EE Bonds and Sequence of Returns Risk

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SantaClaraSurfer
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EE Bonds and Sequence of Returns Risk

Post by SantaClaraSurfer »

We are launching our 20 year EE bond ladder this month and I've really had to think this through since it's a strategy that requires consistency and follow through.

We are aiming for investing approx. $10,000 per year in EE Bonds and expect to redeem them at maturity in 20 years, creating a steady stream of $20,000 in income every year minus federal taxes on the interest.

I've crunched the numbers and gotten some advice on this and basically feel very good about it. (Especially this comment with pros and cons from langelgjm and this very useful annual count down chart of comparative return over time from noobvestor that lets you see the return you'd need from a comparable investment to beat the EE Bond each year as it moves to maturity.)

What I'd like to put up for discussion is that the EE Bond's doubling at maturity coupled with its tax deferred growth is a unique characteristic that helps reduce the sequence of returns risk after we are no longer earning income.

Specifically, assuming that we complete this bond ladder in twenty years purchasing $10,000 EE Bonds per year. That will mean that in 2040 on the month prior to our first redemption, that we will have 20 separate lots of EE bonds worth around $200,000 total on the books but each generating a fixed, predictable and market beating return as they approach maturity:

2040 Maturity $10,000 EE Bond = 100% return for $20,000
2041 Maturity $10,000 EE Bond = 42.42% return in 1 year for $20,000
2042 Maturity $10,000 EE Bond = 25.99% return in 2 years for $20,000 and so on...

Essentially, after you've endured the 20 year wait, and assuming you've set up the complete bond ladder, the situation reverses and the EE Bond investor benefits from the exact aspect of the EE Bond that makes it less appealing now: the returns only kick in at the very end.

In effect, you've got guaranteed income, tax deferred, in an investment that is predictably earning 100% the year before it matures. It may be difficult to see that $10,000 sitting doing virtually nothing for year after year, but in the final few years before maturity, there will be no better alternative investment vehicle in which to put that money and get that guaranteed return.

That sets an EE Bond investor up to weather a scenario that threatens a poor sequence of returns or a market decline in the years just preceding retirement.

For example, in a worst case sequence of returns situation, with a massive market drop AND inflation the year you stop earning income, you would have lifted your guaranteed income floor by $20,000 per year with zero risk to your principal and zero taxes owed prior to redemption. That $20,000 in income would require $500,000 in retirement savings if it were funded with a 4% withdrawal. A massive market downturn might threaten your overall retirement savings and net worth, but if you've invested in EE bonds, the risk for that portion of your retirement income is simply off the table.

On top of that, at redemption, there's no state and local tax, no capital gains to consider, just federal tax on the interest.

And EE Bonds are predictable. Even if there were hyper inflation impacting your younger EE Bonds in the ladder at some point you'd have a clear chart spelling out what return in what timeframe the comparative fixed income investment would have to beat in order to justify switching. Further, IF those rates justified switching, there's almost zero tax consequence to do so...you're just converting the principal to a new investment. (I think this is overlooked as an option. As unexpected inflation increases, the first thing would be that your new EE Bond rates would increase, and for two, if inflation got ugly enough to threaten your EE Bonds, you'd still be in the driver's seat, you either get your 3.5% or you switch to the better alternative, 3.5% is the floor that you're locking in.)

A massive market drop and inflation the year you stop earning income would be chilling. But it would look very different having a 20 year bond ladder with EE Bonds as a fixed income backstop.

(Update: this scales up and down perfectly. It's accessible to everyone and can be set up as an auto-scheduled investement. You can do this for $25 a month, $200 a month, or $20,000 per year for a couple with two Treasury Direct accounts, and so on. You can also redeem in smaller increments, as well!)
Last edited by SantaClaraSurfer on Thu Sep 17, 2020 11:51 am, edited 3 times in total.
alluringreality
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Re: EE Bonds and Sequence of Returns Risk

Post by alluringreality »

My main reason for buying is to setup an income ladder for retirement, basically in order to avoid the current situation in the future, which could be recency bias. Since inflation has generally trended down over much of my years, I question if that might be another recency bias. If inflation somehow exceeds an average of 3.5%, then I Bonds might make more sense. At this time I figure EE bonds may be more likely to exceed I bond returns over my timeline, due to Fed inflation targets, but I could be wrong. If I am not able to hold for 20 years, then EE bonds could be a comparably terrible option, so I think of I bonds as the more liquid choice. Doubling a limited portion of my assets seems like a reasonable decision for me at this time, and in my planning for the future I haven't been able to talk myself into a larger allocation towards EE bonds over I bonds. My primary reservation is that it's difficult to say what double current value might actually be worth in real terms after 20 years, yet waiting could mean changed terms, so I'm planning on buying again this year.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)
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SantaClaraSurfer
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Re: EE Bonds and Sequence of Returns Risk

Post by SantaClaraSurfer »

alluringreality wrote: Wed Sep 16, 2020 6:26 pm My primary reservation is that it's difficult to say what double current value might actually be worth in real terms after 20 years, yet waiting could mean changed terms, so I'm planning on buying again this year.
I agree that unexpected inflation is the big question mark with the EE Bonds.

For our own strategy, we purchase both I-Bonds and EE Bonds and Tax free Muni Bonds in our taxable. But, given those three, the EE Bonds' 3.5% rate coupled with the predictability seem very worthwhile to me.

I would put it this way. You know EXACTLY what the EE Bonds will be worth in twenty years. (Double.)

You don't know what the exact spending power of that will amount will be.

However, that's not that unusual with any retirement investment. And in this case it's guaranteed and many basis points better than current alternatives.

From my point of view, lifting the income floor for a given retirement year with an amount that you know will be 2x today's dollars is a pretty awesome use of those dollars given the opportunity costs.

