If, after holding the EE Bond for 20 years, they have not doubled due to the interest rate, there is a one time adjustment that doubles it for you. This gives you an effective interest rate of 3.53%.
protagonist
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Re: I don't understand the case for EE bonds

Post by protagonist »

You are not alone. I don't understand the case for EE bonds either. (Or their popularity in this forum).

I-bonds, on the other hand, make a lot of sense, regardless of their coupon rate.
Last edited by protagonist on Thu Mar 19, 2020 11:43 am, edited 1 time in total.
alluringreality
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Re: I don't understand the case for EE bonds

Post by alluringreality »

tim1999 wrote: Thu Mar 19, 2020 11:21 am Folks are talking about 3.5% yields but I'm not seeing it?
EE bonds currently double in value at 20 years, which works out to that rate.

"Treasury guarantees that for an electronic EE Bond with a June 2003 or later issue date, after 20 years, the redemption (cash-in) value will be at least twice the purchase price of the bond. If the redemption (cash-in) value is not at least twice the purchase price of the electronic bond as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20-year anniversary of the bond's issue date to make up the difference."
https://www.treasurydirect.gov/indiv/re ... ndafer.htm
Last edited by alluringreality on Thu Mar 19, 2020 11:32 am, edited 1 time in total.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)
james22
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Re: I don't understand the case for EE bonds

Post by james22 »

Other legitimate issues: maximum purchase ($10K doesn't move the needle), timing maturity (do I need/want the income then?).
bligh wrote: Thu Mar 19, 2020 10:42 am... it is extremely hard to beat EE Bonds, provided you can be sure you do not need to touch those funds for that duration.
How can anyone be sure of that? I don't want to make a twenty-year bet, period.
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Re: I don't understand the case for EE bonds

Post by jdilla1107 »

protagonist wrote: Thu Mar 19, 2020 11:26 am You are not alone. I don't understand the case for EE bonds either. (Or their popularity in this forum).
If you do not like long term treasuries, then you would not like EE bonds. If you do like long term treasuries, then EE bonds are better in (almost) every way. (except liquidity)

Note that if you hold Total Bond Market then you are holding about 20% long bonds.

I don't need liquidity on the EE portion of my bonds, so I like the superiority of return, tax treatment, and the very valuable put option.
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Re: I don't understand the case for EE bonds

Post by jdilla1107 »

james22 wrote: Thu Mar 19, 2020 11:31 am Other legitimate issues: maximum purchase ($10K doesn't move the needle), timing maturity (do I need/want the income then?).
bligh wrote: Thu Mar 19, 2020 10:42 am... it is extremely hard to beat EE Bonds, provided you can be sure you do not need to touch those funds for that duration.
How can anyone be sure of that? I don't want to make a twenty-year bet, period.
Do you hold Total Bond Market? If so, you have already made the 20 year bet as 20% of the holdings are long term bonds. There are some 25+ year bonds in there!!

People that hold EE bonds think of it a portion of their fixed income. No one is advocating 100% ee bonds.
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bligh
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Re: I don't understand the case for EE bonds

Post by bligh »

james22 wrote: Thu Mar 19, 2020 11:31 am Other legitimate issues: maximum purchase ($10K doesn't move the needle), timing maturity (do I need/want the income then?).
bligh wrote: Thu Mar 19, 2020 10:42 am... it is extremely hard to beat EE Bonds, provided you can be sure you do not need to touch those funds for that duration.
How can anyone be sure of that? I don't want to make a twenty-year bet, period.
I suppose that is a choice left to each individual investor. If I am 90 years old, a 20 year investment time frame would either be useless or intended for my kids. If I am 20 years old, I am going to be invested for maybe 60 years. If I am a buy and hold investor, I am by definition making a 20+ year bet.

The purchase cap is indeed also an issue, but if you are married, over time you can build a sizable holding. I've been buying $20K a year for a few years now. Also if $10K doesn't move the needle much for you as an investor, then it makes it more likely that you will not need to touch it for 20 years. :)

I mean, I am not trying to talk you into buying them since I dont know your situation. They certainly do not make sense for everyone. But for me, I love them and I'm glad I have been buying them (along with I Bonds) over the last several years.
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Re: I don't understand the case for EE bonds

Post by james22 »

jdilla1107 wrote: Thu Mar 19, 2020 11:24 amIf high inflation presents itself in the first 5-7 years, long term bonds will be crushed. For EE bonds you would just cash them in early, resulting in an opportunity cost loss of like 1% a year. (A small real loss and no nominal loss)
My opportunity cost would be more like 6%, as I'd buy BAC-L/WFC-L rather than VUSUX today.
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bligh
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Re: I don't understand the case for EE bonds

Post by bligh »

jdilla1107 wrote: Thu Mar 19, 2020 11:34 am Do you hold Total Bond Market? If so, you have already made the 20 year bet as 20% of the holdings are long term bonds. There are some 25+ year bonds in there!!

People that hold EE bonds think of it a portion of their fixed income. No one is advocating 100% ee bonds.
I do. I also own a significant amount in Limited term bonds. (~3 year duration) and some cash reserves. The EE Bonds pair nicely with those.

Agreed, EE-Bonds are just a tool in your tool kit. They should only make up part of your fixed income portfolio.
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Re: I don't understand the case for EE bonds

Post by jdilla1107 »

james22 wrote: Thu Mar 19, 2020 11:40 am
jdilla1107 wrote: Thu Mar 19, 2020 11:24 amIf high inflation presents itself in the first 5-7 years, long term bonds will be crushed. For EE bonds you would just cash them in early, resulting in an opportunity cost loss of like 1% a year. (A small real loss and no nominal loss)
My opportunity cost would be more like 6%, as I'd buy BAC-L/WFC-L rather than VUSUX today.
Comparing stocks (preferred or otherwise) and bonds doesn't make any sense to me. The decision for EE bonds comes after you have decided to hold a portion of your allocation in long term treasuries. That is what they most resemble from a risk and duration perspective.

Why would you hold BAC-L when you could hold a equity that pays dividends of 25% a year? (MRCC) You are paying a steep opportunity cost there!
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Re: I don't understand the case for EE bonds

Post by Grt2bOutdoors »

james22 wrote: Thu Mar 19, 2020 11:31 am Other legitimate issues: maximum purchase ($10K doesn't move the needle), timing maturity (do I need/want the income then?).
bligh wrote: Thu Mar 19, 2020 10:42 am... it is extremely hard to beat EE Bonds, provided you can be sure you do not need to touch those funds for that duration.
How can anyone be sure of that? I don't want to make a twenty-year bet, period.
Aren't you making that with equities? Or any other investment for that matter?

