Why not go EE bonds (instead of bond funds)?

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Grt2bOutdoors
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Re: Why not go EE bonds (instead of bond funds)?

Post by Grt2bOutdoors »

aj76er wrote: Mon Sep 13, 2021 1:31 am
Grt2bOutdoors wrote: Sun Sep 12, 2021 8:46 pm
SafeBonds wrote: Sun Sep 12, 2021 4:56 pm It's a no brainer … EE Bonds are better than 20 year zero coupon treasuries held to maturity.

And just to add, EE bonds have beaten the yield on the 20 year yield to maturity US Treasuries over the last 6 years.

Looking at yield alone doesn’t tell the whole story.

Using EDV as a proxy for 20yr zero coupon nominal treasuries, since 2015, it has returned 5.85%.

Furthermore, because EDV is marketable and liquid, it could have been rebalanced with equities at at fire sale prices (due to uncorrelated behavior). A 60/40 balanced portfolio (using VTI as a proxy for equities), rebalanced annually has returned 11.2% since 2015.

Meanwhile, holders of EE bonds only have 14 more years to go to collect 3.5% total return on their original investment. The future is unknown, but the past is certain: holders of EE Bonds have paid a massive opportunity cost compared to marketable, liquid alternatives.
You still don’t get it, you continually compare apples and oranges. We have already established that EE savings bonds are fixed income - yet you continually bring equities up in your responses.
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Re: Why not go EE bonds (instead of bond funds)?

Post by aj76er »

SnowBog wrote: Sun Sep 12, 2021 4:30 pm
Grt2bOutdoors wrote: Mon Sep 13, 2021 6:15 am
EE bonds should not be thought of as direct replacement for marketable, nominal bonds in a portfolio. The 20 year lockup for money in EE bonds puts a big dividing line between them and liquid, marketable investments of any kind.

Let’s do a thought experiment in which you are using a one-fund portfolio, Vanguard LifeStrategy Moderate Growth Fund (VSMGX) in all your accounts (401k, Roth, taxable, etc). You have $10k available to invest in the following ways:
  • $10k into VSMGX, with plan to retire in 20yrs
  • $10k of EE bonds with a 20yr doubling rate
  • $10k pay down of a 20yr remaining mortgage @3.5%
All are valid ways to invest, and the best choice depends on one’s personal risk tolerance, preferences, and circumstances. But I am arguing that they are distinct and orthogonal investments.

If you use the money to pay down your mortgage, you wouldn’t suddenly count that equity as part of your portfolio, would you? I contend that EE bonds should be treated in a similar vein due to their 20yr lock-up requirement.
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Re: Why not go EE bonds (instead of bond funds)?

Post by Grt2bOutdoors »

aj76er wrote: Mon Sep 13, 2021 8:53 am
SnowBog wrote: Sun Sep 12, 2021 4:30 pm
Grt2bOutdoors wrote: Mon Sep 13, 2021 6:15 am
EE bonds should not be thought of as direct replacement for marketable, nominal bonds in a portfolio. The 20 year lockup for money in EE bonds puts a big dividing line between them and liquid, marketable investments of any kind.

Let’s do a thought experiment in which you are using a one-fund portfolio, Vanguard LifeStrategy Moderate Growth Fund (VSMGX) in all your accounts (401k, Roth, taxable, etc). You have $10k available to invest in the following ways:
  • $10k into VSMGX, with plan to retire in 20yrs
  • $10k of EE bonds with a 20yr doubling rate
  • $10k pay down of a 20yr remaining mortgage @3.5%
All are valid ways to invest, and the best choice depends on one’s personal risk tolerance, preferences, and circumstances. But I am arguing that they are distinct and orthogonal investments.

If you use the money to pay down your mortgage, you wouldn’t suddenly count that equity as part of your portfolio, would you? I contend that EE bonds should be treated in a similar vein due to their 20yr lock-up requirement.
I get what you are saying, though one can think of their tax deferred 401k in a similar vein. You can’t get access to the money before a certain age with no penalty, you can certainly cash it out prior but will pay a steep cost for doing so. EE bonds are just another savings vehicle and yes, there are other options out there but they all come with different risks.
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SnowBog
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Re: Why not go EE bonds (instead of bond funds)?

Post by SnowBog »

aj76er wrote: Mon Sep 13, 2021 8:53 am
SnowBog wrote: Sun Sep 12, 2021 4:30 pm
Grt2bOutdoors wrote: Mon Sep 13, 2021 6:15 am
EE bonds should not be thought of as direct replacement for marketable, nominal bonds in a portfolio. The 20 year lockup for money in EE bonds puts a big dividing line between them and liquid, marketable investments of any kind.