It's not the only investment you could/should be making, but EE Bonds are a great context for everything else you're doing.
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Re: EE Bonds and Sequence of Returns Risk

Post by aristotelian »

OP, if you don't mind answering, what is your age? I started buying EE bonds this year at age 45. In my mind, I will be creating a ladder that I can use from age 66-69 to provide guaranteed income while delaying SS. I already have 3 X $10K in I Bonds that I can use to extend the ladder on the front end to cover 63-65. My biggest anxiety with EE Bonds is that the longer I continue purchasing, the higher risk I will die without using them. Not a terrible outcome (financially) but I'd prefer not to force my wife or kids to have to deal with Treasury Direct.

I elected to buy EE Bonds rather than I Bonds this year due to 0% fixed rate on I Bonds. I will probably continue buying EE Bonds for the next 3-4 years to complete my ladder through Age 69, then resume buying I Bonds when hopefully the fixed rate improves.
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Re: EE Bonds and Sequence of Returns Risk

Post by Juice3 »

SantaClaraSurfer wrote: Wed Sep 16, 2020 7:25 pm
I would put it this way. You know EXACTLY what the EE Bonds will be worth in twenty years. (Double.)
This is known at the time of purchase. Keep in mind there is a history of the maturity period being extended. I would expect this to happen if the current low interest rates continue.
Live
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Re: EE Bonds and Sequence of Returns Risk

Post by Live »

My wife and I have done similar for i-bonds over the past decade, as one form of longevity insurance for our 80's (and 90's if we continue) with guaranteed inflation protection, less federal-only taxes on earnings. $25k/yr including the $5k tax refund allowed. The actual rates have been low, though.But a good place for safety and inflation protection in one corner of our planning. Not hyped by investment houses, since no fees for them, though. :wink:

Same for EE's in the future as you are doing, as long as the rules for new EE's don't change soon. But you are betting that inflation does not eat your return, and that you will not need the money for 20 years. Good luck!
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Re: EE Bonds and Sequence of Returns Risk

Post by Grt2bOutdoors »

Live wrote: Thu Sep 17, 2020 9:40 am My wife and I have done similar for i-bonds over the past decade, as one form of longevity insurance for our 80's (and 90's if we continue) with guaranteed inflation protection, less federal-only taxes on earnings. $25k/yr including the $5k tax refund allowed. The actual rates have been low, though.But a good place for safety and inflation protection in one corner of our planning. Not hyped by investment houses, since no fees for them, though. :wink:

Same for EE's in the future as you are doing, as long as the rules for new EE's don't change soon. But you are betting that inflation does not eat your return, and that you will not need the money for 20 years. Good luck!
So long as one does not place all of their assets in EE bonds then the risk of inflation should be mitigated. It’s amazing how in exactly 5 years time, people are latching on to the ladder concept with EE bonds. The biggest issue I have with the Series I bonds is the zero fixed rate and lower reported inflation which affects your return. In essence, the variable rate could lead to less earnings not more in 20 years. I see this with some of the I bonds I’ve held now for almost 10 years, the rate of inflation would need to really move up to equal a doubling of the bond value in the subsequent 10 years.
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SantaClaraSurfer
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Re: EE Bonds and Sequence of Returns Risk

Post by SantaClaraSurfer »

aristotelian wrote: Thu Sep 17, 2020 9:01 am OP, if you don't mind answering, what is your age? I started buying EE bonds this year at age 45. In my mind, I will be creating a ladder that I can use from age 66-69 to provide guaranteed income while delaying SS. I already have 3 X $10K in I Bonds that I can use to extend the ladder on the front end to cover 63-65. My biggest anxiety with EE Bonds is that the longer I continue purchasing, the higher risk I will die without using them. Not a terrible outcome (financially) but I'd prefer not to force my wife or kids to have to deal with Treasury Direct.

I elected to buy EE Bonds rather than I Bonds this year due to 0% fixed rate on I Bonds. I will probably continue buying EE Bonds for the next 3-4 years to complete my ladder through Age 69, then resume buying I Bonds when hopefully the fixed rate improves.
I'm 50 and my wife is 40. I think maybe because we are all Gen X and there's a bigger population cohort ahead of us and behind us (ie. closer to retirement and further from retirement), this option isn't as popular due to the 20 year timeframe, but whether I-Bonds or EE Bonds this strategy really pencils out for the 40-50 y.o. age range.

Like I mentioned above, EE Bonds are just one part of what we are doing, but I'm really sold on the concept of lifting the guaranteed income in the future. I really think it applies to almost everyone from small contributions to larger.
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Re: EE Bonds and Sequence of Returns Risk

Post by Grt2bOutdoors »

SantaClaraSurfer wrote: Thu Sep 17, 2020 10:32 am
aristotelian wrote: Thu Sep 17, 2020 9:01 am OP, if you don't mind answering, what is your age? I started buying EE bonds this year at age 45. In my mind, I will be creating a ladder that I can use from age 66-69 to provide guaranteed income while delaying SS. I already have 3 X $10K in I Bonds that I can use to extend the ladder on the front end to cover 63-65. My biggest anxiety with EE Bonds is that the longer I continue purchasing, the higher risk I will die without using them. Not a terrible outcome (financially) but I'd prefer not to force my wife or kids to have to deal with Treasury Direct.

I elected to buy EE Bonds rather than I Bonds this year due to 0% fixed rate on I Bonds. I will probably continue buying EE Bonds for the next 3-4 years to complete my ladder through Age 69, then resume buying I Bonds when hopefully the fixed rate improves.
I'm 50 and my wife is 40. I think maybe because we are all Gen X and there's a bigger population cohort ahead of us and behind us (ie. closer to retirement and further from retirement), this option isn't as popular due to the 20 year timeframe, but whether I-Bonds or EE Bonds this strategy really pencils out for the 40-50 y.o. age range.

