Yet another I-Bond Thread: Ladders

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friar1610
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Yet another I-Bond Thread: Ladders

Post by friar1610 »

The basic question is: does anyone use I-Bonds as part of a bond/CD ladder?

The backstory is:

- As I approached early retirement (age 58) in 2003, I tried to predict how much we would need every year over and above my pension.
- I put together a 5 year CD ladder so that the right amount would mature each year, figuring that I would take enough from either stock or bond mutual funds each year (whichever asset class was "up") to replenish the CD on the long end of the ladder. As things have turned out, expenses were initially lower than expected and we didn't have to use the money from the CDs as they matured. Now that we both have SS coming in, that is even more true. However, I decided to keep the ladder going in case I predecease my wife in which case her income will drop and she would likely need the money. So, for a few years, I just kept rolling over matured CDs to new 5 year CDs.
- Separately, my wife and I were fortunate enough to buy the maximum allowable amount of I-Bonds in 2001 (@3.5%) and a few more in 2003 (@1.1%). One day it occurred to me that I could include these in my latter because they essentially have variable maturity dates. That is, whenever I needed to plug a hole somewhere in the ladder, I could assign my own "virtual" maturity date to an I-Bond or two, and put it/them in the ladder where they were needed.
- After a while, I abandoned that idea because it was getting too hard to keep my spreadsheet straight. Over time, I morphed back to a true 5 year CD ladder and kept the I-Bonds separate, figuring that, at least in the case of the 3.5% bonds, I'd hold them as long as possible and it would mean that I didn't have to worry about having TIPS in my bond allocation.
- Over the last few years with declining CD interest rates, I've been reluctant to do the true ladder thing as CDs have matured. That is, with the interest rate on 5 year CDs so low and with the likelihood (?) of increasing interest rates in the future, I've only been buying one year CDs as longer ones have matured to keep my options open. The result of this is that my 5 year ladder is no longer a 5 year ladder, although I have 5 years worth of expenses in CDs.
- That got me thinking again: if one were to replace maturing CDs with I-Bonds (and I realize the annual limits here could be a problem) and as long as one had enough he had held for more than 5 years, is there any reason to have a 5 year CD ladder for living expenses?
-- If you have enough I-Bonds to cover 5 years of living expenses (over and above other income streams) AND if you have the discipline not to redeem more than your planned amount in any given year, what's not to like?
-- If you don't need the money in a given year, you just let it sit in the I-Bonds and don't have to worry about reinvesting a matured CD. If you do need the money, you redeem I-Bonds up to your planned annual amount.
--- As long as you've held them 5 years (to avoid the early redemption penalty) you can redeem the ones with the lowest fixed interest rate and hold on to those with higher rates.

I suppose where this breaks down is that the fixed + inflation portion of I-Bond interest might not always be equal to or exceed CD interest rates, so in those cases you'd be better off with CDs paying a higher rate.

Comments/critiques/ideas/suggestions?
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hollowcave2
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I-bonds

Post by hollowcave2 »

I'll let others answer more fully, but my first reaction is:

Keep the I-bonds from 2001 through 2003 as long as you can and don't redeem them until you really need the money.

You'll never see fixed rates like that again. To be a part of a true ladder, you need to have a plan to redeem or roll them into another bond. I wouldn't redeem these until they matured at 30 years or you need the money and have liquidated everything else.

Just my 2 cents.

Steve
swyck
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Post by swyck »

I kind of do this, kind of. With IBond rates higher than CD's I've been buying them instead of CDs. I haven't actually bought a new CD in a while, and I've stopped the rollovers.

I guess once\when CDs have better returns I'll start them up again. One difference is that you can buy as many CDs as you want, but no IBonds so there's a limit to using them in a ladder.
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Post by Mel Lindauer »

It's a great plan and, as you said, the I Bonds make their own ladder because they can be redeemed at any time between one year and 30 years.

Additionally, in your case, you might not need the I Bonds until after your demise, so hopefully you'll be holding onto those good fixed rate bonds for a long time.