Let’s do a thought experiment in which you are using a one-fund portfolio, Vanguard LifeStrategy Moderate Growth Fund (VSMGX) in all your accounts (401k, Roth, taxable, etc). You have $10k available to invest in the following ways:
  • $10k into VSMGX, with plan to retire in 20yrs
  • $10k of EE bonds with a 20yr doubling rate
  • $10k pay down of a 20yr remaining mortgage @3.5%
All are valid ways to invest, and the best choice depends on one’s personal risk tolerance, preferences, and circumstances. But I am arguing that they are distinct and orthogonal investments.

If you use the money to pay down your mortgage, you wouldn’t suddenly count that equity as part of your portfolio, would you? I contend that EE bonds should be treated in a similar vein due to their 20yr lock-up requirement.
If someone has only $10k to invest each year, I'd agree EE Bonds aren't likely the best investment for that person.

But for those that have already maxed out tax-advantaged accounts, wouldn't mind having "extra" tax advantaged space, and could use the bonds to maintain their AA - EE Bonds might be an exceptional choice. And in doing so, I see no reason they couldn't/shouldn't think of them as a portion of their fixed income.

I don't buy the "keep them separate because of the 20 year lockup" argument. I can't access my 401k for more than 20 years from when I started investing in it... I likely won't access my Roth for more than 20 years from when it started. And I might not even use some of the "first" money that went into taxable until after 20 years (I'll pull out the money added later with less gains first). How are EE Bonds different? (I get the very little interest until 20 years, but again I've got lots of "money" invested in not touched for 20 years from when it was invested... Nothing new here...)

That said, if people want to manage their portfolio and think of EE Bonds as separate, whatever works for them. To me, it's a similar discussion as should ones EF be part of - or separate from - their portfolio (or is an EF needed at all). Everyone has what works for them... I know what works for me...

For myself, I actually treat EE Bonds both ways depending on the tool/model. In my home built model (and tools that support modeling it this way), I treat EE Bonds as an annuity - so $10k purchased this year shows up as an income stream of $20k in 20 years, in so doing I exclude them from the rest of the portfolio (as you seem to recommend). But other tools like Firecalc don't support that level of modeling, so there I just treat EE Bonds as part of my fixed income. Life isn't perfect, so I do my best to do what makes sense and works for the situation.
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Re: Why not go EE bonds (instead of bond funds)?

Post by willthrill81 »

While EE bonds are a fixed income instrument, the '20 year lockup period' makes them a qualitatively distinct instrument. In fact, it makes them so distinct that I'm not sure how appropriate it is to just lump EE bond holdings together with one's other fixed income holdings. EE bonds are essentially worthless for rebalancing purposes, they cannot be spent in retirement prior to the 20 year period, etc.

I cannot help but wonder whether some of those who are attracted to EE bonds and willing to not touch the funds for 20 years are stretching for yield.

Some are attracted to the guaranteed 3.53% effective nominal return that EE bonds offer, but that has historically come at a very high opportunity cost compared to certain other types of investments.
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Re: Why not go EE bonds (instead of bond funds)?

Post by SnowBog »

willthrill81 wrote: Mon Sep 13, 2021 10:57 am While EE bonds are a fixed income instrument, the '20 year lockup period' makes them a qualitatively distinct instrument. In fact, it makes them so distinct that I'm not sure how appropriate it is to just lump EE bond holdings together with one's other fixed income holdings. EE bonds are essentially worthless for rebalancing purposes, they cannot be spent in retirement prior to the 20 year period, etc.

I cannot help but wonder whether some of those who are attracted to EE bonds and willing to not touch the funds for 20 years are stretching for yield.

Some are attracted to the guaranteed 3.53% effective nominal return that EE bonds offer, but that has historically come at a very high opportunity cost compared to certain other types of investments.
Personally, I'm more concerned with people "recently" getting interested in I Bonds as chasing yields... While I like and buy I Bonds - I accept them for what they are - basically holding purchasing power into the future.

And I've been very clear that EE Bonds are not a suitable replacement for fixed income that may need to be used for rebalancing. Build that pile first - before thinking about EE Bonds.

But to me there are several reasons I like EE Bonds:
  • The primary reason is their DIY Annuity characteristic - which I'm using to build an "income floor" from retirement through delayed SS/pensions
  • They also help diversify my fixed income holdings - they are backed by the US Gov. so are some of the "safest" bonds I own
  • Likewise, their non-marketability I view as an advantage - again in providing a very safe investment that won't be impacted by interest rate changes, market conditions, etc. I know what I invest will be worth at least 2x in 20 years (although I don't know what "purchasing power" that will provide at that time).
  • This non-marketability may also help in our [previously] low interest environment, as if interest rates continue to rise - traditional bond funds may suffer NAV loses - while at least EE Bonds won't be negatively impacted (but also won't benefit by paying out higher interest rates for previously issued bonds).
  • I've decided that the limited purchase limit of EE Bonds is oddly a benefit - as it forces this to be "in addition to" my broader plan/investments.
Or put differently, I can line up EE Bonds (and later the delayed SS/pensions that will replace them) as covering my "essential spending". With a paid off house, $40k ($10k purchased for each spouse doubling in 20 years) is enough to cover our "essential" expenses - even with reasonable future inflation eating away at the actual purchasing power. By using EE Bonds (and later SS/pension) - I've ensured that no matter the market conditions (even if we have a long lasting 70% crash) - we'll have enough to meet essential needs basically for life. Ultimately, that's my goal/use case for EE Bonds (paired up with delayed SS/pensions that will replace them).