Like I mentioned above, EE Bonds are just one part of what we are doing, but I'm really sold on the concept of lifting the guaranteed income in the future. I really think it applies to almost everyone from small contributions to larger.
I’ve been buying them since mid 40s so you aren’t alone. Nothing wrong with establishing a floor for retirement income.
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Re: EE Bonds and Sequence of Returns Risk

Post by Rookie »

This is nothing new.
Build Your Own Annuity
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Re: EE Bonds and Sequence of Returns Risk

Post by Grt2bOutdoors »

Rookie wrote: Thu Sep 17, 2020 10:52 am This is nothing new.
Build Your Own Annuity
And what if people were doing this way before that article came out? Hmm?
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Re: EE Bonds and Sequence of Returns Risk

Post by Live »

I think 2020 has led us to look for safety more than in other years. Hard to get any interest, though, so I think the EE plan seems great as long as the 20-year doubling holds up. An I-bond ladder like ours could be supplemented by EE bonds for longevity insurance with a 10 year overlap, either as an EE substitute or an addition--are there better options over at Treasury direct?
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Re: EE Bonds and Sequence of Returns Risk

Post by Grt2bOutdoors »

Live wrote: Thu Sep 17, 2020 11:53 am I think 2020 has led us to look for safety more than in other years. Hard to get any interest, though, so I think the EE plan seems great as long as the 20-year doubling holds up. An I-bond ladder like ours could be supplemented by EE bonds for longevity insurance with a 10 year overlap, either as an EE substitute or an addition--are there better options over at Treasury direct?
No better options as of now.
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Re: EE Bonds and Sequence of Returns Risk

Post by bligh »

Though your reasoning had more nuance to it, it matched mine when I started building my EE Bond & I Bond ladder 5 years ago. As you can imagine, so far I have been happy with the decision. I buy EE Bonds/ I Bonds each year to provide an income floor in my retirement years, they also help me expand my tax deferred space and shift more of my income to lower income retirement years (I figure, if my tax rate is the same or higher in my retirement years, it will be a good problem to have, since it will mean that I have been doing really well). I also live in a high tax state, regardless of whether I retire here or not, they also help me save on those pesky state income taxes.

The same goes with if my EE Bonds & I Bonds are my poorest performing investments. (I will be glad that my primary portfolio will have done so well over the 20 year period). Either way I sure feel smart holding those EE Bonds and I Bonds while people are settling for the current bond yields.

One risk that should be considered is the possibility of the terms of the EE Bond changing (or going away altogether). People on this board have brought up the possibility of EE Bonds increasing their doubling period. (This doubling period was increased from 17 years to its current 20 years so there is precedent for this).
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Re: EE Bonds and Sequence of Returns Risk

Post by JBTX »

EE bonds are interesting. Hold 20 years and dramatically exceed current treasury bond rates. While there is inflation risk, for every year you hold it, the YTM goes up. So if inflation pops up 5 years, at that point the YTM is higher, maybe around 5%.

If there is deflation or negative interest rates, even earning 0.1 or whatever they earn short term beats that.

Ultimately I don't know if I have the liquidity to dump $20k in every year, or wait until I'm almost 80 to get a return. We already do ibonds.
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Re: EE Bonds and Sequence of Returns Risk

Post by simplesimon »

bligh wrote: Thu Sep 17, 2020 12:09 pm One risk that should be considered is the possibility of the terms of the EE Bond changing (or going away altogether). People on this board have brought up the possibility of EE Bonds increasing their doubling period. (This doubling period was increased from 17 years to its current 20 years so there is precedent for this).
Did this change affect existing EE bonds or only new purchases?
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Re: EE Bonds and Sequence of Returns Risk

Post by neurosphere »

Another benefit, which may have already been mentioned, is that you do not NEED to cash them in at 20 years. Suppose inflation is very low in 20 years (e.g. similar rate environment we have today). If you do not need the cash, and have other taxable income (e.g. SS, RMDs, etc), you can simply wait to cash the EE bond to realize the income in a more opportune year (through year 30 of the bond). I realize that typically once RMDs and Social Security have started, there isn't likely to be many situations where delaying redemption is beneficial. But it does give an additional small amount of flexibility.
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Re: EE Bonds and Sequence of Returns Risk

Post by Grt2bOutdoors »

simplesimon wrote: Thu Sep 17, 2020 12:33 pm
bligh wrote: Thu Sep 17, 2020 12:09 pm One risk that should be considered is the possibility of the terms of the EE Bond changing (or going away altogether). People on this board have brought up the possibility of EE Bonds increasing their doubling period. (This doubling period was increased from 17 years to its current 20 years so there is precedent for this).
Did this change affect existing EE bonds or only new purchases?
New purchases, they don’t go back and change terms of previously issued securities.
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Re: EE Bonds and Sequence of Returns Risk

Post by AlwaysLearningMore »

Grt2bOutdoors wrote: Thu Sep 17, 2020 10:53 am
Rookie wrote: Thu Sep 17, 2020 10:52 am This is nothing new.
Build Your Own Annuity
And what if people were doing this way before that article came out? Hmm?
The first post in this thread https://tinyurl.com/y2cy8ylr has the link to the 1984 New York Times article YOUR MONEY; SAVING BONDS AS AN ANNUITY which describes this approach. (For those accustomed to today's near-zero rates, the rates mentioned in the 1984 article are somewhat startling.)
Last edited by AlwaysLearningMore on Thu Sep 17, 2020 3:35 pm, edited 1 time in total.
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Re: EE Bonds and Sequence of Returns Risk

Post by Grt2bOutdoors »

AlwaysLearningMore wrote: Thu Sep 17, 2020 1:24 pm
Grt2bOutdoors wrote: Thu Sep 17, 2020 10:53 am
Rookie wrote: Thu Sep 17, 2020 10:52 am This is nothing new.
Build Your Own Annuity
And what if people were doing this way before that article came out? Hmm?
The first post in this thread has the link to the 1984 New York Times article YOUR MONEY; SAVING BONDS AS AN ANNUITY which describes this approach. (For those accustomed to today's near-zero rates, the rates mentioned in the 1984 article are somewhat startling.)
That’s interesting, I read the times back then on occasion for school but had zero means to be purchasing even a dollars worth of bonds back then.
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Re: EE Bonds and Sequence of Returns Risk

