I Bonds vs Other Choices - Growth of $10,000

[tonyclifton]

In this thread, nisiprius included a chart that gave me some inspiration to try and compare I Bonds vs other investment choices. The eyebonds.info website has the I Bond data (and thank you to tipscruncher for making this available including the help file and explanations). Portfolio Visualizer has the fund data.

I compared the growth of $10,000 if someone bought $10,000 dollars in January every year since 1999 to January 2021.

If my Excel is correct, $10,000 of I Bonds purchased every January since 1999 would accumulate to $364,060.00 in January of 2021. The chart below compares to other investment choices.

I picked these funds for comparison because I am generally thinking about these kinds of investments when I am weighing my own fixed income choices. These particular funds existed back in 1999 with the exception of the VISPX TIPS Fund which is noted below.

I read all the I Bonds threads but haven't yet made a purchase and have major fear of missing out.

Is this a reasonable back test of how $10,000 invested would have fared? I don't think it is reasonable to include equities in this comparison.

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| Ticker | Fund                                    | Fund Final Balance | I Bond Final Balance | Variance (Fund vs I Bond) |
|--------|-----------------------------------------|--------------------|----------------------|---------------------------|
|        | I Bonds                                 | $364,060.00        | $364,060.00          | $0.00 (0.0%)              |
| CASHX  | Cash                                    | $261,607.00        | $364,060.00          | -$102,453.00 (-28.1%)     |
| VFISX  | Vanguard Short-Term Treasury Inv        | $301,899.00        | $364,060.00          | -$62,161.00 (-17.1%)      |
| VSGBX  | Vanguard Short-Term Federal Inv         | $313,716.00        | $364,060.00          | -$50,344.00 (-13.8%)      |
| VFITX  | Vanguard Interm-Term Treasury Inv       | $375,367.00        | $364,060.00          | $11,307.00 (3.1%)         |
| VBMFX  | Vanguard Total Bond Market Index Inv    | $380,253.00        | $364,060.00          | $16,193.00 (4.4%)         |
| VIPSX  | Vanguard Inflation-Protected Secs Inv** | $362,595.00        | $330,936.00          | $31,659.00 (9.6%)         |
| VUSTX  | Vanguard Long-Term Treasury Inv         | $522,147.00        | $364,060.00          | $158,087.00 (43.4%)       |

**For the TIPS fund (VIPSX - Vanguard Inflation-Protected Securities), it started in June of 2000, so I skipped the January 1999 purchase of I Bonds.

CASHX is Portfolio Visualizers' cash equivalent (1 month Treasury Bills) which is supposed to be equivalent to money market funds.

[fabdog]

that seems like the data on how things went... the question is going forward do you think the environment for bonds will be the same as it was from 1999 to now?

LT Treasury Crushed IBonds and all the other fixed income choices.... do you think that will repeat over the next 20 years? Last 20 years have been awesome for bond funds as rates have come down... and down... and down...

IBonds are good at a very specific thing... inflation protection, can't lose nominal money, and federal tax deferred, state tax exempt. The only drawback is the limited amount you can deploy each year

Not sure what you have fear of missing out on...

Mike

[Value52]

Nice post, thanks for gathering the data. I Bonds look pretty good in comparison to other fixed income choices. Also, they are lower risk than most other options presented as they don’t have a fluctuating NAV. I Bonds could look even better in the next decade if interest rates stay flat or rise. In this chart the other funds had the advantage of the declining interest rate environment we have been in during the time period presented. I jumped on the I Bond bandwagon last month. I do think it is worth noting that I think retirement accounts should be maxed out first before investing in I Bonds, other than perhaps an emergency fund.

[anon_investor]

... I do think it is worth noting that I think retirement accounts should be maxed out first before investing in I Bonds, other than perhaps an emergency fund.

+1.

[Mel Lindauer]

... I do think it is worth noting that I think retirement accounts should be maxed out first before investing in I Bonds, other than perhaps an emergency fund.

+1.

Agree. While both retirement plans and I Bonds offer tax-deferral, the contributions to IRAs are tax-deductible for those who qualify, while purchases of I Bonds don't offer the tax deduction. However, if one can afford to do both, that would be my suggestion.