The rest of the portfolio addresses the "wants."
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Re: Why not go EE bonds (instead of bond funds)?

Post by abc132 »

The starting points for discussion should be
- the effect a change or difference in investment choice on the entire portfolio
- whether the change subjectively is good/big enough to make doing it worthwhile

Rebalancing
It's fairly easy to calculate the portion of fixed income needed for rebalancing, and there will always be some fixed income space left over. That eliminates rebalancing as an issue for anyone that maintains less than half of their fixed income in EE bonds.

Fund Withdrawal
Anyone willing to rebalance already has fixed income in excess of what they plan to withdraw in a market downturn. Most of those with an emergency fund and any fixed income in their AA will have fixed income in excess of what they need to withdraw, leaving EE bonds as one possible option in a portfolio.

Subjective Value
Having established that there is fixed income space that is not used for emergency funds or for rebalancing, the question becomes the value of adding EE bonds to a portfolio of fixed income products. This is subjective to our assessment of what risks or rewards we individually care about, so it should not be surprising if different people have different conclusions.

I personally have found value in adding a mix of both I-bonds and EE bonds to my portfolio of individual treasuries and bond funds. I bonds help deal with inflation and leave space for short term expenses. EE bonds currently give a higher yield than anything that can promise a nominal return. The space I am filling will reach 20 years before social security and after retirement. I have enough Roth space to manage my tax bracket in retirement, and some guaranteed income gives me more confidence in owning my riskier assets.
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Re: Why not go EE bonds (instead of bond funds)?

Post by SnowBog »

abc132 wrote: Mon Sep 13, 2021 11:46 am The starting points for discussion should be
- the effect a change or difference in investment choice on the entire portfolio
- whether the change subjectively is good/big enough to make doing it worthwhile

Rebalancing
It's fairly easy to calculate the portion of fixed income needed for rebalancing, and there will always be some fixed income space left over. That eliminates rebalancing as an issue for anyone that maintains less than half of their fixed income in EE bonds.

Fund Withdrawal
Anyone willing to rebalance already has fixed income in excess of what they plan to withdraw in a market downturn. Most of those with an emergency fund and any fixed income in their AA will have fixed income in excess of what they need to withdraw, leaving EE bonds as one possible option in a portfolio.

Subjective Value
Having established that there is fixed income space that is not used for emergency funds or for rebalancing, the question becomes the value of adding EE bonds to a portfolio of fixed income products. This is subjective to our assessment of what risks or rewards we individually care about, so it should not be surprising if different people have different conclusions.

I personally have found value in adding a mix of both I-bonds and EE bonds to my portfolio of individual treasuries and bond funds. I bonds help deal with inflation and leave space for short term expenses. EE bonds currently give a higher yield than anything that can promise a nominal return. The space I am filling will reach 20 years before social security and after retirement. I have enough Roth space to manage my tax bracket in retirement, and some guaranteed income gives me more confidence in owning my riskier assets.
Well stated! :beer
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Re: Why not go EE bonds (instead of bond funds)?

Post by Angst »

SnowBog wrote: Mon Sep 13, 2021 11:29 am [Snip...]
willthrill81 wrote: Mon Sep 13, 2021 10:57 am [Snip...]
There's no doubt in my mind that committing to buying EE Bonds bears monitoring LT interest rates over time with respect to the changing (rising) YTM of one's EE Bonds holdings. A few or more years out there may well be an unequivocally better choice to "cut bait" rather than hang on to some of one's EE Bonds. I also agree that one probably should put rebalancing and emergency use as fairly "out of the question" topics - one needs to commit to essentially owning a non-negotiable zero-coupon investment. (Note chart below.)

A little over 10 years ago when I began building an LMP of TIPS to provide a portion of my retirement income floor, I chose only to buy TIPS at auction (easier to do, no spread and no accrued inflation to potentially lose to deflation) but was disappointed that auctions were limited to 30 and 10 yr issues. I decided to gamble on EE Bonds as well for my 20 year rungs. I now consider myself lucky how well that gamble has worked out, so far. Inflation and nominal rates have generally stayed below the magic 3.53% threshold. Of course today, I Bonds are pretty much superior to any US Govt bond choice, whether one's building an LMP or just adding to their overall fixed income holdings.