Post by simplesimon »

Grt2bOutdoors wrote: Thu Sep 17, 2020 12:41 pm
simplesimon wrote: Thu Sep 17, 2020 12:33 pm
bligh wrote: Thu Sep 17, 2020 12:09 pm One risk that should be considered is the possibility of the terms of the EE Bond changing (or going away altogether). People on this board have brought up the possibility of EE Bonds increasing their doubling period. (This doubling period was increased from 17 years to its current 20 years so there is precedent for this).
Did this change affect existing EE bonds or only new purchases?
New purchases, they don’t go back and change terms of previously issued securities.
That's what I thought. So what is the risk of terms changing for EE bonds purchased today?
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Re: EE Bonds and Sequence of Returns Risk

Post by Grt2bOutdoors »

simplesimon wrote: Thu Sep 17, 2020 3:11 pm
Grt2bOutdoors wrote: Thu Sep 17, 2020 12:41 pm
simplesimon wrote: Thu Sep 17, 2020 12:33 pm
bligh wrote: Thu Sep 17, 2020 12:09 pm One risk that should be considered is the possibility of the terms of the EE Bond changing (or going away altogether). People on this board have brought up the possibility of EE Bonds increasing their doubling period. (This doubling period was increased from 17 years to its current 20 years so there is precedent for this).
Did this change affect existing EE bonds or only new purchases?
New purchases, they don’t go back and change terms of previously issued securities.
That's what I thought. So what is the risk of terms changing for EE bonds purchased today?
It could happen, the last time they did it was in 1986, cutting the rate from 7.5% to 4 percent, then going to a variable earnings based on a percentage of the 5 year Treasury before moving to the lower fixed rate coupons. Just 10 years ago they had fixed rates of 1.4 percent, then 1.1 percent, then 0.60 percent before they brought it down to the current token amount but kept the doubling feature the same at 20 years. If they lengthen the double period then I believe there will be a significant drop off of sales. As it is they don’t currently sell a huge amount of them annually.
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Re: EE Bonds and Sequence of Returns Risk

Post by petercooperjr »

They don't change terms of their bonds once issued, but if you're planning on "I'll buy EE bonds for the next 20 years" you may want to think through some contingency plans if in future years the maximum amount per year is reduced or the doubling time is increased. Both have changed in the past and likely will change again. And when they change them it's not always with much notice (reducing the limits for 2008 was done with only 1 month's notice, for example).
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Re: EE Bonds and Sequence of Returns Risk

Post by SchruteB&B »

petercooperjr wrote: Thu Sep 17, 2020 3:39 pm
And when they change them it's not always with much notice (reducing the limits for 2008 was done with only 1 month's notice, for example).
Now this I never knew! Thank you for mentioning this. We have been buying EE bonds since age 42 and hope/plan to buy to complete a 10 year ladder to use from age 62 to 72. I have the funds for 2020’s purchase and have just been putting it off. Will buy soon!
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Re: EE Bonds and Sequence of Returns Risk

Post by simplesimon »

Does it make sense to buy them at age 35? I may be in a higher tax bracket at age 55, but EE bonds look like a free lunch compared to the 10/30 year Treasury (if held to maturity) and I would count them as part of my bond allocation.
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Re: EE Bonds and Sequence of Returns Risk

Post by Faith20879 »

simplesimon wrote: Fri Sep 18, 2020 7:21 am Does it make sense to buy them at age 35?
It depends. You really don't want to have they mature in your peak earning years. The bonds you buy today will have to be cashed out when you turn 65 (30 years from now). If you are in a high tax bracket at age 65, it might throw a monkey wrench in your tax planning.
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Re: EE Bonds and Sequence of Returns Risk

Post by aristotelian »

simplesimon wrote: Fri Sep 18, 2020 7:21 am Does it make sense to buy them at age 35? I may be in a higher tax bracket at age 55, but EE bonds look like a free lunch compared to the 10/30 year Treasury (if held to maturity) and I would count them as part of my bond allocation.
IMO, yes, the younger your are the more it makes sense to buy them since the odds are better that you will live to see them mature. Although they will stop earning full interest at 20 years, I believe you can let them sit for another 10 years before cashing them in if you wish to avoid the tax hit. If you have any possibility of retiring early, you would be in a lower tax bracket and would have more opportunity to lessen the tax hit.
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Re: EE Bonds and Sequence of Returns Risk

Post by SantaClaraSurfer »

Put through our first purchase but slightly trimmed the amount.

We'll be buying quarterly, so there's plenty of ability to adapt our strategy as we go.

With full credit to noobvestor, I want to post their comparative Yield To Maturity chart for EE Bonds, which is especially relevant given the Fed Reserve announcing this AM a pledge to hold rates close to zero for three years. That puts the YTM chart below into perspective. Within four years, you'd have to have a guaranteed 4.16% return to beat your EE Bond and justifying pulling the money out and reinvesting.

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
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Re: EE Bonds and Sequence of Returns Risk

Post by vineviz »

Faith20879 wrote: Fri Sep 18, 2020 10:35 am
simplesimon wrote: Fri Sep 18, 2020 7:21 am Does it make sense to buy them at age 35?
It depends. You really don't want to have they mature in your peak earning years. The bonds you buy today will have to be cashed out when you turn 65 (30 years from now). If you are in a high tax bracket at age 65, it might throw a monkey wrench in your tax planning.
I agree with this.

In addition , I’d say most 35 year old investors saving for retirement shouldn’t be buying any bonds at all and especially so with after-tax dollars.