[calwatch]

This is based on the high fixed rates of the early part of that era, though, which no longer exist. The inflation rates are published on the Treasury Direct site but it would take work to reconvert those down to a zero or near zero rate. The fixed rate plunged to zero as a result of the global financial crisis in 2008 and aside from the period right after, has not exceeded 0.50% since.

[nisiprius]

This is based on the high fixed rates of the early part of that era, though, which no longer exist. The inflation rates are published on the Treasury Direct site but it would take work to reconvert those down to a zero or near zero rate. The fixed rate plunged to zero as a result of the global financial crisis in 2008 and aside from the period right after, has not exceeded 0.50% since.

And that very plunge has also affected all of the "other choices" you might compare I bonds to.

And another important point is that I bonds do not have interest rate sensitivity. If interest rates do rise, it will depress the value of every marketable bond you own, but it will not affect the redemption values of the I bonds you own.

[calwatch]

The issue with that comparison is that while interest rates for other bonds, as well as TIPS, went back to normal after the GFC, I Bond fixed rates just kind of stayed in the doldrums. Mel was extremely prescient to tell folks to back the truck up back then, but I see no intent of Treasury to even come close to those levels in the foreseeable future.

[JBTX]

... I do think it is worth noting that I think retirement accounts should be maxed out first before investing in I Bonds, other than perhaps an emergency fund.

+1.

Agree. While both retirement plans and I Bonds offer tax-deferral, the contributions to IRAs are tax-deductible for those who qualify, while purchases of I Bonds don't offer the tax deduction. However, if one can afford to do both, that would be my suggestion.

I thought you weren't recommending ibonds because you weren't comfortable with lack of clarity on security / risk of treasury direct?

[nyx328]

... I do think it is worth noting that I think retirement accounts should be maxed out first before investing in I Bonds, other than perhaps an emergency fund.

+1.

Agree. While both retirement plans and I Bonds offer tax-deferral, the contributions to IRAs are tax-deductible for those who qualify, while purchases of I Bonds don't offer the tax deduction. However, if one can afford to do both, that would be my suggestion.

Mel, I’m able to max out all my and DW’s retirement accounts, but do not have an extra 10k in cash to buy the full amount of I Bonds. Does it make sense to buy, say, 1000.00 a month in I Bonds until the max is met? Or does the max need to be bought all at once to achieve much effect? Thanks! Semper Fi

[ivgrivchuck]

I do think it is worth noting that I think retirement accounts should be maxed out first before investing in I Bonds, other than perhaps an emergency fund.

I agree that this might be a good rule of thumb for beginners, but the right answer really depends on many variables.

What is the expected tax benefit from IRA (money invested in bonds) vs. the higher interest earned from I-bonds in taxable?

[calwatch]

What is the expected tax benefit from IRA (money invested in bonds) vs. the higher interest earned from I-bonds in taxable?

In the example above, assuming that somehow you were able to make $10k of purchases in tax deferred (through a 401k, perhaps), you would pay taxes when you take it out, or until you're forced to take it out through the RMD process. Since the purchase was deductible at the start, it would be all taxable at the end (unless you chose the non-deductible IRA, which an I Bond basically is, with the caveats listed further).

On an I Bond, you pay taxes when you take it out or at 30 years - can't defer it further, but can defer it past the current RMD age of 72 for bonds purchased after age 42. And, putting Treasuries in an IRA is bad in states with income tax, because (at least in my state) IRAs are taxed without regard to what is in them. So the gains on a Treasury bond would be taxable to me, whereas they would not be if I held them directly.

[Bama12]

In this thread, nisiprius included a chart that gave me some inspiration to try and compare I Bonds vs other investment choices. The eyebonds.info website has the I Bond data (and thank you to tipscruncher for making this available including the help file and explanations). Portfolio Visualizer has the fund data.

I compared the growth of $10,000 if someone bought $10,000 dollars in January every year since 1999 to January 2021.

If my Excel is correct, $10,000 of I Bonds purchased every January since 1999 would accumulate to $364,060.00 in January of 2021. The chart below compares to other investment choices.

