What's the catch with I Bonds?

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What's the catch with I Bonds?

Post by Buy_N_Hold »

There seems to be increasing dialogue about the relative attractiveness of I Bonds, given where interest rates are currently. Jason Zweig had a great little article in the WSJ recently about them, and I have followed a few threads on the forum here of late that have been instructive.

Does anyone know why the yield seems to be so much higher than other comparable alternatives? 3.54% with a one year lock-up provision seems like a home run for most investors. I guess my question is where is this figure coming from? Is 3.54% the prediction of inflation over the next 12 months, with the idea being that the bonds will retain their purchasing power?

Is there something I am missing about I Bonds? I have seen some comments about the TD website being clunky to use. Is there anything else I should know before adding a few of these to my fixed income portion of my AA?
Last edited by Buy_N_Hold on Wed Jun 02, 2021 9:57 pm, edited 1 time in total.
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Re: What's the catch with I Bonds?

Post by livesoft »

The main catch for me is that one can only purchase a limited dollar amount, so they are just a distraction.
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Re: What's the catch with I Bonds?

Post by UpperNwGuy »

Because of the limit on purchases, I Bonds seem to be most attractive to investors with smaller portfolios. Once your portfolio is large, the I Bonds have little impact.
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Re: What's the catch with I Bonds?

Post by samsoes »

The current 3.54% (inflation component) yield can easily drop to 0% in six months. The current 0% fixed rate component (for the life of the bond) makes I-bonds not worth a second look, at least for now.

Edit to add: Here's a historical chart of inflation and fixed rates:
https://www.treasurydirect.gov/indiv/re ... eChart.pdf
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Re: What's the catch with I Bonds?

Post by SnowBog »

From my view, no catch...

Some will argue that the website... Don't care, I spend minutes there a year...

Some think the limits ($10k/person/year) are too low. That held me off an extra year, but if you buy over many years, the amount adds up. And in my particular use case, are nearly perfectly aligned (with EE Bonds) to build an "income bridge" between early retirement and delayed pensions/SS.

However, you should understand that I Bonds (like TIPS) are intended to basically track inflation. While the current interest rate "seems high", it's reflective of what the Treasury thinks inflation is at right now. And in 6 months, it will adjust to match the then current inflation rate. If this is perfectly done, that means $10k purchased today is basically with the inflation adjusted equivalent $10k (minus taxes) in the future. So these protect your purchase power, but they arguably "don't make you money".

But if your comparison is a savings account, then I Bonds are a screaming deal. You'll "lose less" with I Bonds than savings accounts (which never pay at or above inflation).

FWIW I've been maxing out I Bonds and EE Bonds the last two years.
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Re: What's the catch with I Bonds?

Post by Buy_N_Hold »

UpperNwGuy wrote: Wed Jun 02, 2021 8:25 pm Because of the limit on purchases, I Bonds seem to be most attractive to investors with smaller portfolios. Once your portfolio is large, the I Bonds have little impact.
That makes sense. However, for someone in their accumulation phase with 30+ years to retirement, it seems to me that over 10 years one could build a quite substantial position in these bonds. However, another factor that I didn't mention in my original post is the tailwind that most bonds have received from falling interest rates the past 40 years. Since these do not trade on the secondary market, perhaps that makes them less appealing over the full market cycle, as there is only one real source of return, as opposed to two? Just thinking out loud here.
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Re: What's the catch with I Bonds?

Post by samsoes »

Also, there's a three-month interest penalty if the bond is redeemed in less than 5 years from the issue date.
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Re: What's the catch with I Bonds?

Post by Buy_N_Hold »

samsoes wrote: Wed Jun 02, 2021 8:26 pm The current 3.54% (inflation component) yield can easily drop to 0% in six months. The current 0% fixed rate component (for the life of the bond) makes I-bonds not worth a second look, at least for now.

Edit to add: Here's a historical chart of inflation and fixed rates:
https://www.treasurydirect.gov/indiv/re ... eChart.pdf
It certainly could drop to 0%, but how likely is that really? Also, I suppose it might be helpful to see a chart or table of the yield on these bonds compared to a bond fund like VBTLX.
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Re: What's the catch with I Bonds?

Post by nisiprius »

There's no catch.

They aren't the answer to life, the universe and everything because of the various restrictions, but for as long as I've been paying attention they've been very good investments. Ignoring technicalities and corner cases, they have no inflation risk (before taxes), no interest rate risk, and virtually no credit risk.

Having no interest rate risk is huge. It makes them completely different from TIPS.