Today, inflation threatens the EE Bonds' yield, but I'll continue to take my chances on them while monitoring rates over time. It's a responsibility not everyone is probably well suited for. :D

Code: Select all

Year  YTM     Years left
1     3.53%   20    
2     3.72%   19    
3     3.93%   18    
4     4.16%   17    
5     4.43%   16    
6     4.73%   15    
7     5.08%   14   
8     5.48%   13  
9     5.95%   12  
10    6.50%   11    
11    7.18%   10    
12    8.01%    9    
13    9.05%    8    
14   10.41%    7   
15   12.25%    6   
16   14.87%    5    
17   18.92%    4
18   25.99%    3
19   42.42%    2
20  100.00%    1
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Re: Why not go EE bonds (instead of bond funds)?

Post by SafeBonds »

For the purposes of rebalancing I estimate my EE Bonds to be worth whatever a treasury STRIP on the open market with face value $20,000 is worth. This means my EE Bonds are worth about $13,000 - $14,000. I plug that number into my spreadsheet for rebalancing purposes. I don't sell the EE bonds, I sell other long dated treasuries I own instead.
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Re: Why not go EE bonds (instead of bond funds)?

Post by SantaClaraSurfer »

For me, 20 years of predictably lifting our income floor in retirement (even with inflation risk) with a simple annual investment today, is a no brainer.

It's a great complement to everything else we do, which includes a diverse Boglehead portfolio.

We talk about draw down rates for our portfolios.

Is 4% too much?

Our $9,000 annual EE Bonds purchase yields $18,000 annually guaranteed 20 years from now.

$18,000 = 4% of $450,000.

So one would need a diversified portfolio of $450,000 in 2041 to confidently pull $18,000 per from it.

$9,000 per year invested at $750 per month for 20 years needs an 8.2% return compounded monthly to make $452,000 in year 20.

8.2% a year from a diversified portfolio over 20 years is not at all out of the question.

But it's also by no means guaranteed!

You could have a smaller portfolio outcome after 20 years, say $360,000, as I posted upthread, and buy a lifetime annuity from an insurance company in 20 years that might even pay more than my EE Bonds.

But what will the annuity offerings be in 2041? What will the outlook for the insurance companies be? And what kind of investing journey will you have taken to get to that point?

For example, what if US Stocks go sideways for the next 10 years? How will that $750 per month feel 10 years from now?

Or if there's a 25% market crash in year 18, 19, or 20 after you've earned the 8.25%? What then?

It's very tough to talk about risk in a way that provides a rounded context. My appreciation for EE Bonds comes from the perspective of previously having very little retirement security.

I like the idea that COLA adjusted SSI + EE Bonds + a Small Pension = reasonably strong protection against the worst outcomes.

And like the other EE Bonds advocates in this thread, we are leaving it to the remainder of our investing....all the other money we are setting aside, to help generate our spectrum of potential better outcomes.
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Re: Why not go EE bonds (instead of bond funds)?

Post by Mel Lindauer »

One thing that's often not mentioned when comparing an EE annuity vs and insurance company SPIA is that, while the insurance company annuity is guaranteed for as long as you live, that might just turn out to be only a year or two. In this case, the money reverts to the insurance company, whereas the EE Bonds are part of your estate and would be inherited by your heirs should you die shortly after starting to collect.
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Re: Why not go EE bonds (instead of bond funds)?

Post by JBTX »

willthrill81 wrote: Mon Sep 13, 2021 10:57 am While EE bonds are a fixed income instrument, the '20 year lockup period' makes them a qualitatively distinct instrument. In fact, it makes them so distinct that I'm not sure how appropriate it is to just lump EE bond holdings together with one's other fixed income holdings. EE bonds are essentially worthless for rebalancing purposes, they cannot be spent in retirement prior to the 20 year period, etc.

I cannot help but wonder whether some of those who are attracted to EE bonds and willing to not touch the funds for 20 years are stretching for yield.

Some are attracted to the guaranteed 3.53% effective nominal return that EE bonds offer, but that has historically come at a very high opportunity cost compared to certain other types of investments.
When putting in money to IRAS and 401ks it is often for more than 20 years. They are probably best purchased between ages 40-55 years old. I'm upper 50s and bought a chunk the last year or so, but not convinced I'll keep them. I figure liquidating them in first couple of years isn't too much lost. However once 5 years in the forward rate is just too high to liquidate unless for emergency purposes.
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Re: Why not go EE bonds (instead of bond funds)?

Post by cacophony »

SantaClaraSurfer wrote: Mon Sep 13, 2021 9:26 pm For me, 20 years of predictably lifting our income floor in retirement (even with inflation risk) with a simple annual investment today, is a no brainer.

It's a great complement to everything else we do, which includes a diverse Boglehead portfolio.

We talk about draw down rates for our portfolios.

Is 4% too much?

Our $9,000 annual EE Bonds purchase yields $18,000 annually guaranteed 20 years from now.

$18,000 = 4% of $450,000.

So one would need a diversified portfolio of $450,000 in 2041 to confidently pull $18,000 per from it.