I own some EE bonds along with I bonds, total bond market, T-Bill, then equities are in the other part of the portfolio. If the equities markets go to hell , I know for certain those EE bonds will pay out as requested. Where are you putting your money then?
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Re: I don't understand the case for EE bonds

Post by james22 »

jdilla1107 wrote: Thu Mar 19, 2020 11:49 am
james22 wrote: Thu Mar 19, 2020 11:40 am
jdilla1107 wrote: Thu Mar 19, 2020 11:24 amIf high inflation presents itself in the first 5-7 years, long term bonds will be crushed. For EE bonds you would just cash them in early, resulting in an opportunity cost loss of like 1% a year. (A small real loss and no nominal loss)
My opportunity cost would be more like 6%, as I'd buy BAC-L/WFC-L rather than VUSUX today.
Comparing stocks (preferred or otherwise) and bonds doesn't make any sense to me. The decision for EE bonds comes after you have decided to hold a portion of your allocation in long term treasuries. That is what they most resemble from a risk and duration perspective.
From a risk (TBTF) and duration (non-callable) perspective, BAC/WFC-L resemble long-term treasuries.
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Re: I don't understand the case for EE bonds

Post by james22 »

Grt2bOutdoors wrote: Thu Mar 19, 2020 12:13 pm
james22 wrote: Thu Mar 19, 2020 11:31 am Other legitimate issues: maximum purchase ($10K doesn't move the needle), timing maturity (do I need/want the income then?).
bligh wrote: Thu Mar 19, 2020 10:42 am... it is extremely hard to beat EE Bonds, provided you can be sure you do not need to touch those funds for that duration.
How can anyone be sure of that? I don't want to make a twenty-year bet, period.
Aren't you making that with equities? Or any other investment for that matter?

I own some EE bonds along with I bonds, total bond market, T-Bill, then equities are in the other part of the portfolio. If the equities markets go to hell , I know for certain those EE bonds will pay out as requested. Where are you putting your money then?
Nope. No other investment (essentially) locks me in for twenty years.

And you don't know for certain the inflation-adjusted pay-out of your EE bonds.
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Re: I don't understand the case for EE bonds

Post by jdilla1107 »

james22 wrote: Thu Mar 19, 2020 12:40 pm
jdilla1107 wrote: Thu Mar 19, 2020 11:49 am
james22 wrote: Thu Mar 19, 2020 11:40 am
jdilla1107 wrote: Thu Mar 19, 2020 11:24 amIf high inflation presents itself in the first 5-7 years, long term bonds will be crushed. For EE bonds you would just cash them in early, resulting in an opportunity cost loss of like 1% a year. (A small real loss and no nominal loss)
My opportunity cost would be more like 6%, as I'd buy BAC-L/WFC-L rather than VUSUX today.
Comparing stocks (preferred or otherwise) and bonds doesn't make any sense to me. The decision for EE bonds comes after you have decided to hold a portion of your allocation in long term treasuries. That is what they most resemble from a risk and duration perspective.
From a risk (TBTF) and duration (non-callable) perspective, BAC/WFC-L resemble long-term treasuries.
Disagree completely about the risk. TBTF doesn't mean "Too big to screw over the shareholders or bond holders". Comparing wells fargo to be the same risk as the US government is a non-starter for me in terms of debating random internet posters.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

james22 wrote: Thu Mar 19, 2020 12:47 pm And you don't know for certain the inflation-adjusted pay-out of your EE bonds.
The only bonds that you know the inflation-adjusted return of are TIPS and I-bonds.
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Re: I don't understand the case for EE bonds

Post by james22 »

jdilla1107 wrote: Thu Mar 19, 2020 12:50 pm
james22 wrote: Thu Mar 19, 2020 12:40 pm
jdilla1107 wrote: Thu Mar 19, 2020 11:49 am
james22 wrote: Thu Mar 19, 2020 11:40 am
jdilla1107 wrote: Thu Mar 19, 2020 11:24 amIf high inflation presents itself in the first 5-7 years, long term bonds will be crushed. For EE bonds you would just cash them in early, resulting in an opportunity cost loss of like 1% a year. (A small real loss and no nominal loss)
My opportunity cost would be more like 6%, as I'd buy BAC-L/WFC-L rather than VUSUX today.
Comparing stocks (preferred or otherwise) and bonds doesn't make any sense to me. The decision for EE bonds comes after you have decided to hold a portion of your allocation in long term treasuries. That is what they most resemble from a risk and duration perspective.
From a risk (TBTF) and duration (non-callable) perspective, BAC/WFC-L resemble long-term treasuries.
Disagree completely about the risk. TBTF doesn't mean "Too big to screw over the shareholders or bond holders". Comparing wells fargo to be the same risk as the US government is a non-starter for me in terms of debating random internet posters.
Not comparing Wells Fargo to the US government, I'm comparing WFC-L to US treasuries.

Works for me: http://www.philosophicaleconomics.com/2 ... ed-stocks/

My greater point though, I value being free to take advantage of opportunities when they arise. I don't wish to hold fixed income that I cannot consider dry powder.
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Re: I don't understand the case for EE bonds

Post by bligh »

james22 wrote: Thu Mar 19, 2020 12:47 pm
Grt2bOutdoors wrote: Thu Mar 19, 2020 12:13 pm
james22 wrote: Thu Mar 19, 2020 11:31 am Other legitimate issues: maximum purchase ($10K doesn't move the needle), timing maturity (do I need/want the income then?).
bligh wrote: Thu Mar 19, 2020 10:42 am... it is extremely hard to beat EE Bonds, provided you can be sure you do not need to touch those funds for that duration.
How can anyone be sure of that? I don't want to make a twenty-year bet, period.
Aren't you making that with equities? Or any other investment for that matter?

I own some EE bonds along with I bonds, total bond market, T-Bill, then equities are in the other part of the portfolio. If the equities markets go to hell , I know for certain those EE bonds will pay out as requested. Where are you putting your money then?
Nope. No other investment (essentially) locks me in for twenty years.

And you don't know for certain the inflation-adjusted pay-out of your EE bonds.
You are not locked in. You can get your principal back any time. All of it. You just have an early withdrawal penalty that costs you most of the interest that you had earned. Think of it like a 20 year CD.

Contrast that with buying a 20 year treasury bond. You think you can sell it, but if inflation and interest rates shoot up you would be lucky to even get your principal back!

Imagine things go pear shaped and you need to get at your money after 10 years and you withdraw your EEBond principal. You get back $10,000. You lose almost all of the interest you would have earned over that period. So, you wish you had invested it in treasury bonds so you could have kept all that interest. But lets think about that. Those 10 years your 20 year treasury bonds, untaxed, would have been earning you a whopping 1.6% the whole time! You could have had $11,720 instead. A loss of $1,720 over 10 years as the worst case? Meh.