I picked these funds for comparison because I am generally thinking about these kinds of investments when I am weighing my own fixed income choices. These particular funds existed back in 1999 with the exception of the VISPX TIPS Fund which is noted below.

I read all the I Bonds threads but haven't yet made a purchase and have major fear of missing out.

Is this a reasonable back test of how $10,000 invested would have fared? I don't think it is reasonable to include equities in this comparison.

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+─────────+──────────────────────────────────────────+─────────────────────+───────────────────────+────────────────────────────+
| Ticker  | Investment                               | Fund Final Balance  | I Bond Final Balance  | Variance (Fund vs I Bond)  |
+─────────+──────────────────────────────────────────+─────────────────────+───────────────────────+────────────────────────────+
| CASHX   | Cash                                     | $261,607.00         | $364,060.00           | -$102,453.00 (-28.1%)      |
| VFISX   | Vanguard Short-Term Treasury Inv         | $301,899.00         | $364,060.00           | -$62,161.00 (-17.1%)       |
| VSGBX   | Vanguard Short-Term Federal Inv          | $313,716.00         | $364,060.00           | -$50,344.00 (-13.8%)       |
| VFITX   | Vanguard Interm-Term Treasury Inv        | $375,367.00         | $364,060.00           | $11,307.00 (3.1%)          |
| VIPSX   | Vanguard Inflation-Protected Secs Inv**  | $362,595.00         | $343,776.00           | $18,819.00 (5.5%)          |
| VBMFX   | Vanguard Total Bond Market Index Inv     | $380,253.00         | $364,060.00           | $16,193.00 (4.4%)          |
| VUSTX   | Vanguard Long-Term Treasury Inv          | $522,147.00         | $364,060.00           | $158,087.00 (43.4%)        |
+─────────+──────────────────────────────────────────+─────────────────────+───────────────────────+────────────────────────────+

**For the TIPS fund (VIPSX - Vanguard Inflation-Protected Securities), it started in June of 2000, so I skipped the January 1999 purchase of I Bonds.

CASHX is Portfolio Visualizers' cash equivalent (1 month Treasury Bills) which is supposed to be equivalent to money market funds.

What if they did the same with VTI?

[Mel Lindauer]

... I do think it is worth noting that I think retirement accounts should be maxed out first before investing in I Bonds, other than perhaps an emergency fund.

+1.

Agree. While both retirement plans and I Bonds offer tax-deferral, the contributions to IRAs are tax-deductible for those who qualify, while purchases of I Bonds don't offer the tax deduction. However, if one can afford to do both, that would be my suggestion.

Mel, I’m able to max out all my and DW’s retirement accounts, but do not have an extra 10k in cash to buy the full amount of I Bonds. Does it make sense to buy, say, 1000.00 a month in I Bonds until the max is met? Or does the max need to be bought all at once to achieve much effect? Thanks! Semper Fi

As long as they're more attractive than your other available options, all things considered, buy what you can, when you can. And if you're not able to hit the max in any given year, thst's ok. Just buy what you can.

[Mel Lindauer]

... I do think it is worth noting that I think retirement accounts should be maxed out first before investing in I Bonds, other than perhaps an emergency fund.

+1.

Agree. While both retirement plans and I Bonds offer tax-deferral, the contributions to IRAs are tax-deductible for those who qualify, while purchases of I Bonds don't offer the tax deduction. However, if one can afford to do both, that would be my suggestion.

I thought you weren't recommending ibonds because you weren't comfortable with lack of clarity on security / risk of treasury direct?

Lots of folks don't seem to be concerned about that issue and are comfortable with TD, so I say i Bonds are fine for those folks, since they accept that risk and the TD web site issues.

[ivk5]

[...]
I don't think it is reasonable to include equities in this comparison.
[...]

What if they did the same with VTI?

Curious how comparing fixed income and equities returns might affect your decision-making.

[tonyclifton]

What if they did the same with VTI?

I did not include equities as they are not in the fixed income asset category.

[tonyclifton]

Curious how comparing fixed income and equities returns might affect your decision-making.

To be more clear, my family's decision making is for what kind of fixed income to buy. We do not have a 100% equities portfolio and have fixed income (TIPS funds and Total Bond funds). Our decision making would be whether or not to buy I Bonds to add to the fixed income component instead of other fixed income choices.