They have always been discussed respectfully in the forum, particularly way back when the purchase limit was $30,000 and the "fixed" rate was higher. Mel Lindauer was a notable champion. They are rarely discussed in mainstream "investment" circles, not because they are poor investments but because there is no obvious way in which an advisor or investment firm can make any money from them. For reasons that aren't clear to me around 2008 the government itself rather suddenly seemed to be de-emphasizing them as if they didn't really want people to buy them.
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Re: What's the catch with I Bonds?

Post by nisiprius »

Buy_N_Hold wrote: Wed Jun 02, 2021 8:55 pm...Also, I suppose it might be helpful to see a chart or table of the yield on these bonds compared to a bond fund like VBTLX...
This is for an individual I bond bought in January, 1999. Unfortunately they had much higher fixed rates then.

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Re: What's the catch with I Bonds?

Post by JoMoney »

I like I Bonds. The current interest rate is better than anything comparable, and there's no market or interest rate risk. If you take the money out before 5 years you lose 3 months of interest. Other than that, the big "catch" as far as I can tell is dealing with Treasury Direct. I've had them lock me out of my account for simply trying to add another bank to the account to transfer to/from, and it required sending in a form with Medallion Signature Guarantee (a bit of a pain to get) to get the account unlocked. It seems they've changed the procedure to require a form with signature guarantee to add a bank account now, which is still a pain, but better to know before hand and not have them lock the account :annoyed
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Re: What's the catch with I Bonds?

Post by #Cruncher »

samsoes wrote: Wed Jun 02, 2021 8:26 pmHere's a historical chart of inflation and fixed rates:
https://www.treasurydirect.gov/indiv/re ... eChart.pdf
Here are the same rates, but easier to read: http://eyebonds.info/ibonds/rates.html

And here are the composite rates for each six-month period of the 0% fixed rate I Bonds issued May 2008. (This was the first time the fixed rate was 0%.) Note that all but three of the other 26 six-month periods had a lower composite rate than the current 3.54%; and that the composite rate has averaged 2.06% over the 13-1/2 years.

Code: Select all

         Compos
Effectiv   Rate
May 2008  4.84%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Nov 2008  4.92%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
May 2009  0.00%  |
Nov 2009  3.06%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
May 2010  1.54%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXX
Nov 2010  0.74%  |XXXXXXXXXXXXX
May 2011  4.60%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Nov 2011  3.06%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
May 2012  2.20%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Nov 2012  1.76%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
May 2013  1.18%  |XXXXXXXXXXXXXXXXXXXXX
Nov 2013  1.18%  |XXXXXXXXXXXXXXXXXXXXX
May 2014  1.84%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Nov 2014  1.48%  |XXXXXXXXXXXXXXXXXXXXXXXXXXX
May 2015  0.00%  |
Nov 2015  1.54%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXX
May 2016  0.16%  |XXX
Nov 2016  2.76%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
May 2017  1.96%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Nov 2017  2.48%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
May 2018  2.22%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Nov 2018  2.32%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
May 2019  1.40%  |XXXXXXXXXXXXXXXXXXXXXXXXX
Nov 2019  2.02%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
May 2020  1.06%  |XXXXXXXXXXXXXXXXXXX
Nov 2020  1.68%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
May 2021  3.54%  |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
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Re: What's the catch with I Bonds?

Post by tibbitts »

Buy_N_Hold wrote: Wed Jun 02, 2021 8:18 pm There seems to be increasing dialogue about the relative attractiveness of I Bonds, given where interest rates are currently. Jason Zweig had a great little article in the WSJ recently about them, and I have followed a few threads on the forum here of late that have been instructive.

Does anyone know why the yield seems to be so much higher than other comparable alternatives? 3.54% with a one year lock-up provision seems like a home run for most investors. I guess my question is where is this figure coming from? Is 3.54% the prediction of inflation over the next 12 months, with the idea being that the bonds will retain their purchasing power?

Is there something I am missing about I Bonds? I have seen some comments about the TD website being clunky to use. Is there anything else I should know before adding a few of these to my fixed income portion of my AA?
If you're asking "where is this figure coming from?", you might want to learn more about I-bonds before deciding whether to buy them. There are pros and cons, particularly if you're setting up a TD account just now. Remember that not only do you have to understand I-bonds, you have to explain them to your beneficiaries, so they'll know what to do with them should the need arise. It'll be yet another account for them to deal with. Also, if you defer interest, make sure you're prepared for the tax hit down the road, and how that timing will fit with other events (RMDs, Social Security, etc.)
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Re: What's the catch with I Bonds?