Let's say you do the absolute craziest thing and you pull out your $10K on the 19th year.. (you would have to be crazy to do that.. better off taking out a loan or paying by credit card and pay interest than do that) .. Your 20 year treasury bond, untaxed, would have come up to just 13,520. Is that really the end of the world? As the most remote and worst case downside?
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Re: I don't understand the case for EE bonds

Post by james22 »

bligh wrote: Thu Mar 19, 2020 1:16 pm
james22 wrote: Thu Mar 19, 2020 12:47 pm No other investment (essentially) locks me in for twenty years.
You are not locked in.
Should I have bolded essentially? I understand how EE bonds work. They just don't work for me.
bligh wrote: Thu Mar 19, 2020 1:16 pmImagine things go pear shaped and you need to get at your money after 10 years and you withdraw your EEBond principal. You get back $10,000. You lose almost all of the interest you would have earned over that period. So, you wish you had invested it in treasury bonds so you could have kept all that interest. But lets think about that. Those 10 years your 20 year treasury bonds, untaxed, would have been earning you a whopping 1.6% the whole time! You could have had $11,720 instead. A loss of $1,720 over 10 years as the worst case? Meh.
Imagine the coronavirus and long-term treasury returns since then. The difference between EE bonds is greater than the interest.


Good luck with them, bligh. I really do hope they meet your needs.
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Re: I don't understand the case for EE bonds

Post by bligh »

james22 wrote: Thu Mar 19, 2020 2:32 pm
bligh wrote: Thu Mar 19, 2020 1:16 pm
james22 wrote: Thu Mar 19, 2020 12:47 pm No other investment (essentially) locks me in for twenty years.
You are not locked in.
Should I have bolded essentially? I understand how EE bonds work. They just don't work for me.
To me "essentially locked in" means that you are locked out of your principal. Sort of how I Bonds have a 1 year "lock in" period where you cannot get your principal back. A period of time where you cannot liquidate your holdings. I didn't realize you considered "getting 0.10% nominal returns on an investment in the worst case" to being the same as "essentially locked in".

It's fine, I realize you mean you want the option to access those funds without having to worry about lost returns. Like I said, they aren't for everyone.

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

Post by Noobvestor »

tim1999 wrote: Thu Mar 19, 2020 11:21 am
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.
They double automatically at 20 years, which is effectively around 3.5% annualized. E.g. $10K now = $20K in 20 years.
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Re: I don't understand the case for EE bonds

Post by Noobvestor »

jdilla1107 wrote: Thu Mar 19, 2020 11:49 am
james22 wrote: Thu Mar 19, 2020 11:40 am
jdilla1107 wrote: Thu Mar 19, 2020 11:24 amIf high inflation presents itself in the first 5-7 years, long term bonds will be crushed. For EE bonds you would just cash them in early, resulting in an opportunity cost loss of like 1% a year. (A small real loss and no nominal loss)
My opportunity cost would be more like 6%, as I'd buy BAC-L/WFC-L rather than VUSUX today.
Comparing stocks (preferred or otherwise) and bonds doesn't make any sense to me. The decision for EE bonds comes after you have decided to hold a portion of your allocation in long term treasuries. That is what they most resemble from a risk and duration perspective.
I would take this a step further and say decisions around EE bonds can come as soon as you've committed to holding bonds. A plan that calls for an intermediate average duration, for instance, could be made up of shorter TIPS and/or I Bonds plus EE bonds, for example (barbell). So my plan doesn't actually call for any long-term bonds per se, but with its target duration it accommodates a range of durations that balance out.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: I don't understand the case for EE bonds

Post by mrwalken »

My EE bonds have done MUCH better than most other holdings, like VEU, VSS, VNQI, VNQ, VBR, BND especially when you consider tax consequences.

I would venture to say over the last ten years or so, SPY is the only holding I have that has done better than EE bonds.

Of course the next decade may be different.
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Re: I don't understand the case for EE bonds

Post by Iorek »

I am wondering if it’s worth revisiting this discussion in light of covid-19 and it’s possible long-term effects on the economy.

Note I am someone who is 10 years -/+ from retirement and mostly invests through employer-sponsored retirement but also saves an addition $1000 a month currently split between i-bonds and VFINX, so for me the question is not stocks or bonds but i-bonds or ee bonds.

The main reason I have gone with i-bonds is flexibility (in the sense that you lose most of your return on ee bonds if you cash in sooner than 20 years).

I figure the world/economy/investments/interest rates may be radically different over the next 10 or 15 years and I am hesitant to “lock up” an investment for 20 years (note that I have existing i-bonds that I would tap for personal economic exigencies so while that is something to consider I am mostly disregarding the idea that I’d need to cash them in for cash needs).

That rationale seems reinforced by covid-19– who knows what the world looks like 5-10 years from now.

On the other hand, an ee bond is a 3.5% risk free return over the next 20 years and that seems pretty great in light of potential covid-19 concerns (not “worst case” but “pretty bad case”). Maybe we are at a point in time when we should be “backing the truck up” the way people did when i-bonds had a 3% fixed rate.

Curious if others— who buy savings bonds— have reconsidered between ee and i-bonds lately.

(Less interested in explanations for why savings bonds are a bad idea for anyone, although I have considered plenty of those in the past). Also I recognize that at current level of purchases the difference may not be material, but it’s something to think about besides stocks. 😉

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

Post by jdilla1107 »

Iorek wrote: Fri Mar 20, 2020 10:25 am Curious if others— who buy savings bonds— have reconsidered between ee and i-bonds lately.
The case between them is so different that I think it's hard to compare them objectively. Why not do some of both for diversification?

I started buying EE bonds 10 years ago when "everyone knew that interest rates were going up soon". I am somewhat glad that EE bonds have a purchase limit as it has stopped me from really backing up the truck.

The key with EE bonds is that you have to make sure you will never be forced into cashing them early. So, they can't be used for rebalanacing or anything else. This means you should likely keep them at around 10% or less of bond allocation. (I have gone to 20% because they have been so fantastic the last 10 years, but I keep telling myself I need to taper off.)
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Re: I don't understand the case for EE bonds

Post by Iorek »

jdilla1107 wrote: Fri Mar 20, 2020 12:39 pm
Iorek wrote: Fri Mar 20, 2020 10:25 am Curious if others— who buy savings bonds— have reconsidered between ee and i-bonds lately.
The case between them is so different that I think it's hard to compare them objectively. Why not do some of both for diversification?