$9,000 per year invested at $750 per month for 20 years needs an 8.2% return compounded monthly to make $452,000 in year 20.

8.2% a year from a diversified portfolio over 20 years is not at all out of the question.

But it's also by no means guaranteed!

You could have a smaller portfolio outcome after 20 years, say $360,000, as I posted upthread, and buy a lifetime annuity from an insurance company in 20 years that might even pay more than my EE Bonds.

...
In the EE bond case above, if you're spending $18k per year then you're effectively spending 5% per year of the eventual $360k total. In terms of drawdown rate, how is that different than having $360k in something else and spending 5% per year? Either way, the entirety is likely to be exhausted after 20 years.

Comparing that to having $450k and using a smaller (4%) withdrawal rate doesn't seem like a fair comparison, since in that case the money will clearly last longer.
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Re: Why not go EE bonds (instead of bond funds)?

Post by SnowBog »

cacophony wrote: Tue Sep 14, 2021 1:17 am In the EE bond case above, if you're spending $18k per year then you're effectively spending 5% per year of the eventual $360k total. In terms of drawdown rate, how is that different than having $360k in something else and spending 5% per year? Either way, the entirety is likely to be exhausted after 20 years.

Comparing that to having $450k and using a smaller (4%) withdrawal rate doesn't seem like a fair comparison, since in that case the money will clearly last longer.
I assume you missed this part...
SantaClaraSurfer wrote: Mon Sep 13, 2021 9:26 pm ... X% a year from a diversified portfolio over 20 years is not at all out of the question.

But it's also by no means guaranteed!
...
For example, what if US Stocks go sideways for the next 10 years?
...
Or if there's a 25% market crash in year 18, 19, or 20 after you've earned the 8.25%? What then?
Significant difference on "guaranteed"!

And for full context, let's return to the excellent post, which tries to point out we (most of us anyway) don't view this as "either or" but instead as EE Bonds as "an addition" to a balanced portfolio.
SantaClaraSurfer wrote: Mon Sep 13, 2021 9:26 pm It's very tough to talk about risk in a way that provides a rounded context. My appreciation for EE Bonds comes from the perspective of previously having very little retirement security.

I like the idea that COLA adjusted SSI + EE Bonds + a Small Pension = reasonably strong protection against the worst outcomes.

And like the other EE Bonds advocates in this thread, we are leaving it to the remainder of our investing....all the other money we are setting aside, to help generate our spectrum of potential better outcomes.
So, is it possible that another investment could return significantly better results than EE Bonds? Definitely - and we sure hope so, as we still want the rest of our portfolio to have great results as well!

But is it possible that we could run into "poorly timed" market crash (aka a bad sequence of returns in proximity to our retirement dates)? Absolutely! We can't predict when crashes will occur. But we've established - for lack of a better name - an "insurance policy" to provide at least enough funds to meet our essential needs even during the midst of a major market crash.

I'm knowingly trading some upside potential in favor of some downside protection. My goal isn't to die with as much money as possible. My goal is to provide my overall plan (which includes retiring on my timeline) with the largest chance of success.
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Re: Why not go EE bonds (instead of bond funds)?

Post by SCSurf »

As I turn 40 next year, I have been interested in this EE savings bond ladder from 40 until I stop working for a base level of income. My plan would be to buy a predetermined amount of EE savings bonds every year. If the 20 year treasury begins paying more than 3.53%, I would then buy 20 year STRIPS for that year. Can someone with more knowledge than me explain the risks of doing so.
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Re: Why not go EE bonds (instead of bond funds)?

Post by Chuck »

SCSurf wrote: Tue Sep 14, 2021 9:23 am As I turn 40 next year, I have been interested in this EE savings bond ladder from 40 until I stop working for a base level of income. My plan would be to buy a predetermined amount of EE savings bonds every year. If the 20 year treasury begins paying more than 3.53%, I would then buy 20 year STRIPS for that year. Can someone with more knowledge than me explain the risks of doing so.
There are no real "risks" on the EE bond side. You will get 2x after 20 years. If you redeem early, you'll lose a lot of pretend interest. In reality, you'll have just lost the opportunity cost of your next-best option.

The STRIPS would get you normal interest-rate risk. Initially, they will be pretty volatile.

I started to ladder TIPS until TIPS returns turned awful, which took less than 5 years. Change of plans. You never know what will happen after 20 years.
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Re: Why not go EE bonds (instead of bond funds)?

Post by willthrill81 »

Chuck wrote: Tue Sep 14, 2021 11:33 am There are no real "risks" on the EE bond side.
Inflation risk is a very real risk with any fixed income instrument paying nominal interest.
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Re: Why not go EE bonds (instead of bond funds)?