Post by kacang »

Our AA says we should be getting more bonds, so we're looking into this as well. Considering that tax on interest is deferred and state-exempted, 3.54% is attractive. The annual limit does make it less useful.

But according to https://www.bogleheads.org/wiki/I_savin ... #529_Plans it could be federal-tax exempted if used for qualified educational expenses, including rolling into a 529. That opens up another possibility, hold it for 5 years and if we don't need it, use it to seed a 529. Do this for a few years and this can be a pretty nice 529 for a future grandkid.
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Re: What's the catch with I Bonds?

Post by calwatch »

Regarding the question where the rate comes from, it's based on the six month change of CPI-U between the previous September and March (and March and September), annualized (multiplied by two). It's very possible that inflation may not be constant but could have spiked due to COVID recovery, and as the shock of the stimulus and the need to pay people more to beat unemployment compensation declines, it may not last.

From March to April, the CPI-U went up 0.8%; if prices stay constant from May to September the variable rate for the next crediting period will be 1.6%. The benefit is that bond values can never decline, even if it goes negative. For example, the inflation rate from September 2014 to March 2015 was -0.80%. While those with the nice 3% fixed rates saw their interest rate go down to 1.4% (3 - 0.8 * 2), those who bought November 2014 merely saw their rate equal zero; and for those in the first five years of their bond the effective "early withdrawal" penalty was also zero. It does make for a weird press release though. https://www.treasurydirect.gov/news/pre ... di0515.htm
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Re: What's the catch with I Bonds?

Post by okwriter »

The catch is that you can only buy $10,000 of the "3.54%" bonds, and that 3.54% is actually a 0% fixed rate + 3.54% variable rate. The variable part of the rate is guaranteed only for 6 months, so half of 3.54% of $10K = $177 before taxes. I don't find it all that exciting.

If the fixed rate was 3.54%, it would be a great deal.
calwatch wrote: Thu Jun 03, 2021 1:59 am It does make for a weird press release though. https://www.treasurydirect.gov/news/pre ... di0515.htm
That is funny. "I Bond Earnings Rate of 0.00% includes a Fixed Rate of 0.00%", and in bold print. It feels like they're trying to sell you something, but they forgot to put in the numbers.
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Re: What's the catch with I Bonds?

Post by Xigris1234 »

okwriter wrote: Thu Jun 03, 2021 3:00 am The catch is that you can only buy $10,000 of the "3.54%" bonds, and that 3.54% is actually a 0% fixed rate + 3.54% variable rate. The variable part of the rate is guaranteed only for 6 months, so half of 3.54% of $10K = $177 before taxes. I don't find it all that exciting.

If the fixed rate was 3.54%, it would be a great deal.
What do you recommend as a more exciting investment for surplus cash?
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Re: What's the catch with I Bonds?

Post by Jack FFR1846 »

As I approach retirement, I'm more focused on "forced" income from my investments. Dividends and interest from mutual funds, ETFs and savings accounts are a negative in my view because they can't easily be controlled, thus generating tax liability and potentially jumping up tax brackets. Like non-dividend paying stock, savings bonds can simply be held, deferring tax liability until their sale can be planned during a low income year. I hold just under $400k in paper savings bonds. No medallion nonsense to cash. Just a trip to my credit union with my passport.
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Re: What's the catch with I Bonds?

Post by Makaveli »

Similar age, same dilemma. I ultimately purchased my annual limit a few days ago. I held off initially due to it being such a low percent of my overall portfolio. However, my AA required more bonds and when I stacked up my next purchase, total bond fund vs I Bond, I Bond’s 3.54% won. I added a line to my portfolio tracker and called it a day.
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Re: What's the catch with I Bonds?

Post by Gill »

livesoft wrote: Wed Jun 02, 2021 8:23 pm The main catch for me is that one can only purchase a limited dollar amount, so they are just a distraction.
Maybe a distraction for you but my mid-six figure accumulation over 21 years is far from a distraction. For millions they represent an excellent investment.

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Re: What's the catch with I Bonds?

Post by mmcmonster »

tibbitts wrote: Thu Jun 03, 2021 12:19 am[...] Remember that not only do you have to understand I-bonds, you have to explain them to your beneficiaries, so they'll know what to do with them should the need arise. It'll be yet another account for them to deal with. Also, if you defer interest, make sure you're prepared for the tax hit down the road, and how that timing will fit with other events (RMDs, Social Security, etc.)
Good point.

Cons:
*Having to explain to heirs.
*Dealing with TreasuryDirect. Cannot trade on secondary market.
*$10k per person per year limit (a little more if through a trust or using federal tax rebate to buy)
*3 month interest penalty if selling within 5 years.
*Cannot sell in the first year.
*Requires Medallion signature to initiate.