Series I bonds could be a useful component of an emergency fund, however.
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Re: EE Bonds and Sequence of Returns Risk

Post by FactualFran »

AlwaysLearningMore wrote: Thu Sep 17, 2020 1:24 pm The first post in this thread https://tinyurl.com/y2cy8ylr has the link to the 1984 New York Times article YOUR MONEY; SAVING BONDS AS AN ANNUITY which describes this approach. (For those accustomed to today's near-zero rates, the rates mentioned in the 1984 article are somewhat startling.)
EE Savings Bonds sold in 1984 had a guaranteed minimum annual yield of 7.5%, compounded semi-annually, for the first ten years, if held for at least 5 years. The redemption value after nine and a half years was slightly more than double the purchase price.
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Re: EE Bonds and Sequence of Returns Risk

Post by simplesimon »

Faith20879 wrote: Fri Sep 18, 2020 10:35 am
simplesimon wrote: Fri Sep 18, 2020 7:21 am Does it make sense to buy them at age 35?
It depends. You really don't want to have they mature in your peak earning years. The bonds you buy today will have to be cashed out when you turn 65 (30 years from now). If you are in a high tax bracket at age 65, it might throw a monkey wrench in your tax planning.
What's a better alternative for a bond held for 20-30 years?
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Re: EE Bonds and Sequence of Returns Risk

Post by FactualFran »

SantaClaraSurfer wrote: Fri Sep 18, 2020 11:33 am With full credit to noobvestor, I want to post their comparative Yield To Maturity chart for EE Bonds, which is especially relevant given the Fed Reserve announcing this AM a pledge to hold rates close to zero for three years. That puts the YTM chart below into perspective. Within four years, you'd have to have a guaranteed 4.16% return to beat your EE Bond and justifying pulling the money out and reinvesting.

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
Those yield to maturity percentages would be for an investment that earned zero interest and would double in value at 20 years. Starting May 2005 EE Savings Bonds have had a fixed interest rate that is greater than zero, with the rate depending on the issue date.
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SantaClaraSurfer
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Re: EE Bonds and Sequence of Returns Risk

Post by SantaClaraSurfer »

FactualFran wrote: Fri Sep 18, 2020 12:58 pm Those yield to maturity percentages would be for an investment that earned zero interest and would double in value at 20 years. Starting May 2005 EE Savings Bonds have had a fixed interest rate that is greater than zero, with the rate depending on the issue date.
Yes, exactly, the full info from Treasury Direct is here.

The YTM in that chart is the minimum (which in my view makes it useful to post in a thread that will be viewed over time.) The link above will provide current and historical information from TD, as you note.

I think the key point to understand is that in order to access that 20 year YTM chart, an investor needs to purchase an EE bond and initiate the 20 year countdown. None of us can go back in time and purchase previous US Savings Bonds offerings, though we all wish that we could!

I think Tipswatch is writing about EE Bonds and I Bonds intelligently and is a good reference, as well.
ThisTimeItsDifferent
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Re: EE Bonds and Sequence of Returns Risk

Post by ThisTimeItsDifferent »

FactualFran wrote: Fri Sep 18, 2020 12:58 pm
SantaClaraSurfer wrote: Fri Sep 18, 2020 11:33 am With full credit to noobvestor, I want to post their comparative Yield To Maturity chart for EE Bonds, which is especially relevant given the Fed Reserve announcing this AM a pledge to hold rates close to zero for three years. That puts the YTM chart below into perspective. Within four years, you'd have to have a guaranteed 4.16% return to beat your EE Bond and justifying pulling the money out and reinvesting.

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
Those yield to maturity percentages would be for an investment that earned zero interest and would double in value at 20 years. Starting May 2005 EE Savings Bonds have had a fixed interest rate that is greater than zero, with the rate depending on the issue date.
That's absolutely true but the current fixed rate of 0.1% makes the YTM numbers not much different, all of a whopping $19 of accrued fixed rate interest over the first 19 years on a $1000 initial investment before the final doubling of the base value at year 20!

Although the redeemable value won't decline on an EE bond like it would on a conventional bond if interest rates rise and it is sold before maturity, the near zero fixed rate of the EE bond means the YTM increases so fast it seems one would be unlikely to do better than the YTM by selling if market interest rates increase before the 20 year mark. There would be a high opportunity cost. If the annual fixed rate were 3.5% like it was in 2005, then the ability to sell at the face value plus accrued interest would be a valuable Put option.

It's like a 20 year CD where the early withdrawal penalty is nearly 100% of accrued interest.

Code: Select all

Year	Balance	YTM	Ratio YTM
0	$1,000	1.0353	2.0000	3.526%
1	$1,001	1.0371	1.9980	3.710%i
2	$1,002	1.0391	1.9960	3.914%
3	$1,003	1.0414	1.9940	4.143%
4	$1,004	1.0440	1.9920	4.401%
5	$1,005	1.0469	1.9900	4.695%
6	$1,006	1.0503	1.9880	5.031%
7	$1,007	1.0542	1.9861	5.420%
8	$1,008	1.0588	1.9841	5.876%
9	$1,009	1.0642	1.9821	6.417%
10	$1,010	1.0707	1.9801	7.070%
11	$1,011	1.0787	1.9781	7.874%
12	$1,012	1.0889	1.9762	8.887%
13	$1,013	1.1020	1.9742	10.204%
14	$1,014	1.1198	1.9722	11.985%
15	$1,015	1.1453	1.9702	14.526%
16	$1,016	1.1845	1.9683	18.446%
17	$1,017	1.2528	1.9663	25.281%
18	$1,018	1.4015	1.9643	40.155%
19	$1,019	1.9624	1.9624	96.238%
FactualFran
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Re: EE Bonds and Sequence of Returns Risk

Post by FactualFran »

ThisTimeItsDifferent wrote: Fri Sep 18, 2020 1:35 pm It's like a 20 year CD where the early withdrawal penalty is nearly 100% of accrued interest.

