I-bonds look pretty bad right now

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danielc
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I-bonds look pretty bad right now

Post by danielc » Sun Jun 17, 2018 7:41 pm

Hello,

Today I calculated how long I'd have to wait if I wanted to make a positive real return with I-bonds. The return rate for an I-bond is CPI plus a fixed rate, deferred until you cash the I-bond. Then you pay federal tax but not state and local taxes. You cannot hold an I-bond longer than 30 years. Based on a marginal tax rate of 22%, and assuming that CPI inflation is constant, here is what I got:

Code: Select all

 Fixed Rate = 0.3% | Fixed Rate = 0.5% | Fixed Rate = 0.7% | Fixed Rate = 0.9%
 ------------------+-------------------+-------------------+------------------
    CPI     Years  |    CPI     Years  |    CPI     Years  |    CPI     Years
    1.5%    >= 42  |    1.5%    >=  1  |    1.5%    >=  1  |    1.5%    >=  1
    2.0%    >= 62  |    2.0%    >= 11  |    2.0%    >=  1  |    2.0%    >=  1
    2.5%    >= 73  |    2.5%    >= 26  |    2.5%    >=  2  |    2.5%    >=  1
    3.0%    >= 78  |    3.0%    >= 34  |    3.0%    >= 12  |    3.0%    >=  1
    3.5%    >= 82  |    3.5%    >= 40  |    3.5%    >= 19  |    3.5%    >=  6
    4.0%    >= 84  |    4.0%    >= 44  |    4.0%    >= 24  |    4.0%    >= 11
The current fixed rate is 0.3%, so no matter how long you hold your I-bond, you'll never keep up with inflation. :|

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Re: I-bonds look pretty bad right now

Post by Nate79 » Sun Jun 17, 2018 7:44 pm

danielc wrote:
Sun Jun 17, 2018 7:41 pm
Hello,

Today I calculated how long I'd have to wait if I wanted to make a positive real return with I-bonds. The return rate for an I-bond is CPI plus a fixed rate, deferred until you cash the I-bond. Then you pay federal tax but not state and local taxes. You cannot hold an I-bond longer than 30 years. Based on a marginal tax rate of 22%, and assuming that CPI inflation is constant, here is what I got:

Code: Select all

 Fixed Rate = 0.3% | Fixed Rate = 0.5% | Fixed Rate = 0.7% | Fixed Rate = 0.9%
 ------------------+-------------------+-------------------+------------------
    CPI     Years  |    CPI     Years  |    CPI     Years  |    CPI     Years
    1.5%    >= 42  |    1.5%    >=  1  |    1.5%    >=  1  |    1.5%    >=  1
    2.0%    >= 62  |    2.0%    >= 11  |    2.0%    >=  1  |    2.0%    >=  1
    2.5%    >= 73  |    2.5%    >= 26  |    2.5%    >=  2  |    2.5%    >=  1
    3.0%    >= 78  |    3.0%    >= 34  |    3.0%    >= 12  |    3.0%    >=  1
    3.5%    >= 82  |    3.5%    >= 40  |    3.5%    >= 19  |    3.5%    >=  6
    4.0%    >= 84  |    4.0%    >= 44  |    4.0%    >= 24  |    4.0%    >= 11
The current fixed rate is 0.3%, so no matter how long you hold your I-bond, you'll never keep up with inflation. :|
So what is your alternative?

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Re: I-bonds look pretty bad right now

Post by aristotelian » Sun Jun 17, 2018 7:49 pm

Bad compared to what? Is there any investment under the sun that offers guaranteed real return after taxes and inflation?

They are favorable compared to savings accounts, money market funds, and 1 year CD. They are savings bonds designed to preserve their value. If you want return, you have to take risk and invest.

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Re: I-bonds look pretty bad right now

Post by cheesepep » Sun Jun 17, 2018 7:54 pm

Bonds, at least to me, have always been a waste of money. Just buy stocks and have some cash in a savings account. Don't want the 0.1% interest rate? Oh, well.

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Re: I-bonds look pretty bad right now

Post by KlingKlang » Sun Jun 17, 2018 7:55 pm

With the increased standard deduction there are going to be a lot of people paying 0%, 10%, or 12% marginal tax rates instead of 22%. I'm currently at 0% myself due to ACA income limitations. Also I'm enjoying the cash flow from my 30 year old (Series EE) savings bonds.

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Re: I-bonds look pretty bad right now

Post by AlohaJoe » Sun Jun 17, 2018 8:14 pm

Nate79 wrote:
Sun Jun 17, 2018 7:44 pm
So what is your alternative?
Nominal Treasuries, real estate, stocks, private equity, gold, bitcoin, CDs, fallen angels, and Icelandic savings accounts are just a few of the alternatives available.

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Re: I-bonds look pretty bad right now

Post by danielc » Sun Jun 17, 2018 8:38 pm

Nate79 wrote:
Sun Jun 17, 2018 7:44 pm
So what is your alternative?
Other forms of fixed income I guess. Maybe long-term CDs in a tax-advantaged account, or similar. Looking at the prices right now, if you didn't have to pay taxes (e.g. Roth IRA) there are 2-year CDs right now that can keep up with inflation.

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Re: I-bonds look pretty bad right now

Post by Nate79 » Sun Jun 17, 2018 8:40 pm

danielc wrote:
Sun Jun 17, 2018 8:38 pm
Nate79 wrote:
Sun Jun 17, 2018 7:44 pm
So what is your alternative?
Other forms of fixed income I guess. Maybe long-term CDs in a tax-advantaged account, or similar. Looking at the prices right now, if you didn't have to pay taxes (e.g. Roth IRA) there are 2-year CDs right now that can keep up with inflation.
What guarantee do you have that a CD will beat inflation in the future? You can't know this because you don't know what will be inflation beyond this moment.

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Re: I-bonds look pretty bad right now

Post by Spirit Rider » Sun Jun 17, 2018 8:53 pm

AlohaJoe wrote:
Sun Jun 17, 2018 8:14 pm
Nate79 wrote:
Sun Jun 17, 2018 7:44 pm
So what is your alternative?
Nominal Treasuries, real estate, stocks, private equity, gold, bitcoin, CDs, fallen angels, and Icelandic savings accounts are just a few of the alternatives available.
With the exception of T-bills/CDs <= 1yr: none of those are cash equivalent, principal protected, inflation indexed with no credit/interest rate risk.

