bhough wrote:3. I am expecting interest rate risk from bond funds (drop in price of bonds in fund when/if interest rates rise) in the future
If interest rates increase enough, you will do better with rolling 5-year CDs for 20 years, as I discussed earlier.
5. I will likely be in a lower tax bracket then (and if not, great news!)
I showed an example in which rolling 5-year CDs would come out better if the best available 5-year CD rate increased by less than one percentage point every five years (e.g., 5-year now is 2.75%, and if five years would be 3.75%) if your marginal tax rate now is 35% and would be 25% when you redeemed your EE bond.
6. There is no cost to purchase EE bonds
7. There is no yearly cost to hold EE bonds
8. There is no cost to sell EE bonds
Ditto for CDs bought directly from banks and credit unions.
10. The earnings are tax deferred, whereas TIPS and CDs are taxed yearly
The tax deferral can be quantified, and should be part of your analysis. TIPS and CDs can be held in tax-advantaged accounts, and either be tax-deferred or not taxed at all.
11. There is no call risk
12. Compared to non-government bond funds, they are protected by the full faith of the US government. If you purchase a corporate bond fund, the individual bonds in that fund are subject to default risk.
Direct CDs do have a small amount of call risk, since the bank or credit union could fail, and you could receive your principal and interest to date of failure before maturity. However, if you look at bank failure rates, this is a tiny risk, especially if you don't buy from low-rated banks.
Of course CDs also have no credit risk if you stay within the federal deposit insurance limits, which of course are much higher than we need to consider in comparing to EE bonds, with their annual purchase limits.
15. I'm small potatoes to some of you on here, but what is the harm in putting 10% of your bond allocation to EE bonds (after some similar or large portion to I bonds)? It has unique properties that bond funds don't have and given the unpredictable nature of the future, why not hedge your risks? Since we can't buy $50,000/year of EE bonds, we are kind of splitting hairs a little. I've learned from my wife that it doesn't have to be 100% of one thing and 0% of another. It can be 83% of your bond allocation to I bonds and Tips, 10% to a corporate bond fund and 7% to EE bonds.
True, a small allocation to EE bonds won't hurt you much, but neither will it help you much. With 7% of a 20% bond allocation in EE bonds, that's 1.4% of the portfolio in EE bonds. That's not much of a hedge against whatever risks EE bonds are hedging (e.g., deflation). Same goes for TIPS and I Bonds--a small allocation isn't going to help much if we see high unexpected inflation.
Funny you mentioned that you can't buy $50,000 of EE bonds, since I realized that my wife and I could buy $50K/year of EE bonds (and ditto for I Bonds). Between us we have three living thrusts, so we could buy $10K each as individuals, and $10K for each for our living trusts; that's $50K. Even at that rate, it would take five years to buy as much as we can cover for CDs with federal deposit insurance in an IRA, 10 years to buy as much as we can cover with FDIC insurance in a joint account, and 25 years to buy as much as we can cover with FDIC insurance with a trust or POD account with five beneficiaries.
We could bump the $50K to $100K if we think intergenerationally, and buy $10K each for our five children, or even $130K if we include children's spouses and children (in a few months that would be $150K). So if we really liked EE bonds, we actually could acquire a meaningful amount in a few years.
For a young person with a small portfolio, who's only retirement savings otherwise go into a 401k and/or an IRA, $10K per year is a meaningful amount. But most of these people probably should be buying mostly stocks.
I realize this is a niche market and most people don't benefit from this investment product. However, given the above, I felt EE bonds were superior to TIPS, CDs, and bond funds for me. I would be grateful if someone corrects my thinking so I can invest more profitably.
I think if you are really concerned about interest-rate risk (term risk), and you understand that CDs have many of the benefits you list for EE bonds, then rolling 5-year CDs could be a superior choice for you. But with only 20% of your portfolio in fixed-income, and only a portion of that in EE bonds, it just doesn't matter much.