Code: Select all

Year	Balance	YTM	Ratio YTM
0	$1,000	1.0353	2.0000	3.526%
1	$1,001	1.0371	1.9980	3.710%i
2	$1,002	1.0391	1.9960	3.914%
3	$1,003	1.0414	1.9940	4.143%
4	$1,004	1.0440	1.9920	4.401%
5	$1,005	1.0469	1.9900	4.695%
6	$1,006	1.0503	1.9880	5.031%
7	$1,007	1.0542	1.9861	5.420%
8	$1,008	1.0588	1.9841	5.876%
9	$1,009	1.0642	1.9821	6.417%
10	$1,010	1.0707	1.9801	7.070%
11	$1,011	1.0787	1.9781	7.874%
12	$1,012	1.0889	1.9762	8.887%
13	$1,013	1.1020	1.9742	10.204%
14	$1,014	1.1198	1.9722	11.985%
15	$1,015	1.1453	1.9702	14.526%
16	$1,016	1.1845	1.9683	18.446%
17	$1,017	1.2528	1.9663	25.281%
18	$1,018	1.4015	1.9643	40.155%
19	$1,019	1.9624	1.9624	96.238%
That calculation does not take into account the semi-annual compounding and the rounding done with Savings Bonds. Taking those into account, an EE Savings Bond with a fixed earnings rate of 0.10% and a guaranteed minimum redemption value at 20 years equal to twice the purchase price would have a redemption value at 20 years that is 94.1% greater than the redemption value at 19 years.

94.1% is not the 100.00% written in a previous post. Those who are not concerned about the details can ignore the difference.
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Re: EE Bonds and Sequence of Returns Risk

Post by Day9 »

Did I use this calculator correctly? I plugged in 3.53% (doubles in 20 years), and 1.24% 20-year treasury yield. What does this tell us? EE Bonds are 40% more

Image

https://www.free-online-calculator-use. ... lator.html

1.0353^20=2

1.0124^29=1.28
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spdoublebass
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Re: EE Bonds and Sequence of Returns Risk

Post by spdoublebass »

SantaClaraSurfer wrote: Wed Sep 16, 2020 5:31 pm We are launching our 20 year EE bond ladder this month and I've really had to think this through since it's a strategy that requires consistency and follow through.
I am not trying to hijack your thread. I do have a question about which individuals should attempt this strategy.

-Do you max your 401K and IRA space already and this is extra?

While I am a big fan of EE bonds, I currently do not own any because I have room in my tax deferred accounts. I also have not reached the point where I have need of a taxable account. from what I've read here, these should be funded first. Do you agree?

I am currently debating whether or not to start a ten year EE bond ladder when I turn 40 or 45, just to carry me to age 70. While I do not have to make a decision now, my only reservation about doing so in the future is if I'd rather have that money in I Bonds or a taxable account incase I need it before the 20 years.

I know feelings are never a good sign with investing, but if I'm being honest, I just "like" EE bonds and wish I could find a way to use them, but when I think about it I don't know if they are a good fit for me and DW. Sounds like your plan is solid though, congrats.
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vineviz
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Re: EE Bonds and Sequence of Returns Risk

Post by vineviz »

spdoublebass wrote: Fri Sep 18, 2020 10:11 pm While I am a big fan of EE bonds, I currently do not own any because I have room in my tax deferred accounts. I also have not reached the point where I have need of a taxable account. from what I've read here, these should be funded first. Do you agree?
In effect, savings bonds ARE tax deferred accounts. So no need to giving up some tax-differed space in an IRA or 401k to purchase EE bonds, just as long as you don't put yourself in a position of HAVING to redeem them while you're still employed if you can avoid it. Starting at age 40 or 42 seems a safe strategy to me.
spdoublebass wrote: Fri Sep 18, 2020 10:11 pm I am currently debating whether or not to start a ten year EE bond ladder when I turn 40 or 45, just to carry me to age 70. While I do not have to make a decision now, my only reservation about doing so in the future is if I'd rather have that money in I Bonds or a taxable account incase I need it before the 20 years.
You may find that a combination of Series I and Series EE makes sense when the time comes to start purchasing them.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Topic Author
SantaClaraSurfer
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Re: EE Bonds and Sequence of Returns Risk

Post by SantaClaraSurfer »

spdoublebass wrote: Fri Sep 18, 2020 10:11 pm I am not trying to hijack your thread. I do have a question about which individuals should attempt this strategy.

-Do you max your 401K and IRA space already and this is extra?

While I am a big fan of EE bonds, I currently do not own any because I have room in my tax deferred accounts. I also have not reached the point where I have need of a taxable account. from what I've read here, these should be funded first. Do you agree?
Great questions, I'm not an expert, which is why I post here to learn and get feedback on my strategies.

1. We max our 401(k)s.
2. We rent in a VHCOL area and invest our additional savings in taxable, so our taxable strategy is particular to that situation.
3. Given the above, I like what US Savings Bonds (I Bonds and EE Bonds) offer us for a number of reasons including tax deferred investing and the fact that we can use them for true long term investment. This is not dissimilar from money other people might have locked up in the value of their house.

I do think that I Bonds and EE Bonds could be useful to many, many people. They were originally designed to be.