Your list could not be even remotely considered risk equivalent alternatives to I-Bonds. Gold, Bitcoin, private equity. You have got to be kidding. You can't get any riskier.

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Re: I-bonds look pretty bad right now

Post by danielc » Sun Jun 17, 2018 9:06 pm

aristotelian wrote:
Sun Jun 17, 2018 7:49 pm
Bad compared to what? Is there any investment under the sun that offers guaranteed real return after taxes and inflation?

They are favorable compared to savings accounts, money market funds, and 1 year CD. They are savings bonds designed to preserve their value. If you want return, you have to take risk and invest.
I was just commenting. I was hoping that they would preserve value, but it looks like they don't. When I said "positive real return" I could just as well have said "non-negative". But in any case, you are of course right that I-bonds look better than savings accounts, money market funds, and 1-year CDs.

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Re: I-bonds look pretty bad right now

Post by danielc » Sun Jun 17, 2018 9:11 pm

Nate79 wrote:
Sun Jun 17, 2018 8:40 pm
What guarantee do you have that a CD will beat inflation in the future? You can't know this because you don't know what will be inflation beyond this moment.
Of course, I have no guarantees. But very few things in savings and investments are guaranteed. I know the historical rate of inflation and I know that central banks usually try to keep it in the order of 2%. So one can make an educated guess.

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Re: I-bonds look pretty bad right now

Post by J295 » Sun Jun 17, 2018 9:18 pm

For us, I bonds are one tool in the toolbox. We’re satisfied to have accumulated I bonds over the years that, for the current six month period, have an annualized return rate in the 2.5% plus range and no current taxation

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Re: I-bonds look pretty bad right now

Post by jeffyscott » Sun Jun 17, 2018 9:36 pm

KlingKlang wrote:
Sun Jun 17, 2018 7:55 pm
With the increased standard deduction there are going to be a lot of people paying 0%, 10%, or 12% marginal tax rates instead of 22%.
Other than the new even lower rates, this is not new, around 80% were in the 15% or below tax brackets.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: I-bonds look pretty bad right now

Post by AlohaJoe » Sun Jun 17, 2018 10:38 pm

Spirit Rider wrote:
Sun Jun 17, 2018 8:53 pm
AlohaJoe wrote:
Sun Jun 17, 2018 8:14 pm
Nate79 wrote:
Sun Jun 17, 2018 7:44 pm
So what is your alternative?
Nominal Treasuries, real estate, stocks, private equity, gold, bitcoin, CDs, fallen angels, and Icelandic savings accounts are just a few of the alternatives available.
With the exception of T-bills/CDs <= 1yr: none of those are cash equivalent, principal protected, inflation indexed with no credit/interest rate risk.

Your list could not be even remotely considered risk equivalent alternatives to I-Bonds. Gold, Bitcoin, private equity. You have got to be kidding. You can't get any riskier.
The person I replied didn't ask about risk equivalent alternatives. Often in investing we look at risk adjusted returns and pick something that has higher absolute risk because the even higher returns compensate for it.

It doesn't really strike me as surprising or contentious to decide that the risk adjusted returns for I bonds aren't worth it at the moment and an alternative would be better.

If you're not taking any risk - no principal risk, no inflation risk, no credit risk, no term risk, no liquidity risk, no equity risk - then I'm not surprised there is no return.

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Re: I-bonds look pretty bad right now

Post by oldcomputerguy » Mon Jun 18, 2018 7:39 am

danielc wrote:
Sun Jun 17, 2018 7:41 pm
Hello,

Today I calculated how long I'd have to wait if I wanted to make a positive real return with I-bonds. The return rate for an I-bond is CPI plus a fixed rate, deferred until you cash the I-bond. Then you pay federal tax but not state and local taxes. You cannot hold an I-bond longer than 30 years. Based on a marginal tax rate of 22%, and assuming that CPI inflation is constant, here is what I got:

Code: Select all

 Fixed Rate = 0.3% | Fixed Rate = 0.5% | Fixed Rate = 0.7% | Fixed Rate = 0.9%
 ------------------+-------------------+-------------------+------------------
    CPI     Years  |    CPI     Years  |    CPI     Years  |    CPI     Years
    1.5%    >= 42  |    1.5%    >=  1  |    1.5%    >=  1  |    1.5%    >=  1
    2.0%    >= 62  |    2.0%    >= 11  |    2.0%    >=  1  |    2.0%    >=  1
    2.5%    >= 73  |    2.5%    >= 26  |    2.5%    >=  2  |    2.5%    >=  1
    3.0%    >= 78  |    3.0%    >= 34  |    3.0%    >= 12  |    3.0%    >=  1
    3.5%    >= 82  |    3.5%    >= 40  |    3.5%    >= 19  |    3.5%    >=  6
    4.0%    >= 84  |    4.0%    >= 44  |    4.0%    >= 24  |    4.0%    >= 11
The current fixed rate is 0.3%, so no matter how long you hold your I-bond, you'll never keep up with inflation. :|
I guess there's something I'm not getting. You seem to be saying that the inflation-adjusted portion of the interest rate has zero effect. Am I understanding correctly?
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)

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Re: I-bonds look pretty bad right now

Post by jeffyscott » Mon Jun 18, 2018 8:08 am

oldcomputerguy wrote:
Mon Jun 18, 2018 7:39 am
danielc wrote:
Sun Jun 17, 2018 7:41 pm
Hello,

Today I calculated how long I'd have to wait if I wanted to make a positive real return with I-bonds. The return rate for an I-bond is CPI plus a fixed rate, deferred until you cash the I-bond. Then you pay federal tax but not state and local taxes. You cannot hold an I-bond longer than 30 years. Based on a marginal tax rate of 22%, and assuming that CPI inflation is constant, here is what I got:

Code: Select all

 Fixed Rate = 0.3% | Fixed Rate = 0.5% | Fixed Rate = 0.7% | Fixed Rate = 0.9%
 ------------------+-------------------+-------------------+------------------
    CPI     Years  |    CPI     Years  |    CPI     Years  |    CPI     Years
    1.5%    >= 42  |    1.5%    >=  1  |    1.5%    >=  1  |    1.5%    >=  1
    2.0%    >= 62  |    2.0%    >= 11  |    2.0%    >=  1  |    2.0%    >=  1
    2.5%    >= 73  |    2.5%    >= 26  |    2.5%    >=  2  |    2.5%    >=  1
    3.0%    >= 78  |    3.0%    >= 34  |    3.0%    >= 12  |    3.0%    >=  1
    3.5%    >= 82  |    3.5%    >= 40  |    3.5%    >= 19  |    3.5%    >=  6
    4.0%    >= 84  |    4.0%    >= 44  |    4.0%    >= 24  |    4.0%    >= 11
The current fixed rate is 0.3%, so no matter how long you hold your I-bond, you'll never keep up with inflation. :|
I guess there's something I'm not getting. You seem to be saying that the inflation-adjusted portion of the interest rate has zero effect. Am I understanding correctly?
At 1.5% inflation plus 0.3%, you get 1.8% return. This would mean $1000 grows to $2115 in 42 years. At a 22% tax rate, you would pay $245 in taxes on the gain, leaving you with $1870. At 1.5% inflation, $1000 now would be $1869 after 42 years, so your after tax real return is $1.

(But at a 12% tax rate, you would have a positive after tax real return after just 1 year, ignoring the 3 month penalty.)
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: I-bonds look pretty bad right now

Post by oldcomputerguy » Mon Jun 18, 2018 9:25 am

jeffreyscott, thanks for the explanation. What I wasn’t getting was that you were talkng about after-tax returns.
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Re: I-bonds look pretty bad right now

Post by #Cruncher » Mon Jun 18, 2018 4:46 pm

danielc wrote:
Sun Jun 17, 2018 7:41 pm
Based on a marginal tax rate of 22%, and assuming that CPI inflation is constant, here is what I got: … The current fixed rate is 0.3%, so no matter how long you hold your I-bond, you'll never keep up with inflation. :|
As shown in the following table, this is true for any constant inflation of at least 1.5%. Even if held for 30 years an I Bond will have a negative after tax real return.

Code: Select all

Row  Col A        Col B    Col C    Col D    Col E    Col F    Col G
  1  Fixed rate    0.3%
  2  Tax rate     22.0%
  3  CPI / Yrs ->    5       10       15       20       25       30
  4  0.0%      [*] 0.23%    0.23%    0.24%    0.24%    0.24%    0.24% 
  5  0.5%          0.13%    0.13%    0.13%    0.13%    0.14%    0.14% 
  6  1.0%          0.02%    0.03%    0.04%    0.04%    0.05%    0.05% 
  7  1.5%         (0.08%)  (0.07%)  (0.05%)  (0.04%)  (0.03%)  (0.02%)
  8  2.0%         (0.18%)  (0.16%)  (0.14%)  (0.12%)  (0.10%)  (0.09%)
  9  2.5%         (0.28%)  (0.25%)  (0.22%)  (0.19%)  (0.17%)  (0.14%)
 10  3.0%         (0.37%)  (0.33%)  (0.29%)  (0.26%)  (0.22%)  (0.19%)
 11  3.5%         (0.46%)  (0.41%)  (0.36%)  (0.32%)  (0.27%)  (0.24%)
 12  4.0%         (0.55%)  (0.49%)  (0.43%)  (0.37%)  (0.32%)  (0.27%)
However, there are three ways a 0.3% fixed rate I Bond could have a positive after tax real return.
  1. Held for any period of 5 to 30 years, the return would be positive in the unlikely event that inflation is 1% or less.
  2. As jeffyscott points out in this post, the return will more likely be positive with a tax rate of 12% instead of 22%. For example, it will be positive if held for five years or more with any inflation rate of 2% or less. And even with 4% inflation, it will almost avoid a negative return if held for 30 years.

    Code: Select all

    Row  Col A        Col B    Col C    Col D    Col E    Col F    Col G
      1  Fixed rate    0.3%
      2  Tax rate     12.0%
      3  CPI / Yrs ->    5       10       15       20       25       30
      4  0.0%          0.26%    0.26%    0.26%    0.26%    0.27%    0.27% 
      5  0.5%          0.21%    0.21%    0.21%    0.21%    0.21%    0.21% 
      6  1.0%          0.15%    0.15%    0.16%    0.16%    0.16%    0.17% 
      7  1.5%          0.09%    0.10%    0.11%    0.12%    0.12%    0.13% 
      8  2.0%          0.04%    0.05%    0.06%    0.07%    0.09%    0.10% 
      9  2.5%         (0.01%)   0.01%    0.02%    0.04%    0.05%    0.07% 
     10  3.0%         (0.06%)  (0.04%)  (0.02%)   0.00%    0.02%    0.04% 
     11  3.5%         (0.11%)  (0.08%)  (0.05%)  (0.03%)  (0.00%)   0.02% 
     12  4.0%         (0.16%)  (0.12%)  (0.09%)  (0.05%)  (0.03%)  (0.00%)
  3. Whenever the 6-month CPI change they use is negative, I Bonds may get a bonus because of what I call the "floor feature" (see Can I ever lose money in I bonds?). As an illustration, below I've computed the return with and without the floor feature for a $25 I Bond with 0.00% Fixed Rate Purchased May 2008 using the semi-annual inflation rates (see What have rates been in the past?). Scroll to the bottom to see that in this case the floor feature had the same effect as a fixed rate more than 0.3% points higher.

    Code: Select all

                Infla     W/O      With
                 Rate    Floor    Floor
                         25.00    25.00

    Code: Select all

    May 2008    2.42%    25.61    25.61
    Nov 2008    2.46%    26.24    26.24
    May 2009   (2.78%)   25.51    26.24
    Nov 2009    1.53%    25.90    26.64
    May 2010    0.77%    26.10    26.85
    Nov 2010    0.37%    26.20    26.95
    May 2011    2.30%    26.80    27.57
    Nov 2011    1.53%    27.21    27.99
    May 2012    1.10%    27.51    28.30
    Nov 2012    0.88%    27.75    28.55
    May 2013    0.59%    27.91    28.72
    Nov 2013    0.59%    28.07    28.89
    May 2014    0.92%    28.33    29.16
    Nov 2014    0.74%    28.54    29.38
    May 2015   (0.80%)   28.31    29.38
    Nov 2015    0.77%    28.53    29.61
    May 2016    0.08%    28.55    29.63
    Nov 2016    1.38%    28.94    30.04
    May 2017    0.98%    29.22    30.33
    Nov 2017    1.24%    29.58    30.71
    May 2018    1.11%    29.91    31.05
                         -----    -----
    Annual increase      1.72%    2.07%
* Here is the formula in cell B4 that is copied down to row 12 and right to column G.
0.23% = ((((1+$B$1)*(1+$A4))^B$3*(1-$B$2)+$B$2)/(1+$A4)^B$3)^(1/B$3)-1
A $1,000 bond with 2% inflation for example:

Code: Select all

1,120.74  = grows to              = 1000 * 1.003 ^ 5 * 1.02 ^ 5
  (26.56) = tax                   = 0.22 * (1120.74 - 1000)
1,094.18  = after tax value
  991.03  = after tax real value  = 1094.18 / 1.02 ^ 5
 (0.18%)  = after tax real return = (991.03 / 1000) ^ (1 / 5) - 1
I accidentally wiped out my original post (by overwriting it with a new post :oops: ). This edit 6/22/18 1:10 PM is to restore it from an external copy.
Last edited by #Cruncher on Fri Jun 22, 2018 12:11 pm, edited 2 times in total.

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Re: I-bonds look pretty bad right now

Post by Mel Lindauer » Mon Jun 18, 2018 6:18 pm

Many of the Bogleheads (including me) backed up the truck and loaded up on the old 3.0, 3.3, 3.4 and 3.6% fixed rate I Bonds and are now sitting fat, dumb and happy with nice returns on a risk-free investment. But those were the good old days that we may never see again.
Best Regards - Mel | | Semper Fi

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Re: I-bonds look pretty bad right now

Post by digit8 » Tue Jun 19, 2018 6:49 am

danielc wrote:
Sun Jun 17, 2018 7:41 pm
Then you pay federal tax but not state and local taxes. You cannot hold an I-bond longer than 30 years. Based on a marginal tax rate of 22%, and assuming that CPI inflation is constant, here is what I got:
There is an old joke about the worlds greatest scientest spending 10 years coming up with the perfect formula for betting on horses. The guy who hired him follows the formula, loses every race, demands to know how the scientist came up with such a formula. Scientist says "Well, first, I assumed a spherical horse...." I don't know what inflation will look like in 10, 20 years and I wouldn't be upset if were constant- but I would be surprised.

I've fallen out of love with Ibonds for reasons unrelated to returns, but when I used them it was for emergency funds and an alternative to a standard savings account. I think within those modest terms they will remain a useful product.
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Re: I-bonds look pretty bad right now

Post by not4me » Tue Jun 19, 2018 8:05 am

Mel Lindauer wrote:
Mon Jun 18, 2018 6:18 pm
Many of the Bogleheads (including me) backed up the truck and loaded up on the old 3.0, 3.3, 3.4 and 3.6% fixed rate I Bonds and are now sitting fat, dumb and happy with nice returns on a risk-free investment. But those were the good old days that we may never see again.
I think this gets to the heart of it, but I'll re-phrase a bit to say "loaded up when bonds were cheaper". So, do I-bonds just strip away the "sugar coating" that other areas of "the" bond market have & let us know what our real, risk-adjusted return is expected to be? (By the way Mel, between fat, dumb, & happy, I've got at least 2 out of 3, trying for all 3...)

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Re: I-bonds look pretty bad right now

Post by SagaciousTraveler » Tue Jun 19, 2018 8:08 am

Mel Lindauer wrote:
Mon Jun 18, 2018 6:18 pm
Many of the Bogleheads (including me) backed up the truck and loaded up on the old 3.0, 3.3, 3.4 and 3.6% fixed rate I Bonds and are now sitting fat, dumb and happy with nice returns on a risk-free investment. But those were the good old days that we may never see again.
I'm waiting for those days and the days where CD's were something like 17%-18% like I hear about in the 80s.

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Re: I-bonds look pretty bad right now

Post by ThisTimeItsDifferent » Tue Jun 19, 2018 8:18 am

If CD interest rates were that high because inflation was almost that high, then one was worse off because taxes are on the nominal, not real, gain. I'd rather have inflation of 0% and nominal interest rate rates of 1%, than inflation of 13% and interest returns of 15%. After taxes, even at just a 15% marginal tax rate, one loses money in real terms in the latter. Obviously, we don't have inflation of 0% now either.

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Re: I-bonds look pretty bad right now

Post by diy60 » Tue Jun 19, 2018 8:34 am

SagaciousTraveler wrote:
Tue Jun 19, 2018 8:08 am
Mel Lindauer wrote:
Mon Jun 18, 2018 6:18 pm
Many of the Bogleheads (including me) backed up the truck and loaded up on the old 3.0, 3.3, 3.4 and 3.6% fixed rate I Bonds and are now sitting fat, dumb and happy with nice returns on a risk-free investment. But those were the good old days that we may never see again.
I'm waiting for those days and the days where CD's were something like 17%-18% like I hear about in the 80s.
Be careful what you wish for. I purchased my first house sometime around 1979, my mortgage rate was 18%. Spent the next 15 years refinancing multiple times.

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Re: I-bonds look pretty bad right now

Post by SagaciousTraveler » Tue Jun 19, 2018 8:35 am

ThisTimeItsDifferent wrote:
Tue Jun 19, 2018 8:18 am
If CD interest rates were that high because inflation was almost that high, then one was worse off because taxes are on the nominal, not real, gain. I'd rather have inflation of 0% and nominal interest rate rates of 1%, than inflation of 13% and interest returns of 15%. After taxes, even at just a 15% marginal tax rate, one loses money in real terms in the latter. Obviously, we don't have inflation of 0% now either.
I completely understand you argument. However, if you can lock in the high rates over a long period of time and inflation goes back down. You are one happy customer.

At the same time, I laugh when the Fed/Govt. tells me inflation/cpi is only at 2%. I don't believe that number for a second, I think its higher, maybe even double.