[ivk5]

Curious how comparing fixed income and equities returns might affect your decision-making.

To be more clear, my family's decision making is for what kind of fixed income to buy. We do not have a 100% equities portfolio and have fixed income (TIPS funds and Total Bond funds). Our decision making would be whether or not to buy I Bonds to add to the fixed income component instead of other fixed income choices.

Makes absolute sense. I was wondering about Bama12's question and what actionable intelligence the information could possibly yield.

[tonyclifton]

Makes absolute sense. I was wondering about Bama12's question and what actionable intelligence the information could possibly yield.

In the first post, the link to Portfolio Visualizer contains the setup for the comparison. For Bama12's question about VTI, it didn't exist in January of 1999. I think that Vanguard Total Stock Market Index Fund Investor Shares VTSMX would be the rough equivalent. If you invested $10,000 in the same way as described above you would end up with $790,220. If someone could do both $10,000 in VTSMX and $10,000 in I Bonds they would be a millionaire in 23 years which is pretty awesome (and using a very low risk fixed income option).

I think the actionable info would be how to determine asset allocation and options to consider for fixed income.

[okwriter]

You could also add EE bonds to the comparison. They double in value in 20 years, which is a 3.53% annual growth rate. You only get that rate after 20 years, though. But for the sake of comparison, let's say we use the value "implied" by the 3.53% rate.

For the chosen dates, EE bonds would give you an implied final value of $346,857. This is in between short-term and intermediate treasuries in the table.

But I don't know how much this backtest tells you. That 3.53% EE bond rate is higher than the current SEC yield of all the funds listed in the table. (Looking at Vanguard's website, there's actually only one fund with a higher yield: Emerging Mkts Govt Bd Idx Adm (VGAVX) at 3.78%, which comes with its own set of risks.)

[tonyclifton]

But I don't know how much this backtest tells you.

This is what I am trying to put into perspective. I know that prior performance is not indicative of future returns...However, imagine rolling back the clock to January 1999 and having $10,000 to invest in fixed income for the long-term. The only "bad" choice was to keep it in cash or a money market. All the other choices did well and what would have been expected based on the duration. The surprise for me was Long-Term Treasuries.

Clearly anyone who put $10,000 each year into I Bonds did very well with almost zero risk.

I am currently using the three-fund portfolio (generally) and back then likely would have either chosen the TIPS fund or the Total Bond market and also would have been pleased with the outcome. I wouldn't have had $10,000 and the funds would have allowed me to easily contribute after each paycheck.

Fast forward to today's investor with $10,000 to invest in fixed income....Another forum member described selecting fixed income as choosing the least dirty shirt in the hamper and there are many posts about the golden era of bonds being over. Then there the is the boglehead mantra of stay the course and this time is not different.

If anything, I think the comparison helps to validate some boglehead beliefs:

Save as much as you can as soon as you can...If you can save $10,000 per year for the long-term put it in anything except cash.

Matching your fixed income duration to your investment timeline is a good strategy...If you are investing for the long-term, buy fixed income with matching durations. Vineviz's first 20% of bonds in long-term Treasuries would have been great advice to follow as would buying intermediate bond funds.

Total Bond Market is "good enough". Might have been better in 1999 than it is now but most fixed income doesn't have great yields right now. I Bonds for sure have the highest yield right now of any fixed income choices.

Another bit of good advice and nuance in this thread is to first fill-up tax advantaged space (401k, Ira, 457, 403b, 529, etc) and then consider I Bonds and EE Bonds as "extra" tax advantaged options. Someone who can fill-up all tax advantaged space and buy the maximum allowed of I and EE Bonds is likely to have a well funded retirement and is in a very fortunate financial position.

[alluringreality]

imagine rolling back the clock to January 1999 and having $10,000 to invest in fixed income for the long-term. The only "bad" choice was to keep it in cash or a money market.

It's always difficult to say how long recent trends might continue. There have been historical periods where the difference between holding cash and long term bonds may have had different relationships for considerable periods. Of course it's anyone's guess how things play out going forward.
https://www.portfoliovisualizer.com/bac ... ion3_3=100

put it in anything except cash.