As far as a taxable brokerage accounts go. They don't have to be for taxable investing only. (I can't tell if you are implying that?) We started our Schwab account with money we were saving for a car, for our kids college, and for a vacation. Once we had it set up, we started finding all sorts of additional ways that having a Schwab account was really useful to us. I'm glad we went that route.
Moneybags1
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Re: EE Bonds and Sequence of Returns Risk

Post by Moneybags1 »

Anyone here in late 50's and beyond currently purchasing EE's? At what age would you stop building the EE ladder?
Spyder59
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Re: EE Bonds and Sequence of Returns Risk

Post by Spyder59 »

61, started purchasing EEs inside a family trust last year. In essence, trying to.establish a pension like approach to help my children down the road, and my wife and I can always use the funds if we live longer than anticipated. Have been purchasing I bonds since inception, never thought I would buy EEs until.a few years ago after reading Capital by Piketty. He portrays the growth of the 20th century as a demographic anomaly, and speculates that the future will more like the prior 400 years- little growth or deflation. Will use EEs for the long end of a bond sleeve. Time will tell :)
Day9
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Re: EE Bonds and Sequence of Returns Risk

Post by Day9 »

I am a younger accumulator and I am thinking of adding EE bonds. I have an 85/15 allocation, and my bond portfolio is long term treasuries and I Bonds. One downside to EE bonds is you can't use them to rebalance but since I am in the accumulation stage much of my rebalancing is done with new contributions. I already have I Bonds so it won't add another account to manage. In 20 years I may be in a high tax bracket but I could delay cashing them out another 10 years and at that point consider them part of a cash allocation. Does that all sound right to everyone? Any more feedback for a younger accumulator like me? Due to contribution limits I have until the end of the year to decide.
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vineviz
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Re: EE Bonds and Sequence of Returns Risk

Post by vineviz »

Day9 wrote: Sat Sep 19, 2020 9:26 am I am a younger accumulator and I am thinking of adding EE bonds. I have an 85/15 allocation, and my bond portfolio is long term treasuries and I Bonds. One downside to EE bonds is you can't use them to rebalance but since I am in the accumulation stage much of my rebalancing is done with new contributions. I already have I Bonds so it won't add another account to manage. In 20 years I may be in a high tax bracket but I could delay cashing them out another 10 years and at that point consider them part of a cash allocation. Does that all sound right to everyone? Any more feedback for a younger accumulator like me? Due to contribution limits I have until the end of the year to decide.
If "younger" is younger than 40 I can't see any compelling reason to be loading up on EE savings bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Day9
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Re: EE Bonds and Sequence of Returns Risk

Post by Day9 »

vineviz wrote: Sat Sep 19, 2020 9:58 am
Day9 wrote: Sat Sep 19, 2020 9:26 am I am a younger accumulator and I am thinking of adding EE bonds. I have an 85/15 allocation, and my bond portfolio is long term treasuries and I Bonds. One downside to EE bonds is you can't use them to rebalance but since I am in the accumulation stage much of my rebalancing is done with new contributions. I already have I Bonds so it won't add another account to manage. In 20 years I may be in a high tax bracket but I could delay cashing them out another 10 years and at that point consider them part of a cash allocation. Does that all sound right to everyone? Any more feedback for a younger accumulator like me? Due to contribution limits I have until the end of the year to decide.
If "younger" is younger than 40 I can't see any compelling reason to be loading up on EE savings bonds.
Right but I remember from your posts that is because you disagree with someone under 40 holding any bonds at all, right? Or is there a reason you wouldn't recommend EE bonds instead of treasury bonds specifically?
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vineviz
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Re: EE Bonds and Sequence of Returns Risk

Post by vineviz »

Day9 wrote: Sat Sep 19, 2020 10:08 am Right but I remember from your posts that is because you disagree with someone under 40 holding any bonds at all, right?
That's only part of it. Every situation is different, of course, but my experience is that many people under 40 have other ways of generating nominal returns that are competitive with the return on Series EE bonds (e.g. reduce the principal on a home mortgage, pursue a graduate degree/professional certification, etc.).

Beyond that, though, an investor is taking on a significant amount of tax risk by purchasing a fixed income asset that matures in years in which a) they probably won't need additional income and b) are likely to be the highest income years of their lives.

The yield-to-maturity of Series EE bonds is definitely good, but it's not amazing (long-term corporate bonds have yields that come very close) and it comes with more than little bit of liquidity risk. Having savings bonds that MUST be redeemed before the age of 70 could very well end up thwarting other strategies, like Roth conversions, that end up costing you more than the marginal return of the EE bonds.

Is purchasing Series EE bonds likely to prove disastrous? Definitely not. But it's not the slam dunk for a 35-year old that it is for a 45-year old.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Blue456
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Re: EE Bonds and Sequence of Returns Risk

Post by Blue456 »

vineviz wrote: Sat Sep 19, 2020 9:58 am
Day9 wrote: Sat Sep 19, 2020 9:26 am I am a younger accumulator and I am thinking of adding EE bonds. I have an 85/15 allocation, and my bond portfolio is long term treasuries and I Bonds. One downside to EE bonds is you can't use them to rebalance but since I am in the accumulation stage much of my rebalancing is done with new contributions. I already have I Bonds so it won't add another account to manage. In 20 years I may be in a high tax bracket but I could delay cashing them out another 10 years and at that point consider them part of a cash allocation. Does that all sound right to everyone? Any more feedback for a younger accumulator like me? Due to contribution limits I have until the end of the year to decide.
If "younger" is younger than 40 I can't see any compelling reason to be loading up on EE savings bonds.
Unless you are planning to retire before 60 no?
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Re: EE Bonds and Sequence of Returns Risk

Post by fujiters »

Day9 wrote: Sat Sep 19, 2020 9:26 am I am a younger accumulator and I am thinking of adding EE bonds. I have an 85/15 allocation, and my bond portfolio is long term treasuries and I Bonds. One downside to EE bonds is you can't use them to rebalance but since I am in the accumulation stage much of my rebalancing is done with new contributions. I already have I Bonds so it won't add another account to manage. In 20 years I may be in a high tax bracket but I could delay cashing them out another 10 years and at that point consider them part of a cash allocation. Does that all sound right to everyone? Any more feedback for a younger accumulator like me? Due to contribution limits I have until the end of the year to decide.
I started purchasing EE bonds this year at age 35. I anticipate retiring early (possibly as early as 40) and being in a lower tax bracket at age 55. If not, I would still have the option of holding onto them until 65 before I *have* to redeem, so I think I have enough wiggle room not to fear a tax torpedo.