I look at my I Bonds as both a ladder and an annuity if needed.
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Post by Manbaerpig »

how could you ever have enough in ibonds to meet your expenses tho when limited to $10k per year and inflation-based returns.

eg 20 years of $10k/yr gives you 200k ... say that doubles or so... $400k... that will throw off say you withdraw 5% of that/yr or so in retirement... $20k/yr...

seems like a rather unlikely way to generate retirement income given the $10k limit/yr, especially given some of the TD usability issues... meaning perhaps only $5k/yr contribs
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Post by friar1610 »

Manbaerpig wrote:how could you ever have enough in ibonds to meet your expenses tho when limited to $10k per year and inflation-based returns.

eg 20 years of $10k/yr gives you 200k ... say that doubles or so... $400k... that will throw off say you withdraw 5% of that/yr or so in retirement... $20k/yr...

seems like a rather unlikely way to generate retirement income given the $10k limit/yr, especially given some of the TD usability issues... meaning perhaps only $5k/yr contribs
You may have missed the point that this is money that would be over and above my pension so it's not my sole source of income.

And, many of the I-Bonds I own were from the good ol' days when one could buy $30K in a year. With husband as the primary owner on $30K and wife as primary owner on $30K a family could buy $60K per year.
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Post by friar1610 »

Mel Lindauer wrote: Additionally, in your case, you might not need the I Bonds until after your demise, so hopefully you'll be holding onto those good fixed rate bonds for a long time.
Mel,

Do I-Bonds "step up" like equities do when they become part of one's estate?
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Post by Mel Lindauer »

Manbaerpig wrote:how could you ever have enough in ibonds to meet your expenses tho when limited to $10k per year and inflation-based returns.

eg 20 years of $10k/yr gives you 200k ... say that doubles or so... $400k... that will throw off say you withdraw 5% of that/yr or so in retirement... $20k/yr...

seems like a rather unlikely way to generate retirement income given the $10k limit/yr, especially given some of the TD usability issues... meaning perhaps only $5k/yr contribs
Several points:
1. You used to be able to buy up to $120,000 per year per couple, so many investors hold lots of I Bonds.
2. A couple can still buy up to $20,000 per year, no the $10K you mentioned.
3. This isn't about living off the annual interest thrown off by the I Bonds (there is none, since the interest accumulates tax-deferred). These bonds would be redeemed for living expenses at full face value plus all accumulated interest, just as the CD proceeds or annuity payments would be.
4. Finally, this is just to supplement other sources of income (SS, pension, dividends, etc.)
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Post by Mel Lindauer »

friar1610 wrote:
Mel Lindauer wrote: Additionally, in your case, you might not need the I Bonds until after your demise, so hopefully you'll be holding onto those good fixed rate bonds for a long time.
Mel,

Do I-Bonds "step up" like equities do when they become part of one's estate?
No, they don't get the step-up. However, if you have a co-owner or a benefiary named on the bond(s), they can continue to hold them until they choose to redeem them or until they mature.
Best Regards - Mel | | Semper Fi
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Post by Johm221122 »

I was also thinking same idea,you can put money in I bonds or EE bonds (when rates go higher) and hold them for down years in market and also for 2nd emergency fund.savings bonds give you flexibility,time(30 years) and good rates ( if you buy at good time)

Iam waiting for EE to hit 7%!!!
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Post by Manbaerpig »

if you hold EE for 20 years (there current stated minimum doubling time), you will earn no less than 3.5% effective annually

for time periods under 20 years, sure, worry about the stated rate if it is sub 3.5%
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Post by friar1610 »

friar1610 wrote:
Manbaerpig wrote:how could you ever have enough in ibonds to meet your expenses tho when limited to $10k per year and inflation-based returns.

eg 20 years of $10k/yr gives you 200k ... say that doubles or so... $400k... that will throw off say you withdraw 5% of that/yr or so in retirement... $20k/yr...

seems like a rather unlikely way to generate retirement income given the $10k limit/yr, especially given some of the TD usability issues... meaning perhaps only $5k/yr contribs
You may have missed the point that this is money that would be over and above my pension so it's not my sole source of income.

And, many of the I-Bonds I own were from the good ol' days when one could buy $30K in a year. With husband as the primary owner on $30K and wife as primary owner on $30K a family could buy $60K per year.
And then Mel said:
Several points:
1. You used to be able to buy up to $120,000 per year per couple, so many investors hold lots of I Bonds.
2. A couple can still buy up to $20,000 per year, no the $10K you mentioned.
3. This isn't about living off the annual interest thrown off by the I Bonds (there is none, since the interest accumulates tax-deferred). These bonds would be redeemed for living expenses at full face value plus all accumulated interest, just as the CD proceeds or annuity payments would be.
4. Finally, this is just to supplement other sources of income (SS, pension, dividends, etc.)
Of course Mel is right that you used to be able to buy $120K per year per couple, not $60K as I had said. There was a year in which my wife and I bought $60K but that wasn't because Uncle Sam wouldn't let us; it was because we didn't have any more money.
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