Post by Chuck »

willthrill81 wrote: Tue Sep 14, 2021 11:58 am Inflation risk is a very real risk with any fixed income instrument paying nominal interest.
Yes indeed. On a $10,000 investment, if you pay 25% tax on your 100% gain, you'll end up with $17,500 nominal, and if the federal reserve achieves its target 2% inflation rate, that will be worth $11,683.14 in today's dollars, so you end up with something like 0.78% real return.
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Re: Why not go EE bonds (instead of bond funds)?

Post by tj »

Chuck wrote: Tue Sep 14, 2021 12:18 pm
willthrill81 wrote: Tue Sep 14, 2021 11:58 am Inflation risk is a very real risk with any fixed income instrument paying nominal interest.
Yes indeed. On a $10,000 investment, if you pay 25% tax on your 100% gain, you'll end up with $17,500 nominal, and if the federal reserve achieves its target 2% inflation rate, that will be worth $11,683.14 in today's dollars, so you end up with something like 0.78% real return.
So what would the preferred alternative be?
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Re: Why not go EE bonds (instead of bond funds)?

Post by willthrill81 »

tj wrote: Tue Sep 14, 2021 12:28 pm
Chuck wrote: Tue Sep 14, 2021 12:18 pm
willthrill81 wrote: Tue Sep 14, 2021 11:58 am Inflation risk is a very real risk with any fixed income instrument paying nominal interest.
Yes indeed. On a $10,000 investment, if you pay 25% tax on your 100% gain, you'll end up with $17,500 nominal, and if the federal reserve achieves its target 2% inflation rate, that will be worth $11,683.14 in today's dollars, so you end up with something like 0.78% real return.
So what would the preferred alternative be?
Without knowing the future, it's impossible to know for sure.

EE bonds offer the best guaranteed nominal yield out there right now IF you're willing and able to hold them for the 20 year period needed for the doubling to occur. But as noted above, nominal yields suffer from inflation risk.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Why not go EE bonds (instead of bond funds)?

Post by SCSurf »

willthrill81 wrote: Tue Sep 14, 2021 11:58 am
Chuck wrote: Tue Sep 14, 2021 11:33 am There are no real "risks" on the EE bond side.
Inflation risk is a very real risk with any fixed income instrument paying nominal interest.
Besides having a much more liquid investment and the ability to rebalance. What differences do you see between a EE bond/STRIP ladder and a long term treasury fund.
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Re: Why not go EE bonds (instead of bond funds)?

Post by SnowBog »

Chuck wrote: Tue Sep 14, 2021 12:18 pm
willthrill81 wrote: Tue Sep 14, 2021 11:58 am Inflation risk is a very real risk with any fixed income instrument paying nominal interest.
Yes indeed. On a $10,000 investment, if you pay 25% tax on your 100% gain, you'll end up with $17,500 nominal, and if the federal reserve achieves its target 2% inflation rate, that will be worth $11,683.14 in today's dollars, so you end up with something like 0.78% real return.
And comparing to another nominal bond, such as a Total Bond Fund?

The nominal value could fall even more, and if held in taxable you'd have had a tax drag for 20 years.

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Re: Why not go EE bonds (instead of bond funds)?

Post by willthrill81 »

SCSurf wrote: Tue Sep 14, 2021 12:44 pm
willthrill81 wrote: Tue Sep 14, 2021 11:58 am
Chuck wrote: Tue Sep 14, 2021 11:33 am There are no real "risks" on the EE bond side.
Inflation risk is a very real risk with any fixed income instrument paying nominal interest.
Besides having a much more liquid investment and the ability to rebalance. What differences do you see between a EE bond/STRIP ladder and a long term treasury fund.
I'm not familiar enough with STRIPs to comment on them.
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Re: Why not go EE bonds (instead of bond funds)?

Post by SantaClaraSurfer »

SnowBog wrote: Tue Sep 14, 2021 1:41 am is it possible that we could run into "poorly timed" market crash (aka a bad sequence of returns in proximity to our retirement dates)? Absolutely! We can't predict when crashes will occur. But we've established - for lack of a better name - an "insurance policy" to provide at least enough funds to meet our essential needs even during the midst of a major market crash.

I'm knowingly trading some upside potential in favor of some downside protection. My goal isn't to die with as much money as possible. My goal is to provide my overall plan (which includes retiring on my timeline) with the largest chance of success.
Great think piece, and thank you for the quote!

EE bonds don't have to be seen simply as a bulwark against worst case scenarios.

Example:

Married couple retiring at 64 him, 62 her.

This couple have saved their whole lives for extensive travel in early retirement. They also established a modest EE bond ladder starting at his age of 64. (ie. they bought $250 per month in EE bonds for 20 years). ALL of their investments and planning have gone well, there's no crisis. However, once they get out on their travels they realize that they haven't budgeted quite enough for everything they'd like to do. They'd really like to do more.

When they pencil out the costs, "more" will cost about $12,000 over two years.