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Re: I-bonds look pretty bad right now

Post by SagaciousTraveler » Tue Jun 19, 2018 8:37 am

diy60 wrote:
Tue Jun 19, 2018 8:34 am
SagaciousTraveler wrote:
Tue Jun 19, 2018 8:08 am
Mel Lindauer wrote:
Mon Jun 18, 2018 6:18 pm
Many of the Bogleheads (including me) backed up the truck and loaded up on the old 3.0, 3.3, 3.4 and 3.6% fixed rate I Bonds and are now sitting fat, dumb and happy with nice returns on a risk-free investment. But those were the good old days that we may never see again.
I'm waiting for those days and the days where CD's were something like 17%-18% like I hear about in the 80s.
Be careful what you wish for. I purchased my first house sometime around 1979, my mortgage rate was 18%. Spent the next 15 years refinancing multiple times.
Understood! However, I'm the weird person who has shunned financing anything every again. So while I understand many people will struggle with high rates, I have tried to set myself up to take advantage of that environment.

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Re: I-bonds look pretty bad right now

Post by moehoward » Tue Jun 19, 2018 9:19 am

Are there people out there bashing my poor little iBonds? For me this represents a portion of my fixed portfolio. (yes, I was one who loaded up in the 90s) With iBonds and SS my wife and I could withstand a 3 year down market and easily keep our current lifestyle.

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Re: I-bonds look pretty bad right now

Post by dh » Tue Jun 19, 2018 9:27 am

Mel Lindauer wrote:
Mon Jun 18, 2018 6:18 pm
Many of the Bogleheads (including me) backed up the truck and loaded up on the old 3.0, 3.3, 3.4 and 3.6% fixed rate I Bonds and are now sitting fat, dumb and happy with nice returns on a risk-free investment. But those were the good old days that we may never see again.
Mel, you are the first person that I read that wrote about the advantages of I-Bonds. I am grateful. I have come to the conclusion that some people cannot (or will not) accept what an I-Bond offers. They want to compare them to something else, without learning about what I-Bonds "do." Even though you highlight that you backed up the truck when fixed rates were 3%+ (I wish I would have bought more!), I recall people suggesting I-bonds were silly back then. I have come to accept there are just some people who don't want them in their portfolio. Me, I "get" what they do and how they play a role in my portfolio. ... as Taylor often says there are many roads to Dublin. Good luck to all! :sharebeer

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Re: I-bonds look pretty bad right now

Post by VictoriaF » Tue Jun 19, 2018 10:20 am

AlohaJoe wrote:
Sun Jun 17, 2018 8:14 pm
Nate79 wrote:
Sun Jun 17, 2018 7:44 pm
So what is your alternative?
Nominal Treasuries, real estate, stocks, private equity, gold, bitcoin, CDs, fallen angels...
Have the angels fallen far enough to make them a good buying opportunity?

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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Re: I-bonds look pretty bad right now

Post by spdoublebass » Thu Jun 21, 2018 12:04 am

I'm always hesitant to post on this forum, because most of you are way out of my league, but I guess it's the only way to learn.

I know I-Bonds don't look great, but it's all relative isn't it?

I just used this website:
http://eyebonds.info/ibonds/home1000.html

I also keyed in VBMFX (TBM) in PV. I went from random dates to May 1st 2018.
Comparing the growth of $1000

Jan 1, 2016
TBM= Final Balance $1036, Inflation Adjusted $978
I-Bonds (Bought on Jan. 1, 2016) = $1043.20

Jan 1, 2013
TBM= Final Balance $1074, Inflation Adjusted $984
I-Bonds= $1080

Jan 1, 2010
TBM= Final Balance $1279, Inflation Adjusted $1102
I-Bonds= $1191.60

Jan 1, 2005
TBM= Final Balance $1625, Inflation Adjusted $1234
I-Bonds = $1538.40

Jan 1, 2000
TBM = Final Balance $2303, Inflation Adjusted $1547
I-Bonds = $2795.20



I know with I-Bonds there is still the issues of taxes, liquidity, you can't rebalance, and the fixed rates are different now. Still, they don't seem horrible to me.

Again, I am the farthest thing from an expert with this stuff, but I can't learn unless I speak up.
I'm trying to think, but nothing happens

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Re: I-bonds look pretty bad right now

Post by ivk5 » Thu Jun 21, 2018 2:04 am

The haters are either comparing to what they “wish” iBonds provided, or to nominal instruments. It appears they either do not understand or do not value the insurance against the tail risk of unexpected inflation.

TIPS may be a more suitable comparison. Against TIPS, I believe iBonds compare favorably for individuals (within their constraints including purchase limits), but reasonable minds could differ on that one.

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Re: I-bonds look pretty bad right now

Post by Angst » Thu Jun 21, 2018 4:11 am

#Cruncher wrote:
Mon Jun 18, 2018 4:46 pm
However, there are three ways a 0.3% fixed rate I Bond could have a positive after tax real return.
I think technically there's a 4th:

If proceeds are used to pay for a qualified educational expense.

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Re: I-bonds look pretty bad right now

Post by saj » Thu Jun 21, 2018 5:03 am

I will echo what others are saying in that it depends on your goals and what you’re comparing them to. I wish I was around for the 3+% real returns.

With the current returns I find them to be great for an emergency fund for the follwing reasons:

- better rates than online savings accounts
- more liquid than a CD after 1 year. Having a bank deny an early withdrawl scares me.
- tax efficiency (hopefully) - I’m currently in the 24% bracket. If I am laid off and need to get to this tier of my EF, it probably means I’ll be in a lower bracket that year. Worst case I never need them and manage to use them for educational expenses for my (future) kids. My state also has a 5% tax on interest which might be a concern in the future (interest/divs must exceed $4800/yr). Using I bonds will avoid this tax (if I end up making >$4800 in interest/divs at some point in the future).
Last edited by saj on Thu Jun 21, 2018 6:23 am, edited 1 time in total.

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Re: I-bonds look pretty bad right now

Post by Mel Lindauer » Thu Jun 21, 2018 6:10 am

saj wrote:
Thu Jun 21, 2018 5:03 am
I will echo what others are saying in that it depends on your goals and what you’re comparing them to. I wish I was around for the 3+% real returns.

With the current returns I find them to be great for an emergency fund for the follwing reasons:

- better rates than online savings accounts
- more liquid than a CD after 1 year. Having a bank deny an early withdrawl scares me.
- tax efficiency (hopefully) - I’m currently in the 24% bracket. If I am laid off and need to get to this tier of my EF, it probably means I’ll be in a lower bracket that year. Worst case I never need them and manage to use them for educational expenses for my (future) kids. My state also has a 5% tax on interest which might be a concern in the future (interest/divs must exceed $4800/yr).
Your state's 5% tax shouldn't be a concern since I Bonds are free from state and local taxation.
Best Regards - Mel | | Semper Fi

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Re: I-bonds look pretty bad right now

Post by saj » Thu Jun 21, 2018 6:22 am

Mel Lindauer wrote:
Thu Jun 21, 2018 6:10 am
saj wrote:
Thu Jun 21, 2018 5:03 am
I will echo what others are saying in that it depends on your goals and what you’re comparing them to. I wish I was around for the 3+% real returns.