I tend to consider I bonds as one option for a cash equivalent, although they're somewhat unique in having a 30 year term and a minimum rate of 0% real for a 5 year holding period. It's possible that the recent inflation rates may just be a short-term blip, similar to 2011. At that point an I bond investment made today generally amounts to the 0% real rate, less three months of interest before year 5, and it's always possible other cash equivalent options could have a higher return over a given period. If someone disagrees with owning a cash equivalent, then I bonds don't really seem like an ideal investment choice to me. Personally I decided to start buying I bonds in 2019 because they seemed like a decent long-term option for my interest in having a cash equivalent.

[tonyclifton]

Of course it's anyone's guess how things play out going forward.

An interesting feature of using January 1999 to January 2021 is there were three major financial crises during this period. Dot com bust, mortgage meltdown and a global pandemic. Three very bad major events. Significant (or unexpected) inflation did not occur so maybe I Bonds and TIPS are still yet to be tested. 2021 may be the year that they are put to the inflation test (hopefully not).

[#Cruncher]

If my Excel is correct, $10,000 of I Bonds purchased every January since 1999 would accumulate to $364,060 in January of 2021.

I get the same $364,060 using my I Bond Portfolio Calculator Excel workbook. [1]

The chart below compares to other investment choices.
...

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| Ticker| Investment                              | Fund Bal  | I Bond Bal | Fund vs I Bond |
...
| VIPSX | Vanguard Inflation-Protected Secs Inv** | $362,595  | $343,776   | $18,819 (5.5%) |
| VBMFX | Vanguard Total Bond Market Index Inv    | $380,253  | $364,060   | $16,193 (4.4%) |
...

**For the TIPS fund (VIPSX - Vanguard Inflation-Protected Securities), it started in June of 2000, so I skipped the January 1999 purchase of I Bonds.

However, with the January 1999 purchase omitted, the total is $330,936, not the $343,776 you show. [2] This got me thinking about how to do a more comprehensive comparison of I Bonds and the Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX).

• Assume $5,000 invested every six months in I Bonds and VIPSX [3] starting July 2000 and ending January 2021. (Buying I Bonds every six months instead of every year, picks up every fixed rate during the period.)
• Compare not just repeated purchases beginning at the earliest date, but beginning at every six month date.

For example, the table below shows a 3.45% return on 42 I Bond purchases starting in July 2000 when fixed rates were high, but only a 1.89% return on 26 purchases starting in July 2008 when high fixed rates were but a fond memory. The comparable returns for VIPSX were 4.28% on 42 investments starting July 2000 (0.63% 0.83% points better), and 3.71% on 26 investments starting July 2008 (1.82% points better).

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                     -- Grows To ---   --- Return ---
  2  Invest Fix Rt   I Bond    VIPSX   I Bond   VIPSX