I started buying EE bonds 10 years ago when "everyone knew that interest rates were going up soon". I am somewhat glad that EE bonds have a purchase limit as it has stopped me from really backing up the truck.

The key with EE bonds is that you have to make sure you will never be forced into cashing them early. So, they can't be used for rebalanacing or anything else. This means you should likely keep them at around 10% or less of bond allocation. (I have gone to 20% because they have been so fantastic the last 10 years, but I keep telling myself I need to taper off.)
I think you are right— I’ll see if I can just add ee bonds to my treasury direct purchases. Thanks— I appreciate your contributions to this thread
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Re: I don't understand the case for EE bonds

Post by Mel Lindauer »

protagonist wrote: Thu Mar 19, 2020 11:26 am You are not alone. I don't understand the case for EE bonds either. (Or their popularity in this forum).

I-bonds, on the other hand, make a lot of sense, regardless of their coupon rate.
Here's a Forbes column I did some time ago that gives an excellent reason to own EE Bonds:

https://www.forbes.com/sites/theboglehe ... 80238e7ba3
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Re: I don't understand the case for EE bonds

Post by protagonist »

Mel Lindauer wrote: Fri Mar 20, 2020 11:37 pm
protagonist wrote: Thu Mar 19, 2020 11:26 am You are not alone. I don't understand the case for EE bonds either. (Or their popularity in this forum).

I-bonds, on the other hand, make a lot of sense, regardless of their coupon rate.
Here's a Forbes column I did some time ago that gives an excellent reason to own EE Bonds:

https://www.forbes.com/sites/theboglehe ... 80238e7ba3
The idea makes sense, Mel, but doubling every 20 years, (unlike annuity rates) is often too low a rate to keep up with inflation, and given an unknown future, if there is significant inflation one could really get hammered.

I looked up CPI-U rates at the beginning of every decade since 1940.
1940 13.9
1950 22.5
1960 29.3
1970 37.8
1980 77.8
1990 127.4
2000 168.8
2010 216.6
2020 257

Assuming your money doubles in 20 years, you would have beat inflation in 3 of the 7 20 year periods above and lost to inflation in 4 out of 7...sometimes the losses were rather large.

That seems like awful odds for preserving your money given the relative non-liquidity. Who wants their money tied up for 20+ years if winning or losing is a crap shoot?
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Re: I don't understand the case for EE bonds

Post by soundBatches »

If there is some point during accumulation (or even some point during decumulation where you have excess cash flow from RMDs/pension/SS you can't get into a Roth) that you are not 100% equities, you have to be in something else.

EE bonds offer the individual investor the extra yield of a corporate without the credit risk in exchange for illiquidity. Credit spreads are about 215-250 basis points for 5-20 year corporates and munis over Treasuries. (Source: Fidelity yield table, median yields, 3/20/20)

The EE bond illiquidity spread (natural person spread?) is about 230 basis points (3.50 - 1.22).

Who needs the liquidity when you're just liability matching? You know when you need the guaranteed cash flow. Hedge them with I Bonds if you believe EE bonds might underperform them. For a married couple, that's $40-45k/year you could set aside for $80-90k in cash flow per year on the other side.

Plus, I don't think we've fully aired the tax planning upside in terms of timing redemptions after year 20. Upper income retirees have NIIT and IRMAA to worry about. Middle income retirees with RMDs and two SS records to collect on might have a 30% marginal Federal tax rate given the SS deduction phaseout. Savings bonds also efficiently pass to heirs, so a younger person might pay 15% tax instead of 30%.
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Re: I don't understand the case for EE bonds

Post by spdoublebass »

While I love this forum, I have a hard time figuring out what applies to me and what does not. Can someone break down this for a layperson making $75K a year?

I diligently save 20%, sometimes more, but for planning purposes I say I'll save $15K a year.

I've always wondered about using EE bonds to have some income in retirement. Say my wife and I will receive $2K each SS, would it be a terrible idea to use EE bonds to give us a little more guaranteed income?

I've thought about buying $500 a month of EE bonds starting at 49 until I turn 69. This would give us another $1000 a month in income bringing our income to $60K a year in retirement.

Also, if I'm saving $15K a year, those EE bonds would be 40% of my invested money for the year.
That doesn't seem excessive to me. The rest could be in stocks. Then depending how much stocks go up, maybe I'd have a bond fund along the way as well to rebalance.

The elephant in the room is of course inflation. I'm no expert. Is there a way to incorporate Tips or IBonds into the equation?

What I'm getting at is if I'm living off $75K a year, the peace of mind knowing I have $60K coming in is nice. Also, who knows what the future brings, sometimes I can invest $20K+ a year, I'm only using the $15K as a floor. I don't want to overload on EE bonds, but using them as monthly income just seems like a good idea to me.

I wish I knew more about how to match liability (like with EE bonds) and also protect against inflation.

Unless I'm thinking about this completely wrong then:

-If I buy $500 a month of EE bonds then I get $1000 back in 20 years. BUT that $1000 might not be worth $1000 in todays dollars if inflation was high.

-If I want $1000 in future income from Tips I'd have to invest $1000 of todays dollars in tips.

Thats the catch. For someone like me what I like about EE bonds is that I know what I'm getting with EE bonds. The problem is I'm not smart enough to know how inflation can blow that up. It's a little frustrating to be honest. Even though I don't make that much, I'd like to plan for a floor in retirement.

(on a personal note, If health holds out, I'm in a profession where I will never be fully retired, I will always have some income. This is why I like to think of an income floor and then have stocks on top of that)
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

Iorek wrote: Fri Mar 20, 2020 10:25 am On the other hand, an ee bond is a 3.5% risk free return over the next 20 years
That's not accurate. EE bonds suffer from interest rate risk. If bond yields increased sufficiently, they might turn out to provide better yields than EE bonds paying 3.53%.

Also, the illiquidity of sorts that EE bonds have (i.e. you only get the 3.53% if held for 20 years and basically zero before then, resulting in an increasing penalty for early redemption) is a risk.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

spdoublebass wrote: Sat Mar 21, 2020 3:15 pm I wish I knew more about how to match liability (like with EE bonds) and also protect against inflation.
That's what TIPS and I-bonds are for; they provide explicit inflation protection.
spdoublebass wrote: Sat Mar 21, 2020 3:15 pmUnless I'm thinking about this completely wrong then:

-If I buy $500 a month of EE bonds then I get $1000 back in 20 years. BUT that $1000 might not be worth $1000 in todays dollars if inflation was high.

-If I want $1000 in future income from Tips I'd have to invest $1000 of todays dollars in tips.