As someone within 10 years of potential retirement, I'm increasing my fixed income/bond allocation. Few fixed income options are anywhere near as compelling as EE bonds (I also max out I bonds and am paying off mortgage next month).
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham
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Re: EE Bonds and Sequence of Returns Risk

Post by james3547 »

vineviz wrote: Sat Sep 19, 2020 11:34 am
Day9 wrote: Sat Sep 19, 2020 10:08 am Right but I remember from your posts that is because you disagree with someone under 40 holding any bonds at all, right?
That's only part of it. Every situation is different, of course, but my experience is that many people under 40 have other ways of generating nominal returns that are competitive with the return on Series EE bonds (e.g. reduce the principal on a home mortgage, pursue a graduate degree/professional certification, etc.).

Beyond that, though, an investor is taking on a significant amount of tax risk by purchasing a fixed income asset that matures in years in which a) they probably won't need additional income and b) are likely to be the highest income years of their lives.

The yield-to-maturity of Series EE bonds is definitely good, but it's not amazing (long-term corporate bonds have yields that come very close) and it comes with more than little bit of liquidity risk. Having savings bonds that MUST be redeemed before the age of 70 could very well end up thwarting other strategies, like Roth conversions, that end up costing you more than the marginal return of the EE bonds.

Is purchasing Series EE bonds likely to prove disastrous? Definitely not. But it's not the slam dunk for a 35-year old that it is for a 45-year old.

I find this interesting. As a 32 year old I have decided, after flirting with the idea for a couple of years, to purchase equal amounts of I and Ee bonds starting this year to start a ladder (although have not made the first purchase yet).

I currently have a high income, terminal degree, only debt is home being refinanced to 2.5% and will probably start reducing my salary in my 40s. I have no bonds in my portfolio, just a very solid cash emergency fund.

My long range goal is to retire at 50, but that is a long time from now so who knows. I think I will be positioned to barring the unforseen.

I think it will give me the push to stop earning or work for a hobby with an income floor. Who knows. I think I am going to pull the trigger this year. I have also considered long treasuries in tax deferred due to your long thread but I like the idea of building years of stable assets that could be easily accessed.
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SantaClaraSurfer
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Re: EE Bonds and Sequence of Returns Risk

Post by SantaClaraSurfer »

FactualFran wrote: Fri Sep 18, 2020 5:37 pm
ThisTimeItsDifferent wrote: Fri Sep 18, 2020 1:35 pm It's like a 20 year CD where the early withdrawal penalty is nearly 100% of accrued interest.

Code: Select all

Year	Balance	YTM	Ratio YTM
0	$1,000	1.0353	2.0000	3.526%
1	$1,001	1.0371	1.9980	3.710%i
2	$1,002	1.0391	1.9960	3.914%
3	$1,003	1.0414	1.9940	4.143%
4	$1,004	1.0440	1.9920	4.401%
5	$1,005	1.0469	1.9900	4.695%
6	$1,006	1.0503	1.9880	5.031%
7	$1,007	1.0542	1.9861	5.420%
8	$1,008	1.0588	1.9841	5.876%
9	$1,009	1.0642	1.9821	6.417%
10	$1,010	1.0707	1.9801	7.070%
11	$1,011	1.0787	1.9781	7.874%
12	$1,012	1.0889	1.9762	8.887%
13	$1,013	1.1020	1.9742	10.204%
14	$1,014	1.1198	1.9722	11.985%
15	$1,015	1.1453	1.9702	14.526%
16	$1,016	1.1845	1.9683	18.446%
17	$1,017	1.2528	1.9663	25.281%
18	$1,018	1.4015	1.9643	40.155%
19	$1,019	1.9624	1.9624	96.238%
That calculation does not take into account the semi-annual compounding and the rounding done with Savings Bonds. Taking those into account, an EE Savings Bond with a fixed earnings rate of 0.10% and a guaranteed minimum redemption value at 20 years equal to twice the purchase price would have a redemption value at 20 years that is 94.1% greater than the redemption value at 19 years.

94.1% is not the 100.00% written in a previous post. Those who are not concerned about the details can ignore the difference.
I respect and understand where both of you are coming from. FactualFran, you've identified some (small) errors in the Yield to Maturity table from Noobvestor that I posted that would, admittedly, be more significant if the Fixed Rate portion of the EE Bond were currently higher. And ThisTimeIsDifferent provided a sample calculation roughly following FF's correction that shows that, in this particular case, the change in YTM and balance does not materially impact the overall point I made about the strategy.

I apologize for my imprecision with YTM and the technical specifics of EE Bond fixed interest rates (which are important even though the numbers are currently small) and appreciate that you're cleaning up my work as many people use these forums to research and make decisions. They and I thank you both!

My bottom line, the YTM on EE Bonds can really work to the benefit of an investor who is around 20 years out from retirement in the current Fixed Income marketplace. Whether the final YTM is 94.1%, 96.238% or a rounded, but inaccurate, 100%, the basic point is same: investors who understand the YTM chart for EE Bonds may well become much more comfortable with creating a bond ladder with them.

I know that is what happened for my wife and I. Once we understood this YTM chart, it clicked and we became more open to EE Bonds as a way to boost our income floor in retirement.
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Re: EE Bonds and Sequence of Returns Risk

Post by FactualFran »

Day9 wrote: Fri Sep 18, 2020 6:37 pm Did I use this calculator correctly? I plugged in 3.53% (doubles in 20 years), and 1.24% 20-year treasury yield. What does this tell us? EE Bonds are 40% more
It tells us that for a security with a coupon rate of 3.53% that compounds semi-annually and will have a redemption value of $1,000 in 20 years, $1,404.52 is the market price that results in it having a yield to maturity of 1.24%. A market price that is not meaningful for Savings Bonds because they are not marketable securities.
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