Fortunately for this couple their $250 per month in EE bonds is now $500 in steady income. No ups, no NAV, no downs. Since all of their other investments have matured nicely, they can spend the predictable EE bond funds on their stretch goal budgets, not just on their early retirement travels, but on whatever they choose for 18 further years.

Or flip it entirely, and think of a scenario that doesn't usually figure here.

Example 2:

Another couple has rented in a HCOL area their working lives. At the same time, they've purchased $15,000 in EE bonds every year, and their ladder will start at age 70.

At age 65, they hit their retirement goal number and realize that they'd like to retire and move to another region with lower real estate prices, and perhaps become home owners. The idea of entering into a 25 year mortgage at age 65 is complicated. Should they pay for the retirement house entirely with their retirement funds? What factors will influence their choice of home and location and terms of their purchase? What are the risks and the downsides to purchasing a home after you no longer are earning a salary?

Well, this couple has flexibility due to their ownership of EE bonds. They've got $30,000 per year in reliable income for 20 years from EE bonds starting at age 70. They can match that income to a mortgage payment, HOA fees, and real estate taxes as needed. Alternately, they could make a bigger down payment on the house knowing that they have 20 years of reliable funds to match their other expenses.

My point is that reliable, predictable income flows are critical in bad scenarios, but they're nothing to sneeze at in other scenarios, either.
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Re: Why not go EE bonds (instead of bond funds)?

Post by SantaClaraSurfer »

cacophony wrote: Tue Sep 14, 2021 1:17 am In the EE bond case above, if you're spending $18k per year then you're effectively spending 5% per year of the eventual $360k total. In terms of drawdown rate, how is that different than having $360k in something else and spending 5% per year? Either way, the entirety is likely to be exhausted after 20 years.

Comparing that to having $450k and using a smaller (4%) withdrawal rate doesn't seem like a fair comparison, since in that case the money will clearly last longer.
The EE bonds will be exhausted (unless saved or reinvested) after 20 years, but the fact (or beauty of it) is that there's never anywhere close to a $360,000 total if you're treating it as income.

In year 19, month 11 there's exactly $180,000 (plus .01% interest) in your Treasury Direct account per my example, and those bonds generate $18,000 in annual income as they mature for the following 20 years if you cash them out at maturity. That's it. It's remarkable, and simple. If you die, your estate can pass your EE Bonds along, but even then, your heirs will have to wait for the pre-maturity EE bonds to mature each year.

I compared that to a possible $450,000, if your $750 per month investment earns 8.2% compounded monthly.

If you don't make that return, there's no $450,000.

It is possible to make less...even significantly less in some cases due to markets or behavior...but not impossible that you'll make more with a 60/40 portfolio.

But then there's the question of what to do with that, and the question of investor behavior.

Even if you do make the 8.2%, if just before or after you enter withdrawal phase equities drop significantly, you could have a real problem with your withdrawal strategy. If the market drops equities 25% do you still withdraw 4%?

That's just not a question with EE Bonds.

The interesting comparison, in my opinion, is between what 3.53% guaranteed (subject to inflation risk) looks and feels like over a 40 year journey, versus what a possible 8.2% return + a 4% drawdown looks and feels like over that same timeframe.

I think my first instinct would be to think that the outcome behind the (possible/likely/maybe even more?) 8.2% curtain would be hands down the winner. That's why we have the bulk of our investments in equity index funds.

My point is simply that it's much closer of an outcome than one's first instinct might place it when you view it through the lens of money you can count on spending over a 20 year time frame. And that reliability and predicability is the main feature of EE Bonds.
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Re: Why not go EE bonds (instead of bond funds)?

Post by AlwaysLearningMore »

aj76er wrote: Sat Sep 11, 2021 8:50 pm ... there is a pretty high opportunity cost of buying EE-bonds, on average.
"Opportunity cost" ≠ "Guaranteed income"

The concept isn't difficult: for some investors a different sleeve of the portfolio looks for "opportunity," and a different sleeve seeks guaranteed income. Some people perfer guarantees.
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Re: Why not go EE bonds (instead of bond funds)?

Post by aj76er »

AlwaysLearningMore wrote: Sat Sep 18, 2021 11:18 am
aj76er wrote: Sat Sep 11, 2021 8:50 pm ... there is a pretty high opportunity cost of buying EE-bonds, on average.
"Opportunity cost" ≠ "Guaranteed income"

The concept isn't difficult: for some investors a different sleeve of the portfolio looks for "opportunity," and a different sleeve seeks guaranteed income. Some people perfer guarantees.
The issue you aren't accounting for is that EE-bonds entail quite a bit of inflationary risk. So "guaranteed income" is only in the nominal sense, but there is nothing guaranteed about it in real terms (after inflation).

Both "sleeves", as you put it, carry risk. Over a 20yr time horizon, which is the better bet?
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Re: Why not go EE bonds (instead of bond funds)?