Thats the catch. For someone like me what I like about EE bonds is that I know what I'm getting with EE bonds. The problem is I'm not smart enough to know how inflation can blow that up. It's a little frustrating to be honest. Even though I don't make that much, I'd like to plan for a floor in retirement.
If you want to match liabilities, then TIPS and I-bonds are the investment of choice; all other instruments are riskier. As you note, if inflation rose significantly, EE bonds could really suffer. But future inflation does not impact the inflation-adjusted value of TIPS or I-bonds at the time of redemption.

10 year TIPS currently have a real yield of .62%, which is in addition to whatever the CPI rate turns out to be), and 30 year TIPS have a real yield of .78%. So you wouldn't need to quite invest in $1,000 of TIPS in order to have $1,000 of inflation-adjusted value upon redemption.
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Re: I don't understand the case for EE bonds

Post by spdoublebass »

willthrill81 wrote: Sat Mar 21, 2020 3:24 pm
spdoublebass wrote: Sat Mar 21, 2020 3:15 pm I wish I knew more about how to match liability (like with EE bonds) and also protect against inflation.
That's what TIPS and I-bonds are for; they provide explicit inflation protection.
Right, I guess what I'm saying is I don't understand how to use them to my advantage.

If I want $1000 a month from EE bonds I buy $500 a month 20 years earlier.

If I want $1000 a month form Tips and Ibonds, how much should I buy 20 years earlier? $1000 a month?

If the above is true, whats nice about EE bonds is I'm still putting a lot of my money into equities a month. If I have to put $1000 into I bonds a month it doesn't leave too much left over to put into equities.

Thanks for the response by the way. If I don't ask these questions I never learn.
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Re: I don't understand the case for EE bonds

Post by spdoublebass »

willthrill81 wrote: Sat Mar 21, 2020 3:24 pm
10 year TIPS currently have a real yield of .62%, which is in addition to whatever the CPI rate turns out to be), and 30 year TIPS have a real yield of .78%. So you wouldn't need to quite invest in $1,000 of TIPS in order to have $1,000 of inflation-adjusted value upon redemption.
In order to figure out how much to invest monthly you'd have to use a number for estimated inflation correct? What should I use 2%?
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

protagonist wrote: Sat Mar 21, 2020 8:14 am That seems like awful odds for preserving your money given the relative non-liquidity. Who wants their money tied up for 20+ years if winning or losing is a crap shoot?
I'm very much inclined to agree, though I've softened a little in this regard over the years.

Siegel found that in the U.S., stocks were superior to nominal bonds with regard to at least maintaining their inflation-adjusted value in all periods exceeding 17 years, IIRC (i.e. nominal bonds would never have outperformed stocks over a 17 year or longer holding period). And in the majority of instances, stocks crushed nominal bonds' returns.

But the guarantee of nominal doubling is definitely worth something, and some value that guarantee more than others, which many posts in this thread illustrate. Yet at the same time, I think that some overlook the illiquid nature of EE bonds as well.

It's certainly safe to say that EE bonds are not a free lunch. They have inflation risk, interest rate risk, and, relative to other forms of fixed income, comparatively illiquid.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

spdoublebass wrote: Sat Mar 21, 2020 3:29 pm
willthrill81 wrote: Sat Mar 21, 2020 3:24 pm
spdoublebass wrote: Sat Mar 21, 2020 3:15 pm I wish I knew more about how to match liability (like with EE bonds) and also protect against inflation.
That's what TIPS and I-bonds are for; they provide explicit inflation protection.
Right, I guess what I'm saying is I don't understand how to use them to my advantage.

If I want $1000 a month from EE bonds I buy $500 a month 20 years earlier.

If I want $1000 a month form Tips and Ibonds, how much should I buy 20 years earlier? $1000 a month?

If the above is true, whats nice about EE bonds is I'm still putting a lot of my money into equities a month. If I have to put $1000 into I bonds a month it doesn't leave too much left over to put into equities.

Thanks for the response by the way. If I don't ask these questions I never learn.
But the trick is that you don't know what the inflation-adjusted value of the EE bonds at the time of redemption will be. If you buy $500 worth and it doubles to $1,000, you don't know how the purchasing power of that $1,000 will compare to $1,000 today.

With TIPS and I-bonds, you do know what their inflation-adjusted value will be when they are redeemed. Plus, you can sell TIPS before they mature, and you can redeem I-bonds without the stiff penalty associated with EE bonds.

Don't forget that TIPS and I-bonds (at the moment at least) offer positive real returns (i.e. they are not just returning to your inflation-adjusted money to you). Though I've been told that it's likely that I-bonds' real return will go to zero at the time of the next adjustment.
spdoublebass wrote: Sat Mar 21, 2020 3:32 pm
willthrill81 wrote: Sat Mar 21, 2020 3:24 pm
10 year TIPS currently have a real yield of .62%, which is in addition to whatever the CPI rate turns out to be), and 30 year TIPS have a real yield of .78%. So you wouldn't need to quite invest in $1,000 of TIPS in order to have $1,000 of inflation-adjusted value upon redemption.
In order to figure out how much to invest monthly you'd have to use a number for estimated inflation correct? What should I use 2%?
If you're buying TIPS and I-bonds, you don't have to use an estimated number for inflation at all. It doesn't matter if inflation is 1% or 10%. Your real return at the time of purchase will be on top of whatever inflation is between the time of purchase and the time they mature.
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Re: I don't understand the case for EE bonds

Post by spdoublebass »

willthrill81 wrote: Sat Mar 21, 2020 3:39 pm
If you're buying TIPS and I-bonds, you don't have to use an estimated number for inflation at all. It doesn't matter if inflation is 1% or 10%. Your real return at the time of purchase will be on top of whatever inflation is between the time of purchase and the time they mature.
I see what you mean. I think I'm starting to see why many don't use EE bonds in this way.

For Ibonds/Tips.....is there a way to see what they would be worth (or a calculator that does it) for an estimated inflation?

Like what would $X amount of Ibonds be worth in 20 years even if they have zero real guaranteed return attached to them?
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

spdoublebass wrote: Sat Mar 21, 2020 3:43 pm
willthrill81 wrote: Sat Mar 21, 2020 3:39 pm
If you're buying TIPS and I-bonds, you don't have to use an estimated number for inflation at all. It doesn't matter if inflation is 1% or 10%. Your real return at the time of purchase will be on top of whatever inflation is between the time of purchase and the time they mature.
I see what you mean. I think I'm starting to see why many don't use EE bonds in this way.

For Ibonds/Tips.....is there a way to see what they would be worth (or a calculator that does it) for an estimated inflation?

Like what would $X amount of Ibonds be worth in 20 years even if they have zero real guaranteed return attached to them?
Again, when you buy TIPS or I-bonds, you know what the inflation-adjusted value at the time of redemption will be. What is unknown is what the nominal value is, but that's irrelevant.