With the current returns I find them to be great for an emergency fund for the follwing reasons:

- better rates than online savings accounts
- more liquid than a CD after 1 year. Having a bank deny an early withdrawl scares me.
- tax efficiency (hopefully) - I’m currently in the 24% bracket. If I am laid off and need to get to this tier of my EF, it probably means I’ll be in a lower bracket that year. Worst case I never need them and manage to use them for educational expenses for my (future) kids. My state also has a 5% tax on interest which might be a concern in the future (interest/divs must exceed $4800/yr).
Your state's 5% tax shouldn't be a concern since I Bonds are free from state and local taxation.
Sorry if it wasn't clear, but I was pointing that out as another benefit of I bonds. If I do end up with >$4800 in dividends and interest, I still won't have to pay the tax.

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Re: I-bonds look pretty bad right now

Post by rich126 » Thu Jun 21, 2018 6:29 am

cheesepep wrote:
Sun Jun 17, 2018 7:54 pm
Bonds, at least to me, have always been a waste of money. Just buy stocks and have some cash in a savings account. Don't want the 0.1% interest rate? Oh, well.
That has always been my thought. As I'm in my mid 50s people keep telling me you need 80/20, 60/40, etc. but I don't know if you really do. And at the current rising rates, I can't see it doing anything but hurting returns. I'd rather hold quality stocks and then use cash to buy on market dips. I suppose if you have too much money then having bonds won't hurt.

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Re: I-bonds look pretty bad right now

Post by gd » Thu Jun 21, 2018 6:55 am

VictoriaF wrote:
Tue Jun 19, 2018 10:20 am
Have the angels fallen far enough to make them a good buying opportunity?
I've heard buying into fallen angels is generally a good opportunity-- but only short term.

I have noticed that when dramatic changes occur around me, it generally feels different from past experiences and both circumstances and decisions are surprisingly unclear. I would be surprised if there was not economic turbulence short- to mid-term. A modest investment in I-bonds is diversification for that time.

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Re: I-bonds look pretty bad right now

Post by JBTX » Fri Jun 22, 2018 9:37 am

diy60 wrote:
Tue Jun 19, 2018 8:34 am
SagaciousTraveler wrote:
Tue Jun 19, 2018 8:08 am
Mel Lindauer wrote:
Mon Jun 18, 2018 6:18 pm
Many of the Bogleheads (including me) backed up the truck and loaded up on the old 3.0, 3.3, 3.4 and 3.6% fixed rate I Bonds and are now sitting fat, dumb and happy with nice returns on a risk-free investment. But those were the good old days that we may never see again.
I'm waiting for those days and the days where CD's were something like 17%-18% like I hear about in the 80s.
Be careful what you wish for. I purchased my first house sometime around 1979, my mortgage rate was 18%. Spent the next 15 years refinancing multiple times.
And not to mention the DOW dropped below 100 I think.

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Re: I-bonds look pretty bad right now

Post by #Cruncher » Fri Jun 22, 2018 12:18 pm

#Cruncher wrote:
Mon Jun 18, 2018 4:46 pm
3. Whenever the 6-month CPI change they use is negative, I Bonds may get a bonus because of what I call the "floor feature" ...).
The following table quantifies, for all I Bonds issued before November 2015, the bonus arising from the two cases where the CPI change was negative. [1] For example, scroll down to see that a $10,000 0.0% fixed rate one bought May 2008 benefits $369 in real terms. Over the 10.5 years until November 2018 this is equivalent to having a fixed rate 0.35% points higher.

Code: Select all

                           ------------ Bonus -----------
           Fixed  Yrs to                     Both  Annual
 Bought     Rate  Nov 18   May 09  May 15  on 10K  Return

Code: Select all

Sep 1998   3.40%   20.17    1.14%            $114   0.06% [2]
Nov 1998   3.30%   20.00    1.19%            $119   0.06%
May 1999   3.30%   19.50    1.19%            $119   0.06%
Nov 1999   3.40%   19.00    1.14%            $114   0.06%
May 2000   3.60%   18.50    1.04%            $104   0.06%
Nov 2000   3.40%   18.00    1.14%            $114   0.06%
May 2001   3.00%   17.50    1.34%            $134   0.08%
Nov 2001   2.00%   17.00    1.84%            $184   0.11%
May 2002   2.00%   16.50    1.84%            $184   0.11%
Nov 2002   1.60%   16.00    2.04%   0.01%    $205   0.13%
May 2003   1.10%   15.50    2.30%   0.26%    $256   0.16%
Nov 2003   1.10%   15.00    2.30%   0.26%    $256   0.17%
May 2004   1.00%   14.50    2.35%   0.31%    $266   0.18%
Nov 2004   1.00%   14.00    2.35%   0.31%    $266   0.19%
May 2005   1.20%   13.50    2.24%   0.21%    $245   0.18%
Nov 2005   1.00%   13.00    2.35%   0.31%    $266   0.20%
May 2006   1.40%   12.50    2.15%   0.11%    $225   0.18%
Nov 2006   1.40%   12.00    2.15%   0.11%    $225   0.19%
May 2007   1.30%   11.50    2.20%   0.16%    $236   0.20%
Nov 2007   1.20%   11.00    2.24%   0.21%    $245   0.22%
May 2008   0.00%   10.50    2.86%   0.81%    $369   0.35% [3]
Nov 2008   0.70%   10.00    2.50%   0.46%    $297   0.29%
May 2009   0.10%    9.50    2.81%   0.76%    $358   0.37%
Nov 2009   0.30%    9.00            0.65%     $65   0.07%
May 2010   0.20%    8.50            0.70%     $70   0.08%
Nov 2010   0.00%    8.00            0.81%     $81   0.10%
May 2011   0.00%    7.50            0.81%     $81   0.11%
Nov 2011   0.00%    7.00            0.81%     $81   0.11%
May 2012   0.00%    6.50            0.81%     $81   0.12%
Nov 2012   0.00%    6.00            0.81%     $81   0.13%
May 2013   0.00%    5.50            0.81%     $81   0.15%
Nov 2013   0.20%    5.00            0.70%     $70   0.14%
May 2014   0.10%    4.50            0.76%     $76   0.17%
Nov 2014   0.00%    4.00            0.81%     $81   0.20%
May 2015   0.00%    3.50            0.81%     $81   0.23%
  1. These were the -2.78% and -0.80% semi-annual inflation rates announced May 2009 and May 2015 as shown here.
  2. Example of bonus calculation for 3.40% fixed rate I Bond bought September 1998. Without the floor feature the composite rate would have been -2.25%:

    Code: Select all

    composite rate = fixed rate + ( 2 * inflation rate ) + ( fixed rate * inflation rate )
           -0.0225 = 0.0340     + ( 2 * -0.0278        ) + ( 0.0340     * -0.0278        )
    But with the floor feature the composite rate actually used to value this I Bond for six months was 0%. This was a bonus of 1.14%:
    1.14% = 1 / (1 - 2.25% / 2) - 1
  3. The floor feature is most beneficial for I Bonds with a 0% fixed rate. For example, a $10,000 0.0% fixed rate I Bond bought May 2008 benefits from the two applications of the floor by $369. This is in real terms. Since the CPI applied to this Bond increased 19.6% from 208.490 in September 2007 to 249.554 in March 2018 (as shown here), this is about $440 in nominal terms. Without the floor feature the bond's value would only be about $12,000 in November 2018 instead of its actual value of $12,420.

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Re: I-bonds look pretty bad right now

Post by beardsworth » Fri Jun 22, 2018 1:19 pm

If someone started a thread saying that I''ve been so depressed ever since I had a stroke and can't easily walk anymore, it would seem like an insensitive form of gloating for others to reply, Too bad, I run a half-marathon every weekend. Similarly, if someone posted that I'm so lonely in my personal life and just can't seem to find the right partner, it would seem like an insensitve form of gloating for others to reply, Well, I've been happily married for years, and so have all my closest friends.

And yet it has become a regular feature of these threads, about the advisbability of buying I Bonds at current rates, that some people will show up to post: Well, I've been making big bucks on them, because I really backed up the truck when they were offering 3.6% plus inflation.

This has now happened many, many times, and it seems like a form of Look-what-I-have-that-you'll-never-get type of gloating. It's also irrelevant to a discussion of the attractiveness of I Bond returns now, not at the rates being offered more than 15 years ago. That's my opinion. I'm vicariously happy (truly, I am) for those who "got in while the gettin' was good," but otherwise I find the repeated boasting and self-satisfaction both unattractive and, in the current bond environment and thread topics, unhelpful.

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Re: I-bonds look pretty bad right now

Post by spdoublebass » Fri Jun 22, 2018 1:33 pm

spdoublebass wrote:
Thu Jun 21, 2018 12:04 am
I'm always hesitant to post on this forum, because most of you are way out of my league, but I guess it's the only way to learn.

I know I-Bonds don't look great, but it's all relative isn't it?

I just used this website:
http://eyebonds.info/ibonds/home1000.html

I also keyed in VBMFX (TBM) in PV. I went from random dates to May 1st 2018.
Comparing the growth of $1000

Jan 1, 2016
TBM= Final Balance $1036, Inflation Adjusted $978
I-Bonds (Bought on Jan. 1, 2016) = $1043.20

Jan 1, 2013
TBM= Final Balance $1074, Inflation Adjusted $984
I-Bonds= $1080

Jan 1, 2010
TBM= Final Balance $1279, Inflation Adjusted $1102
I-Bonds= $1191.60

Jan 1, 2005
TBM= Final Balance $1625, Inflation Adjusted $1234
I-Bonds = $1538.40

Jan 1, 2000
TBM = Final Balance $2303, Inflation Adjusted $1547
I-Bonds = $2795.20



I know with I-Bonds there is still the issues of taxes, liquidity, you can't rebalance, and the fixed rates are different now. Still, they don't seem horrible to me.

Again, I am the farthest thing from an expert with this stuff, but I can't learn unless I speak up.
I don't mean to quote myself, but nobody replied to my post up thread.

I'm just curious what I am missing. Again, only trying to wrap my head around things. I currently do not own any I-Bonds, but I was planning on purchasing some in the near future.
I'm trying to think, but nothing happens

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Re: I-bonds look pretty bad right now

Post by mbasherp » Fri Jun 22, 2018 1:40 pm

beardsworth wrote:
Fri Jun 22, 2018 1:19 pm
This has now happened many, many times, and it seems like a form of Look-what-I-have-that-you'll-never-get type of gloating. It's also irrelevant to a discussion of the attractiveness of I Bond returns now, not at the rates being offered more than 15 years ago. That's my opinion. I'm vicariously happy (truly, I am) for those who "got in while the gettin' was good," but otherwise I find the repeated boasting and self-satisfaction both unattractive and, in the current bond environment and thread topics, unhelpful.
I disagree. When I see others post/gloat about having higher fixed rate I bonds, it reminds me that the desirability of an asset is rarely constant. You have to remember that they weren’t some screaming buy back then, either. Because we don’t know the future, we don’t know what assets or interest rates will be good or bad 10 or 30 years from now. When I see those posts, I remind myself that sometimes the “best” buys are things that didn’t seem so at the time. Much like rebalancing.

One thing I know for sure, nobody was high fiving over a fixed 3% ibond 15 years ago. The fact that those are desirable now is a lesson in itself.

I’ll continue adding ibonds at a moderate pace.

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Re: I-bonds look pretty bad right now

Post by beardsworth » Fri Jun 22, 2018 1:42 pm

mbasherp wrote:
Fri Jun 22, 2018 1:40 pm
I’ll continue adding ibonds at a moderate pace.
So do I.

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Re: I-bonds look pretty bad right now

Post by jeffyscott » Fri Jun 22, 2018 1:58 pm

spdoublebass wrote:
Fri Jun 22, 2018 1:33 pm
spdoublebass wrote:
Thu Jun 21, 2018 12:04 am
I'm always hesitant to post on this forum, because most of you are way out of my league, but I guess it's the only way to learn.