Pros:
*Tax deferred. An excellent way to increase tax deferred space.
*Good/Competitive coupon rate.

For those who start buying fairly early in their investing careers, it's a great option. For those late to the game, the purchase limits are problematic.
Last edited by mmcmonster on Thu Jun 03, 2021 6:03 am, edited 2 times in total.
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Re: What's the catch with I Bonds?

Post by dcabler »

As others have mentioned, the main catch is the limit on total purchase amounts each year.

You will not become rich or FIRE on Ibonds alone. But they do what they're supposed to do, which is to keep up with the gov'ts definition of inflation and they do so in a tax deferred way. When the fixed rate is ever above 0%, then I consider it a bonus. For me, they're part of an overall sleep-at-night strategy to create a COLA'd income stream consisting of SS, I-bonds, and TIPs, starting at age 70 and lasting about 15 years. By no means a majority of my portfolio, but enough to cover minimal living expenses as an income floor.

We're both purchasing our max $10K per year as well as the $5K per Tax refund and have been doing so for a number of years now. Will likely set up trusts later this year when we update our wills to be able to purchase additional amounts.

Cheers.
Last edited by dcabler on Thu Jun 03, 2021 6:07 am, edited 1 time in total.
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Re: What's the catch with I Bonds?

Post by dcabler »

mmcmonster wrote: Thu Jun 03, 2021 6:01 am
tibbitts wrote: Thu Jun 03, 2021 12:19 am[...] Remember that not only do you have to understand I-bonds, you have to explain them to your beneficiaries, so they'll know what to do with them should the need arise. It'll be yet another account for them to deal with. Also, if you defer interest, make sure you're prepared for the tax hit down the road, and how that timing will fit with other events (RMDs, Social Security, etc.)
Good point.

Cons:
*Having to explain to heirs.
*Dealing with TreasuryDirect. Cannot trade on secondary market.
*$10k per person per year limit (a little more if through a trust or using federal tax rebate to buy)
*3 month interest penalty if selling within 5 years.
*Cannot sell in the first year.
*Requires Medallion signature to initiate.

Pros:
*Tax deferred. An excellent way to increase tax deferred space.
*Good/Competitive coupon rate.

For those fairly early in their investing careers, it's a great option. For those late to the game, the purchase limits are problematic.
It did not require a Medallion signature for either myself or my wife when we opened up TreasuryDirect accounts and began purchasing Ibonds.

Cheers.
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Re: What's the catch with I Bonds?

Post by nisiprius »

Just to add context to update the chart I posted above. Early series I savings bonds outperformed VBTLX. But not recently.

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Re: What's the catch with I Bonds?

Post by okwriter »

Xigris1234 wrote: Thu Jun 03, 2021 5:38 am
okwriter wrote: Thu Jun 03, 2021 3:00 am The catch is that you can only buy $10,000 of the "3.54%" bonds, and that 3.54% is actually a 0% fixed rate + 3.54% variable rate. The variable part of the rate is guaranteed only for 6 months, so half of 3.54% of $10K = $177 before taxes. I don't find it all that exciting.

If the fixed rate was 3.54%, it would be a great deal.
What do you recommend as a more exciting investment for surplus cash?
EE bonds, which do have a fixed rate of 3.5%.

(It takes 20 years, but they will do better than this year's I-bonds unless inflation averages 3.5% for the next 20 years.)
Last edited by okwriter on Thu Jun 03, 2021 6:57 am, edited 2 times in total.
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Re: What's the catch with I Bonds?

Post by livesoft »

Gill wrote: Thu Jun 03, 2021 6:00 am
livesoft wrote: Wed Jun 02, 2021 8:23 pm The main catch for me is that one can only purchase a limited dollar amount, so they are just a distraction.
Maybe a distraction for you but my mid-six figure accumulation over 21 years is far from a distraction. For millions they represent an excellent investment.

Gill
:) Maybe you would have a mid-seven figure distraction if you had used the money for accumulating something else? Who knows? But I am sure you would have had a mid-six figure accumulation with something else anyways.

Full disclosure: I put some money into an I-bond to see what the fuss was all about. After a few years I redeemed it.
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Re: What's the catch with I Bonds?

Post by nisiprius »

Buy_N_Hold wrote: Wed Jun 02, 2021 8:18 pm...Does anyone know why the yield seems to be so much higher than other comparable alternatives?...
Because rates are not set in a competitive marketplace of profit-making enterprises.

But I haven't a clue as to what leads to their being favorable.