With all other bonds, you know what the nominal value at the time of redemption will be, but you do not what the inflation-adjusted value will be.

Using a standard financial calculator, $1,000 invested in 10 year TIPS (at the current real yield of .62%) means that the inflation-adjusted value at the time of redemption will be $1,064 (i.e. in today's dollars). The actual (i.e. nominal) number of dollars you get will depend on how much inflation we get over the next ten years.
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Re: I don't understand the case for EE bonds

Post by Mel Lindauer »

protagonist wrote: Sat Mar 21, 2020 8:14 am
Mel Lindauer wrote: Fri Mar 20, 2020 11:37 pm
protagonist wrote: Thu Mar 19, 2020 11:26 am You are not alone. I don't understand the case for EE bonds either. (Or their popularity in this forum).

I-bonds, on the other hand, make a lot of sense, regardless of their coupon rate.
Here's a Forbes column I did some time ago that gives an excellent reason to own EE Bonds:

https://www.forbes.com/sites/theboglehe ... 80238e7ba3
The idea makes sense, Mel, but doubling every 20 years, (unlike annuity rates) is often too low a rate to keep up with inflation, and given an unknown future, if there is significant inflation one could really get hammered.

I looked up CPI-U rates at the beginning of every decade since 1940.
1940 13.9
1950 22.5
1960 29.3
1970 37.8
1980 77.8
1990 127.4
2000 168.8
2010 216.6
2020 257

Assuming your money doubles in 20 years, you would have beat inflation in 3 of the 7 20 year periods above and lost to inflation in 4 out of 7...sometimes the losses were rather large.

That seems like awful odds for preserving your money given the relative non-liquidity. Who wants their money tied up for 20+ years if winning or losing is a crap shoot?
For guaranteed inflation protection, I recommend either using, or supplementing the EE Bond ladder with an I Bond ladder.
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Re: I don't understand the case for EE bonds

Post by nps »

spdoublebass wrote: Sat Mar 21, 2020 3:43 pm Like what would $X amount of Ibonds be worth in 20 years even if they have zero real guaranteed return attached to them?
Assuming zero real return, they would be worth $X in terms of 2020 purchasing power. Does it really matter what they are worth in 2040 dollars? We don't know the prices of things in 2040.
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Re: I don't understand the case for EE bonds

Post by market timer »

james22 wrote: Thu Mar 19, 2020 8:29 am I understand that, mt. I just don't believe it likely.
Incredible reversal in inflation breakevens since this post. 10-year breakevens were at 0.5% on March 19th, now 1.25%. Even larger moves in the long end. It's possible the "money printer goes brrr" meme has longer lasting economic implications than the virus.
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Re: I don't understand the case for EE bonds

Post by protagonist »

Mel Lindauer wrote: Sat Mar 21, 2020 7:21 pm
protagonist wrote: Sat Mar 21, 2020 8:14 am
Mel Lindauer wrote: Fri Mar 20, 2020 11:37 pm
protagonist wrote: Thu Mar 19, 2020 11:26 am You are not alone. I don't understand the case for EE bonds either. (Or their popularity in this forum).

I-bonds, on the other hand, make a lot of sense, regardless of their coupon rate.
Here's a Forbes column I did some time ago that gives an excellent reason to own EE Bonds:

https://www.forbes.com/sites/theboglehe ... 80238e7ba3
The idea makes sense, Mel, but doubling every 20 years, (unlike annuity rates) is often too low a rate to keep up with inflation, and given an unknown future, if there is significant inflation one could really get hammered.

I looked up CPI-U rates at the beginning of every decade since 1940.
1940 13.9
1950 22.5
1960 29.3
1970 37.8
1980 77.8
1990 127.4
2000 168.8
2010 216.6
2020 257

Assuming your money doubles in 20 years, you would have beat inflation in 3 of the 7 20 year periods above and lost to inflation in 4 out of 7...sometimes the losses were rather large.

That seems like awful odds for preserving your money given the relative non-liquidity. Who wants their money tied up for 20+ years if winning or losing is a crap shoot?
For guaranteed inflation protection, I recommend either using, or supplementing the EE Bond ladder with an I Bond ladder.
Unlike EE bonds, I bonds make lots of sense to me. They are the best available product of which I am aware to guarantee preservation of assets. I buy the maximum every year regardless of coupon rate.
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Re: I don't understand the case for EE bonds

Post by Dovahkiin »

tim1999 wrote: Thu Mar 19, 2020 11:21 am
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.
It's been stated several times in this thread that EE bonds are guaranteed to double in 20 years:
https://www.treasurydirect.gov/indiv/re ... ndafer.htm
Treasury guarantees that an EE Bond will be worth at least its face value after the first 20 years. If an EE Bond does not double in value (reach its face value) as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20-year anniversary of the bond's issue date to make up the difference.
Pull up a compounding interest calculator, put $10,000 in for the principal, 20 years, and play around with the interest rates:
http://www.moneychimp.com/calculator/co ... ulator.htm

What interest rate causes it to double? It's exactly 3.53%.


I'm also considering using some EE bonds when I turn 40-45 to "build my own" annuity to delay social security, and possibly income past that. My partner and I each have a revocable living trust, and a joint trust, allowing us to buy $50k of EE bonds per year, or $30k if I'm single by then. For numbers sake say I want $60k/year or $5k/mo.

I played around with quotes on https://www.immediateannuities.com/ and found out it seems like a deferred annuity compounds at 3.04% interest rate. If I get a life annuity at age 65 it costs $1,047,448 for $5k/mo. If I want to get a deferred annuity giving $5k nominal at age 65 at age 40 (25 years of deferral) it'll cost 495,000. $495k compounded at 3.04% = 1,046,529.44.

So, the EE bond route at age 45 looks really attractive. Individually with my two trusts and my individual account I can buy $30k EE bonds per year. According to actuarial tables life expectancy is probably 85 years old on average, so you'd get the same monthly payment for 20 years for a $600k outlay. Now, granted, that's a life annuity where the insurance company still has to pay out even if you live to 114 years old. Even so, you're still saving money if you do the EE ladder for 30 years as that'd be 900k, starting at age 40 and ending at age 70, the EE bond ladder will stop paying at age 100. (To be fair I don't know if you'd keep investing in the EE ladder at age 60-70 though.)

I'm 33 years old so I won't be funding it now. Right now my asset allocation is 100% Hedgefundie's risk parity - 55% upro/45% TMF. I am planning on at least 5 years of EE purchases starting at age 40-45 and ending age 50 if rates are still in the toilet to help me delay social security. I'd probably would pair it up with an equal amount of I-bond purchases. If my risk parity adventure goes exceptionally well (like if I hit $10m+ at that age), then I'll probably max it out for the full 20-30 years.