I know I-Bonds don't look great, but it's all relative isn't it?

I just used this website:
http://eyebonds.info/ibonds/home1000.html

I also keyed in VBMFX (TBM) in PV. I went from random dates to May 1st 2018.
Comparing the growth of $1000

Jan 1, 2016
TBM= Final Balance $1036, Inflation Adjusted $978
I-Bonds (Bought on Jan. 1, 2016) = $1043.20

Jan 1, 2013
TBM= Final Balance $1074, Inflation Adjusted $984
I-Bonds= $1080

Jan 1, 2010
TBM= Final Balance $1279, Inflation Adjusted $1102
I-Bonds= $1191.60

Jan 1, 2005
TBM= Final Balance $1625, Inflation Adjusted $1234
I-Bonds = $1538.40

Jan 1, 2000
TBM = Final Balance $2303, Inflation Adjusted $1547
I-Bonds = $2795.20



I know with I-Bonds there is still the issues of taxes, liquidity, you can't rebalance, and the fixed rates are different now. Still, they don't seem horrible to me.

Again, I am the farthest thing from an expert with this stuff, but I can't learn unless I speak up.
I don't mean to quote myself, but nobody replied to my post up thread.

I'm just curious what I am missing. Again, only trying to wrap my head around things. I currently do not own any I-Bonds, but I was planning on purchasing some in the near future.
The only thing I see is that you are showing an inflation adjustment for the bond fund, but not the I-bond. The figures from that site are based on total returns to I-bonds and so can just be compared to the bond fund directly, for example:

Jan 1, 2013
TBM= Final Balance $1074
I-Bonds= $1080

Or using your inflation factor, comparison should be:
Jan 1, 2013
TBM= Final Balance $1074, Inflation Adjusted $984
I-Bonds= $1080, Inflation Adjusted $989
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: I-bonds look pretty bad right now

Post by dcabler » Fri Jun 22, 2018 2:15 pm

beardsworth wrote:
Fri Jun 22, 2018 1:42 pm
mbasherp wrote:
Fri Jun 22, 2018 1:40 pm
I’ll continue adding ibonds at a moderate pace.
So do I.
Same here, but only because a moderate pace is all that's allowed. :D

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Re: I-bonds look pretty bad right now

Post by spdoublebass » Fri Jun 22, 2018 2:42 pm

jeffyscott wrote:
Fri Jun 22, 2018 1:58 pm

The only thing I see is that you are showing an inflation adjustment for the bond fund, but not the I-bond. The figures from that site are based on total returns to I-bonds and so can just be compared to the bond fund directly, for example:

Jan 1, 2013
TBM= Final Balance $1074
I-Bonds= $1080

Or using your inflation factor, comparison should be:
Jan 1, 2013
TBM= Final Balance $1074, Inflation Adjusted $984
I-Bonds= $1080, Inflation Adjusted $989
Should have thought of that. Thanks.
I'm trying to think, but nothing happens

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Re: I-bonds look pretty bad right now

Post by spdoublebass » Fri Jun 22, 2018 5:43 pm

jeffyscott wrote:
Fri Jun 22, 2018 1:58 pm

The only thing I see is that you are showing an inflation adjustment for the bond fund, but not the I-bond. The figures from that site are based on total returns to I-bonds and so can just be compared to the bond fund directly, for example:

Jan 1, 2013
TBM= Final Balance $1074
I-Bonds= $1080

Or using your inflation factor, comparison should be:
Jan 1, 2013
TBM= Final Balance $1074, Inflation Adjusted $984
I-Bonds= $1080, Inflation Adjusted $989
Wait a second. Aren't the whole point of I-Bonds that they keep pace with inflation? Why would I have to adjust for them?
I'm trying to think, but nothing happens

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Re: I-bonds look pretty bad right now

Post by jeffyscott » Fri Jun 22, 2018 6:14 pm

spdoublebass wrote:
Fri Jun 22, 2018 5:43 pm
jeffyscott wrote:
Fri Jun 22, 2018 1:58 pm

The only thing I see is that you are showing an inflation adjustment for the bond fund, but not the I-bond. The figures from that site are based on total returns to I-bonds and so can just be compared to the bond fund directly, for example:

Jan 1, 2013
TBM= Final Balance $1074
I-Bonds= $1080

Or using your inflation factor, comparison should be:
Jan 1, 2013
TBM= Final Balance $1074, Inflation Adjusted $984
I-Bonds= $1080, Inflation Adjusted $989
Wait a second. Aren't the whole point of I-Bonds that they keep pace with inflation? Why would I have to adjust for them?
You don't, but why did you do an inflation adjustment to TBM? Maybe I misinterpreted your point, which I thought was comparing inflation adjusted TBM to the nominal I-bond value.

If I bought the I-bond in January 2013, I now have $1080 nominal dollars, I do not have $1080 inflation adjusted, 2013 dollars.

Since it was a 0% I-bond, I should have (at least) $1000 inflation adjusted 2013 dollars. Based on your inflation figures, I don't. I do not know if that is because of the lag or if the inflation adjustment that you applied to TBM was wrong.
Time is your friend; impulse is your enemy. - John C. Bogle

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spdoublebass
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Re: I-bonds look pretty bad right now

Post by spdoublebass » Fri Jun 22, 2018 6:17 pm

jeffyscott wrote:
Fri Jun 22, 2018 6:14 pm

You don't, but why did you do an inflation adjustment to TBM? Maybe I misinterpreted your point, which I thought was comparing inflation adjusted TBM to the nominal I-bond value.

If I bought the I-bond in January 2013, I now have $1080 nominal dollars, I do not have $1080 inflation adjusted, 2013 dollars.

Since it was a 0% I-bond, I should have (at least) $1000 inflation adjusted 2013 dollars. Based on your inflation figures, I don't. I do not know if that is because of the lag or if the inflation adjustment that you applied to TBM was wrong.
Yeah, You are right. You only need the final balance. That's the only one that matters. I don't know what I was thinking.
I'm trying to think, but nothing happens

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jeffyscott
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Re: I-bonds look pretty bad right now

Post by jeffyscott » Fri Jun 22, 2018 6:36 pm

It is interesting that after 5+ years, according to the ibond there's only been 8% cummulative inflation.

I know when I bought them, I was expecting larger nominal returns than that.
Time is your friend; impulse is your enemy. - John C. Bogle

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