My assumption, just an assumption, is that they have also been perceived as a kind of social welfare program and a "thrift" incentive, like the Postal Savings Banks that existed from 1911-1967.

I have long wondered just what are the motivations that guide issuance of savings bonds.

This is just personal maundering but during World War II the sale of "war bonds" was important to the government as a source of funds to fight the war, and they were very heavily advertised, and surrounded by an aura of patriotism. After the war, in the fifties and sixties, I don't know if they were important to the government, but there was still an atmosphere of patriotism surrounding them. There was a widespread advertising campaign to sell them. As a kid, series EE savings bonds were a common gift e.g. from grandparents and I remember staring at the redemption table printed on the back. Into at least the seventies, they promoted a "payroll savings plan" involving the automatic purchase of (series EE) savings bonds out of your wages.

Last time I checked, the amount of money in savings bonds was very roughly 1% of all Treasury debt. My assumption is that for a long time, but probably not any more, they were actually a cheap way for the government to borrow a not insignificant amount of money.

In the 1970s and on, they were decent savings vehicles, broadly on a par with bank accounts. 1980-1990 bank interest rates began to decline sharply. EE bond interest rates were only reset every six months and toward the end of the six months were quite noticeably higher than whatever banks were paying. I personally took advantage of that a couple of times. If you had money to save and it was near the end of that six months, it was better to buy a savings bond than to put it in a bank.

In 2008, suddenly, and with no real explanation before or since, and with only 31 days' notice, the Treasury cut the annual purchase limit from $30,000 to $5,000. They subsequently raised it to $10,000. They also begin the bizarre business of not allowing you to buy paper I bonds any more, yet allowing you to request that up to $5,000 of your tax refund be paid in the form of paper I bonds. I have never seen any coherent explanation of why.

[ I deleted a paragraph here, that had touched off some misunderstandings].
Last edited by nisiprius on Thu Jun 03, 2021 2:51 pm, edited 3 times in total.
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Re: What's the catch with I Bonds?

Post by donaldfair71 »

UpperNwGuy wrote: Wed Jun 02, 2021 8:25 pm Because of the limit on purchases, I Bonds seem to be most attractive to investors with smaller portfolios. Once your portfolio is large, the I Bonds have little impact.
This.

I would add that they are beneficial to middle class savers who can afford to wait out the year holding period. I say this for those who would look at them primarily as a savings account or CD alternative rather than a bond piece of the portfolio (though I suppose the same benefits apply).

- Under 153K income married and contributing to a 529 plan, savings bonds can be completely tax exempt.
- Even when not completely exempt, they can have an effective after-tax yield higher than CDs and savings accounts.

The catch is the year, not a small catch, but anyone with the desire to do so can kind of stagger/ladder entries from savings accounts into I bonds so that within a year the I Bonds become liquid, eventually having them serve almost identically to a savings account.
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Re: What's the catch with I Bonds?

Post by UpperNwGuy »

nisiprius wrote: Thu Jun 03, 2021 6:54 am So I am going to present an hypothesis. If government debt is truly a serious problem, I would predict that there will be a renaissance of the savings bond program, with the purchase limits being increased the government again promoting the program in advertising... and that the rates will be adjusted so that they are less favorable to borrowers and more favorable to the government.
There's the catch: current rates are favorable to the purchaser and not favorable to the government. Sooner or later, that will change.
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Re: What's the catch with I Bonds?

Post by KingRiggs »

I only saw the Boglehead light two years ago at age 52.

Wish I had plowed money into EE bonds many years ago to bridge the retirement-to-Soc Sec years, but that has passed me by.

I'm currently in the process of converting our $100k emergency fund held in no-penalty CDs to I-Bonds, $20k per year. Once that conversion is complete, I'll let them sit until our SS and RMDs meet our annual expenses, then decide if I still need an emergency fund or not...

They will not play a large role in my portfolio because of the annual purchase limit and the size of my portfolio.
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Re: What's the catch with I Bonds?

Post by HueyLD »

livesoft wrote: Wed Jun 02, 2021 8:23 pm The main catch for me is that one can only purchase a limited dollar amount, so they are just a distraction.
A distraction? Please have mercy on us, those poor souls without a fat wallet.
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Re: What's the catch with I Bonds?

Post by livesoft »

HueyLD wrote: Thu Jun 03, 2021 8:17 am A distraction? Please have mercy on us, those poor souls without a fat wallet.
It is rather interesting to me that many of the posts on bogleheads.org are about having a simple investing portfolio without increasing the number of custodians. In other words, I-bonds can still be a distraction to folks with a thin wallet.