I also think another interesting use case with EE bonds is liability matching your mortgage for your FIRE date to reduce sequence of returns risk. If you have a mortgage under 3.53% then instead of paying off the mortgage early it may make sense to buy EE bonds instead. Suppose you're in under a 3.5% 30 year mortgage, FIRE date is 20 years away, then any dollar you "would have paid down the mortgage with" instead you can throw into an EE bond. You pocket the spread risk free, and you have 2 dollars 20 years from now to pay your fixed costs. Say $1.66k/mo mortgage, buy $10k of EE bonds per year = 1 year of paid off housing in 20 years. So do that for 10 years and when you FIRE 20 years from now it's like your mortgage is paid off early as the EE bonds liability matched the mortgage. Let's assume a $400k mortgage @ 3.0% APR in my examples, which is equal to this payment stream.

And unlike pre-paying the mortgage you can always raid the EE bonds if needed or other investment opportunities present themselves. Using a mortgage amortization calculator and applying the same payment to your mortgage payment will pay it off in 13 years, so faster, but only if you do it for 17 years. You're getting 10 years of no mortgage for only 10 years of payments, spread out over 10 years. 100k lump sum isn't as good either, it only shaves off 11 years, vs 10. So, we need a "present value of cash flows calculator" to figure out what the PV is of this EE bond strategy today if paid to the mortgage: https://www.calculatorsoup.com/calculat ... ulator.php

So, to model the EE bond ladder we need 2 lines, 20 periods of $0 cash flow, and 10 lines of 20k per year. The interest rate is 3.53%. The calculator spits out a present value of 82,984.19 to re-create these cash flows. So, unfortunately, pre-paying the mortage with that amount only reduces it for 9 years, and of course, we are only funding the EE ladder $10k per year, not $82k. So yeah, the EE bonds majorly win over pre-paying a mortgage that's under 3.5%, ignoring taxes.

So, what about if we make $10k payments per year to the 3% mortgage instead? Well using this calculator: https://www.mortgagecalculator.org/addi ... alculator/#

It pushes back the final payment date by 9 years, instead of 10 with the EE bonds. We only save $86,825.36 of interest on the mortgage too, while the EE bonds will generate $100k of interest off $100k of principal.

So, what about taxes? Well, we're break even at the 15% marginal tax bracket rate, and we're probably a lot lower in retirement as we really care about the effective tax rate we have. 3% / (1-.15) = 3.53% so we're break even at a 15% effective/marginal tax rate.

Also, 100000/86825 = 1.15.

So, it seems like the EE bond idea possibly has some merit for early retirement liability matching to a mortgage vs making extra payments. You gain an extra year, on the face it seems tax efficient, and I feel it's better to have liquid EE bonds sitting around than more home equity.


And, if you have a larger mortgage, just create a trust for more EE bonds. $20k of EE bonds will provide $40k of cash flow, enough for an $800k mortgage @ 3%, and so on.
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Re: I don't understand the case for EE bonds

Post by WolfgangPauli »

tim1999 wrote: Thu Mar 19, 2020 11:21 am
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.
The 3.5% is guaranteed if you hold to 20 years. On the 20th year you will see a huge jump in interest as it "settles up" so you have earned 3.5%. You have to keep for 20 years to get it.. .
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Re: I don't understand the case for EE bonds

Post by protagonist »

Dovahkiin wrote: Wed Apr 01, 2020 2:35 am

I played around with quotes on https://www.immediateannuities.com/ and found out it seems like a deferred annuity compounds at 3.04% interest rate.
So, the EE bond route at age 45 looks really attractive. Individually with my two trusts and my individual account I can buy $30k EE bonds per year.

Now, granted, that's a life annuity where the insurance company still has to pay out even if you live to 114 years old.
Are deferred annuities very attractive investments for 45 year olds? I think not.

I have yet to see anybody on Bogleheads recommend them.

One look at a graph of US treasury rates , particularly since WW 2 , would give me jitters regarding tying my money up for 20 years at around 3% compounded.

Don't let recency bias cloud your judgement.

Plus, a lot can happen in 20 years that could make you need to tap into that money. Divorce, health emergencies, national crisis, loss of employment, etc.

https://www.visualcapitalist.com/the-hi ... 670-years/
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Re: I don't understand the case for EE bonds

Post by UpperNwGuy »

WolfgangPauli wrote: Sat Apr 04, 2020 6:40 am The 3.5% is guaranteed if you hold to 20 years. On the 20th year you will see a huge jump in interest as it "settles up" so you have earned 3.5%. You have to keep for 20 years to get it.. .
And therein lies the problem. You have to live for 20 more years. For some of us, that might be a gamble.
209south
Posts: 516
Joined: Mon Jan 28, 2013 10:58 pm

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

Post by 209south »

protagonist wrote: Tue Apr 07, 2020 8:54 am
Dovahkiin wrote: Wed Apr 01, 2020 2:35 am

I played around with quotes on https://www.immediateannuities.com/ and found out it seems like a deferred annuity compounds at 3.04% interest rate.
So, the EE bond route at age 45 looks really attractive. Individually with my two trusts and my individual account I can buy $30k EE bonds per year.

Now, granted, that's a life annuity where the insurance company still has to pay out even if you live to 114 years old.
Are deferred annuities very attractive investments for 45 year olds? I think not.

I have yet to see anybody on Bogleheads recommend them.

One look at a graph of US treasury rates , particularly since WW 2 , would give me jitters regarding tying my money up for 20 years at around 3% compounded.

Don't let recency bias cloud your judgement.

Plus, a lot can happen in 20 years that could make you need to tap into that money. Divorce, health emergencies, national crisis, loss of employment, etc.

https://www.visualcapitalist.com/the-hi ... 670-years/
It is certainly true that few on this forum recommend DIAs be purchased at age 45. Having said that, I began buying DIAs when I turned 55 - against all the advice on this forum when many said 'rates can't stay this low forever' - and am exceedingly happy I did. These represent ~5% of my conservative portfolio, so 5% of the 65% I have in a diversified fixed income portfolio. They are nominal DIAs and complement my TIPs ladder and my expected social security, as well as my far larger position in BND - in particular they provide some longevity insurance, which is very important to my wife and me. To replace these DIAs 5 years later would cost me ~60% more than I paid for them, so again, not for everyone, but this strategy worked for me!
Dovahkiin
Posts: 154
Joined: Thu Jan 26, 2012 11:36 pm

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

Post by Dovahkiin »

protagonist wrote: Tue Apr 07, 2020 8:54 am Are deferred annuities very attractive investments for 45 year olds? I think not.