Post by ApeAttack »

aj76er wrote: Mon Sep 20, 2021 5:10 pm
AlwaysLearningMore wrote: Sat Sep 18, 2021 11:18 am
aj76er wrote: Sat Sep 11, 2021 8:50 pm ... there is a pretty high opportunity cost of buying EE-bonds, on average.
"Opportunity cost" ≠ "Guaranteed income"

The concept isn't difficult: for some investors a different sleeve of the portfolio looks for "opportunity," and a different sleeve seeks guaranteed income. Some people perfer guarantees.
The issue you aren't accounting for is that EE-bonds entail quite a bit of inflationary risk. So "guaranteed income" is only in the nominal sense, but there is nothing guaranteed about it in real terms (after inflation).

Both "sleeves", as you put it, carry risk. Over a 20yr time horizon, which is the better bet?
We won't know until 2041. I have both nominal bonds and inflation protected bonds. Both are doing okay so far.
Just another lazy index investor who recently found out about I-Bonds (https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm).
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Re: Why not go EE bonds (instead of bond funds)?

Post by SnowBog »

aj76er wrote: Mon Sep 20, 2021 5:10 pm
AlwaysLearningMore wrote: Sat Sep 18, 2021 11:18 am
aj76er wrote: Sat Sep 11, 2021 8:50 pm ... there is a pretty high opportunity cost of buying EE-bonds, on average.
"Opportunity cost" ≠ "Guaranteed income"

The concept isn't difficult: for some investors a different sleeve of the portfolio looks for "opportunity," and a different sleeve seeks guaranteed income. Some people perfer guarantees.
The issue you aren't accounting for is that EE-bonds entail quite a bit of inflationary risk. So "guaranteed income" is only in the nominal sense, but there is nothing guaranteed about it in real terms (after inflation).

Both "sleeves", as you put it, carry risk. Over a 20yr time horizon, which is the better bet?
Whenever I read posts like yours, they seem to infer that my "opportunity cost" of locking up money in EE Bonds should somehow be comparable to holding a non-"fixed income" option in its place - presumably like a Total Stock Market fund. Which makes zero sense to me - as EE Bonds can only be adequately compared against other fixed income options.

So I argue the part you are missing is I can't escape that inflationary risk for this part of my portfolio - nominal bonds. I've already decided my AA, and thus decided I'm going to hold bonds. I've decided (at least for the money I'd consider for EE Bonds) to hold nominal bonds. So the logical comparison is against other nominal bonds.

Ultimately, all nominal bonds have an inflationary risk - that is the nature of nominal bonds. With other nominal bonds - I have no idea what they'll be worth in 20 years - they could well be worth less both in real and nominal terms... But with EE Bonds - I know exactly what they'll be worth in 20 years (at least in nominal terms). Which lets me use these to plan an "income floor" (or DIY Annuity, etc.) - in my case for the years between retirement and delayed SS/pensions.
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Re: Why not go EE bonds (instead of bond funds)?

Post by Northern Flicker »

EE bonds are not very liquid. And the closer to the 20-yr maturity point you get, the larger the imputed cost in terms of the subsequent yield you are giving up by cashing them in until you have a big asingularity on the day they turn 20.

With current rates, including them in an asset allocation is quite reasonable, but it should not be for a part of the portfolio you depend on for liquidity in times of duress other than as a last resort.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Why not go EE bonds (instead of bond funds)?

Post by AlwaysLearningMore »

aj76er wrote: Mon Sep 20, 2021 5:10 pm
AlwaysLearningMore wrote: Sat Sep 18, 2021 11:18 am
aj76er wrote: Sat Sep 11, 2021 8:50 pm ... there is a pretty high opportunity cost of buying EE-bonds, on average.
"Opportunity cost" ≠ "Guaranteed income"

The concept isn't difficult: for some investors a different sleeve of the portfolio looks for "opportunity," and a different sleeve seeks guaranteed income. Some people perfer guarantees.
The issue you aren't accounting for is that EE-bonds entail quite a bit of inflationary risk. So "guaranteed income" is only in the nominal sense, but there is nothing guaranteed about it in real terms (after inflation).

Both "sleeves", as you put it, carry risk. Over a 20yr time horizon, which is the better bet?
Save for I bonds and TIPS, don't most bonds (to one degree or another) entail inflation risk?

Nominal guaranteed income is also what a non-COLA'd pension provides. To the best of my knowledge one cannot today purchase a COLA'd SPIA (only with 2% or 3% increases, with reduced initial payments; from what I gather it takes 6-9 years for those increases to match the reduced initial income).
aj76er wrote: Mon Sep 20, 2021 5:10 pm Both "sleeves", as you put it, carry risk. Over a 20yr time horizon, which is the better bet?
Some investors prefer the guaranteed payout of EE bonds as part of their income floor. (The can take risk in other parts of their portfolio.)

Regarding "which is the better bet?" with EE bonds one not need "bet" to know the outcome in 20 years. NB: Equity puts become more expensive with maturity, and not the other way around.
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