Also it is not rare to read comments about smaller portfolio holdings in terms of percentages or fractions under 10% are not going to move the needle much. I'd like to know who has at least 5% and at least 10% of their portfolio in I-bonds? I know one has to start at 0%, so I realize that it can be a work in progress, but do those folks with less than 5% of their portfolio in I-bonds expect their I-bonds to become more than 10% of their portfolio?

What fraction of your total invested portfolio is composed of I-bonds? And what is the largest expected fraction that you hope to attain?

(I can answer for myself: 0% nowadays, but I think you all knew that already.)
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RubyTuesday
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Re: What's the catch with I Bonds?

Post by RubyTuesday »

livesoft wrote: Thu Jun 03, 2021 8:27 am
HueyLD wrote: Thu Jun 03, 2021 8:17 am A distraction? Please have mercy on us, those poor souls without a fat wallet.
It is rather interesting to me that many of the posts on bogleheads.org are about having a simple investing portfolio without increasing the number of custodians. In other words, I-bonds can still be a distraction to folks with a thin wallet.

Also it is not rare to read comments about smaller portfolio holdings in terms of percentages or fractions under 10% are not going to move the needle much. I'd like to know who has at least 5% and at least 10% of their portfolio in I-bonds? I know one has to start at 0%, so I realize that it can be a work in progress, but do those folks with less than 5% of their portfolio in I-bonds expect their I-bonds to become more than 10% of their portfolio?

What fraction of your total invested portfolio is composed of I-bonds? And what is the largest expected fraction that you hope to attain?

(I can answer for myself: 0% nowadays, but I think you all knew that already.)
We have about 5%. That will probably be the peak fraction. We’re thinking about simplifying more by reducing brokers/custodians and if that happens will probably redeem over next 5-10 years.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
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Re: What's the catch with I Bonds?

Post by 7eight9 »

livesoft wrote: Thu Jun 03, 2021 8:27 am
HueyLD wrote: Thu Jun 03, 2021 8:17 am A distraction? Please have mercy on us, those poor souls without a fat wallet.
It is rather interesting to me that many of the posts on bogleheads.org are about having a simple investing portfolio without increasing the number of custodians. In other words, I-bonds can still be a distraction to folks with a thin wallet.

Also it is not rare to read comments about smaller portfolio holdings in terms of percentages or fractions under 10% are not going to move the needle much. I'd like to know who has at least 5% and at least 10% of their portfolio in I-bonds? I know one has to start at 0%, so I realize that it can be a work in progress, but do those folks with less than 5% of their portfolio in I-bonds expect their I-bonds to become more than 10% of their portfolio?

What fraction of your total invested portfolio is composed of I-bonds? And what is the largest expected fraction that you hope to attain?

(I can answer for myself: 0% nowadays, but I think you all knew that already.)
9.9% currently. Getting to 20% certainly seems achievable buying $25K/year (2 x $10K + $5K tax refund).
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Re: What's the catch with I Bonds?

Post by donaldfair71 »

UpperNwGuy wrote: Thu Jun 03, 2021 8:01 am
nisiprius wrote: Thu Jun 03, 2021 6:54 am So I am going to present an hypothesis. If government debt is truly a serious problem, I would predict that there will be a renaissance of the savings bond program, with the purchase limits being increased the government again promoting the program in advertising... and that the rates will be adjusted so that they are less favorable to borrowers and more favorable to the government.
There's the catch: current rates are favorable to the purchaser and not favorable to the government. Sooner or later, that will change.
Yep, and sometimes, they can be very unfavorable in light of similar alternatives.

Right now, I Bonds are a wonderful deal compared to savings accounts and CDs. But they aren't always (though I would venture to say, depending on circumstances, they are a good deal more often than not- really depends on tax rates and the value one places on liquidity).
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Re: What's the catch with I Bonds?

Post by Old Guy »

I do have a question about the accrual of interest. With my paper bonds I can check every month to see how much interest has been earned. When I checked on June 2 on the electronic bonds I bought on May 1, there was no interest shown. How come?
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Re: What's the catch with I Bonds?

Post by rebellovw »

What is the age cut off - or when is it really not worth it - I'm 55 - I'd start buying now - what age would it make sense to stop buying?

I guess unlike EE bonds - I can simply take them at 10 years, 15 years - even sooner w/o penalty (to some extent.) Or perhaps in my 80's I might be greatful...

Perhaps I'll start buying each year....
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Re: What's the catch with I Bonds?