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  3  7/2000   3.6%   16,146   14,481    3.45%   4.28% [4]
  4  1/2001   3.4%   14,976   13,520    3.26%   4.21%
  5  7/2001   3.0%   13,458   12,764    3.08%   4.15%
  6  1/2002   2.0%   10,888   12,735    2.91%   4.10%
  7  7/2002   2.0%   10,654   11,729    2.82%   4.03%
  8  1/2003   1.6%    9,816   10,918    2.73%   3.98%
  9  7/2003   1.1%    8,872   10,827    2.65%   3.95%
 10  1/2004   1.1%    8,658   10,045    2.60%   3.91%
 11  7/2004   1.0%    8,444    9,895    2.55%   3.89%
 12  1/2005   1.0%    8,292    9,395    2.50%   3.87%
 13  7/2005   1.2%    8,386    9,347    2.45%   3.86%
 14  1/2006   1.0%    7,964    9,142    2.37%   3.84%
 15  7/2006   1.4%    8,124    9,165    2.31%   3.83%
 16  1/2007   1.4%    8,040    9,103    2.22%   3.79%
 17  7/2007   1.3%    7,754    8,771    2.11%   3.74%
 18  1/2008   1.2%    7,524    7,874    2.00%   3.70%
 19  7/2008   0.0%    6,424    7,813    1.89%   3.71% [5]
 20  1/2009   0.7%    6,770    8,331    1.88%   3.72%
 21  7/2009   0.1%    6,186    7,965    1.82%   3.66%
 22  1/2010   0.3%    6,308    7,477    1.82%   3.62%
 23  7/2010   0.2%    6,148    7,285    1.78%   3.61%
 24  1/2011   0.0%    5,980    7,150    1.76%   3.61%
 25  7/2011   0.0%    5,960    6,536    1.76%   3.61%
 26  1/2012   0.0%    5,824    6,178    1.75%   3.70%
 27  7/2012   0.0%    5,736    5,965    1.75%   3.87%
 28  1/2013   0.0%    5,670    5,955    1.77%   4.10%
 29  7/2013   0.0%    5,626    6,347    1.80%   4.36%
 30  1/2014   0.2%    5,662    6,355    1.83%   4.54%
 31  7/2014   0.1%    5,590    6,137    1.84%   4.72%
 32  1/2015   0.0%    5,506    6,064    1.86%   4.99%
 33  7/2015   0.0%    5,466    6,228    1.90%   5.32%
 34  1/2016   0.1%    5,492    6,272    1.96%   5.60%
 35  7/2016   0.1%    5,448    5,947    1.98%   5.84%
 36  1/2017   0.0%    5,422    6,034    1.99%   6.36%
 37  7/2017   0.0%    5,346    6,008    1.98%   6.84%
 38  1/2018   0.1%    5,308    5,982    2.00%   7.39%
 39  7/2018   0.3%    5,270    5,965    1.99%   7.95%
 40  1/2019   0.5%    5,222    5,931    1.93%   8.36%
 41  7/2019   0.5%    5,152    5,660    1.76%   8.09%
 42  1/2020   0.2%    5,088    5,452    1.52%   7.73%
 43  7/2020   0.0%    5,026    5,135    1.04%   5.40%
 44  1/2021   0.0%    5,000    5,000
                    -------  -------
               Sum  304,626  334,882

1. Here are the 23 individual I Bond purchases with a total $364,060 value as of January 2021:

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     6                  Face   Fixed     Value
     7      Bought     Value    Rate    1/2021

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     9      1/1999    10,000    3.3%    33,124
    10      1/2000    10,000    3.4%    32,116
    11      1/2001    10,000    3.4%    29,952
    12      1/2002    10,000    2.0%    21,776
    13      1/2003    10,000    1.6%    19,632
    14      1/2004    10,000    1.1%    17,316
    15      1/2005    10,000    1.0%    16,584
    16      1/2006    10,000    1.0%    15,928
    17      1/2007    10,000    1.4%    16,080
    18      1/2008    10,000    1.2%    15,048
    19      1/2009    10,000    0.7%    13,540
    20      1/2010    10,000    0.3%    12,616
    21      1/2011    10,000    0.0%    11,960
    22      1/2012    10,000    0.0%    11,648
    23      1/2013    10,000    0.0%    11,340
    24      1/2014    10,000    0.2%    11,324
    25      1/2015    10,000    0.0%    11,012
    26      1/2016    10,000    0.1%    10,984
    27      1/2017    10,000    0.0%    10,844
    28      1/2018    10,000    0.1%    10,616
    29      1/2019    10,000    0.5%    10,444
    30      1/2020    10,000    0.2%    10,176
    31      1/2021    10,000    0.0%    10,000
                     -------           -------
               Sum   230,000           364,060

2. It looks like you may have picked up the I Bond values as of January 2022 instead of 2021.
3. Unfortunately Portfolio Visualizer's Backtesting doesn't allow semi-annual contributions. So on a spreadsheet I applied the growth each six months to an assumed $5,000 investment.
4. Return on 42 investments July 2000 to Jan 2021 calculated with Excel RATE function:
   IBond: 3.45% =RATE(41, -5000, -5000, 304626, 0) * 2
   VIPSX: 4.28% =RATE(41, -5000, -5000, 334882, 0) * 2
5. Return on 26 investments July 2008 to Jan 2021:
   IBond: 1.89% =RATE(25, -5000, -5000, 146630, 0) * 2
   VIPSX: 3.71% =RATE(25, -5000, -5000, 165173, 0) * 2

[nisiprius]

What if they did the same with VTI?