I have yet to see anybody on Bogleheads recommend them.

One look at a graph of US treasury rates , particularly since WW 2 , would give me jitters regarding tying my money up for 20 years at around 3% compounded.

Don't let recency bias cloud your judgement.

Plus, a lot can happen in 20 years that could make you need to tap into that money. Divorce, health emergencies, national crisis, loss of employment, etc.

https://www.visualcapitalist.com/the-hi ... 670-years/
Have you looked at the Yield to Maturity charts for the EE bond?

Year YTM Yrs left
1 3.53% 20
2 3.72% 19
3 3.93% 18
4 4.16% 17
5 4.43% 16
6 4.73% 15
7 5.08% 14
8 5.48% 13
9 5.95% 12
10 6.50% 11
11 7.18% 10
12 8.01% 9
13 9.05% 8
14 10.41% 7
15 12.25% 6
16 14.87% 5
17 18.92% 4
18 25.99% 3
19 42.42% 2
20 100.00% 1

10 years into an EE bond current treasury rates would need to be 7.18% to eat the opportunity cost to switch to long term treasuries. Even just holding for 1-2 years bumps their YTM to 4%+. Right now the 20 year treasury rate is 1.08%. If you have to buy new bonds right now I'd rather buy the EE bond as it beats out the 20 year in nominal interest, and if yields go back up then you don't lose principal.

Now, going back to my personal situation right now I'm 100% invested in Hedgefundie's 55% UPRO/45% TMF portfolio, so that's a lot of risk. I'm only 33 years old. I'd absolutely want to de-risk at some point. Say I want a 10 year annuity starting at age 60 to age 70 that matches or exceeds my social security income, so I can delay taking SS, then as of right now in the market I have three options:

1. invest and buy a 10 year annuity then.
2. buy a deferred annuity now that starts in 20 years.
3. A 20 year EE bond ladder with 10 years of purchases (10 rungs).

1. Has investment & behavior risk.
2. Has credit risk that the insurance company will be around in 20 years and death risk if you die(life annuity, 10 year certain has no death risk).
3. In the current low rate market it looks really attractive.

So, to make it simple, I want $20k of income per year for 10 years, that's a $1,666 monthly payment. That's equal to one $10k of EE bonds purchased now per year, and $20k at maturity. Return of principal is fine, as that's what annuities do anyways, so they're directly comparable.

Let's price out each options for returning a $1666 monthly income. At age 60, male, life, cash refund, and 10 year guaranteed payments all have around the same monthly income (ie at this age you're not getting mortality credits.) But since you obviously can't do EE bonds for life, I'll compare the 10 year annuity quotes to be the most applicable.

For choice 1: Buying the 10 year annuity at age 60:
10 year annuity that produces $20k/year income costs $186,500 at age 60, male, in California. A respective life annuity costs $400k.
The 10 year is a pretty crappy rate as $186,500/10/12 = $1,554. Using the 3.53% interest rate 20k/year of cash flows for 10 years has a $165k present value, so this annuity costs you $21,500 for the guarantee. Solving for the cash flows interest rate the annuity is only guaranteeing you 1.28% Ouch!

For choice 2: Buying a 20 year 10-year annuity at age 40:
Costs $98,300. Since from choice 1 we know the annuity at age 60 costs $186,500, I'll now solve for the annual compounded interest rate: $3.2% as of today. Guess it's a little bit less interest rate hit than the life annuity, but I guess there is less risk of a certain year period baked into it too. Still, as of today, $3.2% < 3.53%.

However that is the interest rate is for $98,300 -> $186,500, which isn't fair, as $186,500 isn't a fair price compared to EE bonds with a 1.28% interest rate. What is the interest rate of $98,300 -> $165,000? 2.59%

Also, once you pay the $98,300 premium, the money is gone. Obviously no one would do this deferred annuity in practice, but it's needed to compare to example 3, the EE bond.

Choice 3: $10k/year for 10 year EE Bond Ladder:
Cost: $10k a year, $100k total cost. Costs $1,700 more than the deferred annuity, but saves you $86,500 if you purchase it at age 60! However, you only have to make $10k/year payments! No commitments! That $10k in year 9 is worth less today, and let's not even go into the opportunity cost of having to front $98,300, that you're gaining with the EE bonds.

Plus if you need the money for something else you can always raid it.

So that's the case for EE bonds. The case for them is if you want certain guaranteed nominal payments to happen in 20 years, for up to 20 years of income. The other case for EE bonds is nominal yields that significantly beat out long term treasuries unless rates rise dramatically, with no interest rate risk. Rates near 0%/negative? Buy EE bonds. Rates above 3.5% in year 0 of original purchase, 3.72% in year 1 of purchase, 3.93% in year 2 of purchase, 4.16% in year 3 of original purchase, etc? Then buy long term treasuries itself, as if yields drop you get capital gains from the market value of the treasuries!


Going back to my personal situation I hope I have $1m-$10m+ by investing 100% in a very aggressive risk-parity portfolio, so hopefully it doesn't matter much of what I do. I guess technically the portfolio is 165% stocks, 135% bonds, but the bonds aren't used for income but as a correlation trading strategy to hedge a portfolio based on investor behavior in the market. I'd like to take some money off the table. Let's say it's $1m when I start doing so, that's only 1% per year cost going into a very safe bond ladder. It'd be 10% of bonds by year 10 if the portfolio is flat. I'd have all my base expenses covered for the first 10 years and significantly reduce sequence of returns risk when I retire. Hell, I can see making a case for them in my situation as early as age 35 as it'd reduce sequence of return risk at age 55. A 15 year ladder starting at that age of EE bonds seems very attractive to me, especially for the low price of $10k/year.
WolfgangPauli
Posts: 390
Joined: Sun Aug 23, 2015 8:28 am

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

Post by WolfgangPauli »

UpperNwGuy wrote: Tue Apr 07, 2020 9:08 am
WolfgangPauli wrote: Sat Apr 04, 2020 6:40 am The 3.5% is guaranteed if you hold to 20 years. On the 20th year you will see a huge jump in interest as it "settles up" so you have earned 3.5%. You have to keep for 20 years to get it.. .
And therein lies the problem. You have to live for 20 more years. For some of us, that might be a gamble.
True, it is always a gamble.. But, I think it is reasonable to gamble you will live to 78.. Better life through chemistry!

If you are 70 now, it is probably not that crazy to think you will live to 90 but even if you do not.. it will be a nice gift..
Twitter: @JAXbogleheads | EM: JAXbogleheads@gmail.com
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