Post by langelgjm »

livesoft wrote: Thu Jun 03, 2021 8:27 am
HueyLD wrote: Thu Jun 03, 2021 8:17 am A distraction? Please have mercy on us, those poor souls without a fat wallet.
It is rather interesting to me that many of the posts on bogleheads.org are about having a simple investing portfolio without increasing the number of custodians. In other words, I-bonds can still be a distraction to folks with a thin wallet.

Also it is not rare to read comments about smaller portfolio holdings in terms of percentages or fractions under 10% are not going to move the needle much. I'd like to know who has at least 5% and at least 10% of their portfolio in I-bonds? I know one has to start at 0%, so I realize that it can be a work in progress, but do those folks with less than 5% of their portfolio in I-bonds expect their I-bonds to become more than 10% of their portfolio?

What fraction of your total invested portfolio is composed of I-bonds? And what is the largest expected fraction that you hope to attain?

(I can answer for myself: 0% nowadays, but I think you all knew that already.)
I have 6.6% in I bonds, and another 3.6% in EE bonds, so a total of 10.2% in non-marketable, tax-deferred federal bonds. 99% were purchased since 2013.

Among other things, they allow me to achieve my desired AA on the taxable side while keeping my taxable brokerage account fully invested in total stock market funds. For that reason they'd never exceed 20%, and between the purchase limits and stock growth, it may be a challenge to even keep them at 10%.
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Re: What's the catch with I Bonds?

Post by Gill »

HueyLD wrote: Thu Jun 03, 2021 8:17 am
livesoft wrote: Wed Jun 02, 2021 8:23 pm The main catch for me is that one can only purchase a limited dollar amount, so they are just a distraction.
A distraction? Please have mercy on us, those poor souls without a fat wallet.
+1 My reaction as well.
Gill
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Re: What's the catch with I Bonds?

Post by Gill »

livesoft wrote: Thu Jun 03, 2021 8:27 am

What fraction of your total invested portfolio is composed of I-bonds?[/b]
Roughly 12%. Better than a kick in the head. Do the math.

Gill
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Re: What's the catch with I Bonds?

Post by RubyTuesday »

Old Guy wrote: Thu Jun 03, 2021 8:55 am I do have a question about the accrual of interest. With my paper bonds I can check every month to see how much interest has been earned. When I checked on June 2 on the electronic bonds I bought on May 1, there was no interest shown. How come?
I believe (too lazy to check) TD doesn’t show interest for bonds which cannot be redeemed yet (less than 1 year) and when they are older than a year but less than 5 years, it will also reduce the interest by the 3 month penalty. I suspect if your paper bonds were one month old you would also not see interest when checking value.
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Re: What's the catch with I Bonds?

Post by rebellovw »

livesoft wrote: Wed Jun 02, 2021 8:23 pm The main catch for me is that one can only purchase a limited dollar amount, so they are just a distraction.
Thanks - that is what I'm thinking as well - would take lots of work for me to try to buy 20K of iBonds each year - selling stocks - taking a tax hit etc moving money around where I can simply stay simple with a 3 fund portfolio across 6+ account types and not deal with any tax consequences.
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Re: What's the catch with I Bonds?

Post by SnowBog »

livesoft wrote: Thu Jun 03, 2021 8:27 am What fraction of your total invested portfolio is composed of I-bonds? And what is the largest expected fraction that you hope to attain?
A little over 3% (I and EE combined) of a low seven figure portfolio, and we just started buying last year (but we also buy I Bonds in trust accounts, so with tax refund we bought $45k of I Bonds and $20k of EE Bonds this year).

I don't have a target %. Instead these are filing a quasi-LMP for us, helping to create an "income bridge" which is expected to be roughly equal to delayed social security. So in terms of "retirement plan", I look at I/EE Bonds more like a term annuity (part fixed like EE, part inflation adjusted like I Bonds). This ultimately simplifies other parts of my plan, as I can effectively assume this "income" starting when we retire and lasting for life (I/EE Bond "income" will be replaced by social security income).

I accept this is a very conservative approach, and we'd likely have more savings if we invested these into other types of funds. But this is part of our "stay the course" approach. We are nearing the point where we'd have enough money to retire (FI) but aren't yet ready to retire. So to our mind, we don't need to take on more risk to reach our goals. Because these aren't marketable securities, they are nearly immune to what the market does. So in our "worst case" scenario of a market crash right at (or after) we retire, these won't be impacted and can provide an "income floor" (enough to cover our basic needs) without needing to tap into the rest of our portfolio.