That's an inappropriate comparison, because VTI is a moderately volatile, moderately risky investment. Vanguard puts it in risk category 4 in on their 1-5 scale.

Series I savings bonds are virtually zero volatility and are also virtually free from interest rate risk. The appropriate comparison is with other zero volatility, zero interest-rate risk investments, such as Treasury bills, bank accounts, and money market mutual funds. If Vanguard were to classify them, they would undoubtedly be in risk category 1--even lower than Total Bond and their intermediate-term TIPS fund, which have some volatility and are in category 2.

And while it is certainly true that I bonds had a higher fixed rate circa 2000, I assure you that at the time people said they were ridiculously low-earning and not a serious investment... just as they do now.

Now obviously if you want a portfolio that is 100% stocks... or one that has literally no "cash" or "short-term reserves" in it, then you don't want I bonds... or money market mutual funds or Treasury bills or bank accounts.

Series I savings bonds have another remarkable characteristic which so far has not mattered because the fixed rate has basically only gone down. The characteristic is that because they are not marketable and don't have interest rate risk, if interest rates rise you are not stuck with a low-earning I bond. If I bond fixed rates go up, you simply redeem your low-interest I bonds and use the proceeds to replace them with higher-earning I bonds.

With marketable bonds this is a useless exercise, because bond math guarantees it will be of no benefit. If you have buy $1,000 worth of marketable bonds and interest rates rise, you can't replace them with $1,000 worth of higher-earning bonds, because their market value will no longer be $1,000, it will be less.

But if you have $1,000 worth of I bonds and interest rates rise, you can redeem them for at least $1,000 despite the interest rate rise, and buy (at least) $1,000 worth of new, higher-earning I bonds. You can simply ratchet up the interest rate by replacing them... subject to the annual purchase limit, alas.

[tonyclifton]

However, with the January 1999 purchase omitted, the total is $330,936, not the $343,776 you show. ... This got me thinking about how to do a more comprehensive comparison of I Bonds and the Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX).

Thank you for checking the figures and the correction. You are right. I corrected the the chart in the first post for the line comparing I Bond to Vanguard Inflation-Protected Securities VIPSX.

I really like your "buy $5,000 every 6 months" scenario. This truly is the "what if I bought every I Bond possible" scenario. VIPSX ends up with a final balance of $334,882 which is $30,256.00 (9.9%) higher than the I Bond final balance of $304,626.

I am surprised by the significant difference in final balance considering the purpose of both is to mitigate inflation. 70% of our fixed income is in TIPS funds so this is more than just curiosity

[Mel Lindauer]

What if they did the same with VTI?

That's an inappropriate comparison, because VTI is a moderately volatile, moderately risky investment. Vanguard puts it in risk category 4 in on their 1-5 scale.

Series I savings bonds are virtually zero volatility and are also virtually free from interest rate risk. The appropriate comparison is with other zero volatility, zero interest-rate risk investments, such as Treasury bills, bank accounts, and money market mutual funds. If Vanguard were to classify them, they would undoubtedly be in risk category 1--even lower than Total Bond and their intermediate-term TIPS fund, which have some volatility and are in category 2.

And while it is certainly true that I bonds had a higher fixed rate circa 2000, I assure you that at the time people said they were ridiculously low-earning and not a serious investment... just as they do now.

Now obviously if you want a portfolio that is 100% stocks... or one that has literally no "cash" or "short-term reserves" in it, then you don't want I bonds... or money market mutual funds or Treasury bills or bank accounts.

Series I savings bonds have another remarkable characteristic which so far has not mattered because the fixed rate has basically only gone down. The characteristic is that because they are not marketable and don't have interest rate risk, if interest rates rise you are not stuck with a low-earning I bond. If I bond fixed rates go up, you simply redeem your low-interest I bonds and use the proceeds to replace them with higher-earning I bonds.

With marketable bonds this is a useless exercise, because bond math guarantees it will be of no benefit. If you have buy $1,000 worth of marketable bonds and interest rates rise, you can't replace them with $1,000 worth of higher-earning bonds, because their market value will no longer be $1,000, it will be less.