ETA: I should add that we have a specific retirement date in mind, tied to spouse vesting in retirement benefits such as access to purchase retiree healthcare. Additionally, my job/industry is such that it's unlikely I can continue to work indefinitely - not a lot of 50+ year olds still around. So a driving factor for us is "protecting" that retirement date. It may not be realistic for us to "work a few more years" if the market dives before we retire...
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Re: What's the catch with I Bonds?

Post by Old Guy »

Thank you Ruby.
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Re: What's the catch with I Bonds?

Post by MishkaWorries »

UpperNwGuy wrote: Thu Jun 03, 2021 8:01 am
nisiprius wrote: Thu Jun 03, 2021 6:54 am So I am going to present an hypothesis. If government debt is truly a serious problem, I would predict that there will be a renaissance of the savings bond program, with the purchase limits being increased the government again promoting the program in advertising... and that the rates will be adjusted so that they are less favorable to borrowers and more favorable to the government.
There's the catch: current rates are favorable to the purchaser and not favorable to the government. Sooner or later, that will change.
I'm lost.

The current fixed rate for an I-bond is 0% plus the official government inflation rate. How can it get more favorable for the government? Unless the fudge the inflation numbers or discontinue I-bonds. Maybe you guys are just talking about government bonds other than I-bonds.
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Re: What's the catch with I Bonds?

Post by MishkaWorries »

Old Guy wrote: Thu Jun 03, 2021 10:48 am Thank you Ruby.
Almost. I'm too lazy to check the rule too but the I-bonds we bought in January didn't show any interest until April and then only showed one month of interest. I think TD "hides" the three months of interest until the 5 year mark.
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Re: What's the catch with I Bonds?

Post by vineviz »

MishkaWorries wrote: Thu Jun 03, 2021 11:10 am
UpperNwGuy wrote: Thu Jun 03, 2021 8:01 am
nisiprius wrote: Thu Jun 03, 2021 6:54 am So I am going to present an hypothesis. If government debt is truly a serious problem, I would predict that there will be a renaissance of the savings bond program, with the purchase limits being increased the government again promoting the program in advertising... and that the rates will be adjusted so that they are less favorable to borrowers and more favorable to the government.
There's the catch: current rates are favorable to the purchaser and not favorable to the government. Sooner or later, that will change.
I'm lost.

The current fixed rate for an I-bond is 0% plus the official government inflation rate. How can it get more favorable for the government? Unless the fudge the inflation numbers or discontinue I-bonds. Maybe you guys are just talking about government bonds other than I-bonds.
The rate on Series I savings bonds is less favorable to the government than the rate on other securities with similar characteristics.
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Re: What's the catch with I Bonds?

Post by vineviz »

rebellovw wrote: Thu Jun 03, 2021 8:55 am What is the age cut off - or when is it really not worth it - I'm 55 - I'd start buying now - what age would it make sense to stop buying?

I guess unlike EE bonds - I can simply take them at 10 years, 15 years - even sooner w/o penalty (to some extent.) Or perhaps in my 80's I might be greatful...

Perhaps I'll start buying each year....
As long as the fixed rate is favorable compared to the rate on marketable bonds (e.g. TIPS), it's probably "worth it" to buy Series I savings bonds until age 80 or when your remaining life expectancy is less than 5 years.
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Re: What's the catch with I Bonds?

Post by rebellovw »

vineviz wrote: Thu Jun 03, 2021 11:33 am
rebellovw wrote: Thu Jun 03, 2021 8:55 am What is the age cut off - or when is it really not worth it - I'm 55 - I'd start buying now - what age would it make sense to stop buying?

I guess unlike EE bonds - I can simply take them at 10 years, 15 years - even sooner w/o penalty (to some extent.) Or perhaps in my 80's I might be greatful...

Perhaps I'll start buying each year....
As long as the fixed rate is favorable compared to the rate on marketable bonds (e.g. TIPS), it's probably "worth it" to buy Series I savings bonds until age 80 or when your remaining life expectancy is less than 5 years.
Thank you!
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Re: What's the catch with I Bonds?

Post by Beardog »

I am guilty of not reading every post in a thread before replying, but there isn't much of a "catch" with I bonds. They seem to be about the simplest investment in terms of things one needs to know before investing in an asset class. I don't own any, but that is because at 58 years old, I would have a hard time accumulating enough of them to make a significant difference in our portfolio. If I had been more attentive to investing 30 years ago, I would have no problem with owning a pile of them in our portfolio now. Back then, all I did was put away my maximum allowable, and trusted my "advisor"....a big mistake, that thankfully we rectified before we were 40 years old. If one starts buying I bonds as part of a long term buy and hold strategy at a young age, I see no downsides, as long as they are being purchased for the "right" reasons.
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