But if you have $1,000 worth of I bonds and interest rates rise, you can redeem them for at least $1,000 despite the interest rate rise, and buy (at least) $1,000 worth of new, higher-earning I bonds. You can simply ratchet up the interest rate by replacing them... subject to the annual purchase limit, alas.

Excellent post, Nisi.

[moneyman11]

I Bond hype is out of control.

I fear the hype in the mainstream financial media (and perhaps even on this very site) is leading more than a few people to buy I Bonds before they have maximized their 401k and/or Roth contributions for the year … a decision that especially young people will regret in retrospect.

[Iorek]

I Bond hype is out of control.

I fear the hype in the mainstream financial media (and perhaps even on this very site) is leading more than a few people to buy I Bonds before they have maximized their 401k and/or Roth contributions for the year … a decision that especially young people will regret in retrospect.

I dunno, seems like a good case could be made that putting money in ibonds instead of into bonds in your 401k is rational. I also think that young people who are hesitant to lock money up in a 401k might be more open to saving in ibonds, so it could increase overall longterm savings for some people.

[billthecat]

that seems like the data on how things went... the question is going forward do you think the environment for bonds will be the same as it was from 1999 to now?

LT Treasury Crushed IBonds and all the other fixed income choices.... do you think that will repeat over the next 20 years? Last 20 years have been awesome for bond funds as rates have come down... and down... and down...

IBonds are good at a very specific thing... inflation protection, can't lose nominal money, and federal tax deferred, state tax exempt. The only drawback is the limited amount you can deploy each year

Not sure what you have fear of missing out on...

Mike

Let's just suppose there were no limits to buying I bonds. If it were possible, would allocating 100% of fixed income to I bonds (especially during retirement) be best? I realize it's not possible but I was wondering, as a thought experiment.

[Tom_T]

that seems like the data on how things went... the question is going forward do you think the environment for bonds will be the same as it was from 1999 to now?

LT Treasury Crushed IBonds and all the other fixed income choices.... do you think that will repeat over the next 20 years? Last 20 years have been awesome for bond funds as rates have come down... and down... and down...

IBonds are good at a very specific thing... inflation protection, can't lose nominal money, and federal tax deferred, state tax exempt. The only drawback is the limited amount you can deploy each year

Not sure what you have fear of missing out on...

Mike

Let's just suppose there were no limits to buying I bonds. If it were possible, would allocating 100% of fixed income to I bonds (especially during retirement) be best? I realize it's not possible but I was wondering, as a thought experiment.

If inflation is low or even steady, then the six-month CPI change might be very small, and the I Bond variable rate would be very low. Another fixed income vehicle could easily provide a better yield. I feel like it's best to have a combination of things, unless you're like Mel who has a boatload of I Bonds from way back with high fixed rates.

[billthecat]

that seems like the data on how things went... the question is going forward do you think the environment for bonds will be the same as it was from 1999 to now?

LT Treasury Crushed IBonds and all the other fixed income choices.... do you think that will repeat over the next 20 years? Last 20 years have been awesome for bond funds as rates have come down... and down... and down...

IBonds are good at a very specific thing... inflation protection, can't lose nominal money, and federal tax deferred, state tax exempt. The only drawback is the limited amount you can deploy each year

Not sure what you have fear of missing out on...

Mike

Let's just suppose there were no limits to buying I bonds. If it were possible, would allocating 100% of fixed income to I bonds (especially during retirement) be best? I realize it's not possible but I was wondering, as a thought experiment.

If inflation is low or even steady, then the six-month CPI change might be very small, and the I Bond variable rate would be very low. Another fixed income vehicle could easily provide a better yield. I feel like it's best to have a combination of things, unless you're like Mel who has a boatload of I Bonds from way back with high fixed rates.

Higher yield but also the possibility of loss of principal. But, it sounds like, then, for the fixed income allocation a 50/50 split between I bonds and total bond (or muni index, if in taxable with high marginal rates) would be a good approach, again assuming there were no limits on I bonds. It would just be awful to be very old and experience the bond drop of 2022, with insufficient time to hold on and wait it out. But, if the person had been 50/50 for many years prior, during a period of low inflation, then perhaps the earlier higher yield would make up for that, compared to having been in I bonds only.