When to incorporate I bond in portfolio?

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Topic Author
iamfinethanku
Posts: 29
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When to incorporate I bond in portfolio?

Post by iamfinethanku »

(I realized I posted this on wrong sub-forum so posting here instead, sorry!)

I'm in my mid-late 30s, and plan on starting long-term investment with basically something similar to 3 fund portfolio with slight factor tilt.

In the mean time, with recent inflation and spike in interest rate, my wife and I bought total $20000 of I-bond this year planning to keep it as semi-emergency fund.

After reading a bit about I -bond, I thought it makes sense to use I bond as emergency fund during accumulation stage and as part of retirement fund as well, so I was planning to keep I-bond as emergency fund going forward.

My question is, I wasn't sure whether to buy more I bonds in near future as part of bond portion of my portfolio. I've read in some threads that some people start buying I bond annually 10 years prior to retirement, rather than 20-30 years prior to retirement.

I'm still trying to "optimize" my portfolio, and wasn't sure if I should just use total market bond fund from Vanguard as bond portion of my portfolio , and start buying I bond 10 years prior to retirement, or start buying I-bond annually now and include I-bond as portion of bond in my portfolio.

Thank you!
toddthebod
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Re: When to incorporate I bond in portfolio?

Post by toddthebod »

I would not choose I bonds for retirement at this point in time. TIPs are currently paying a real interest rate more than 1% higher than I bonds (which currently have a 0% fixed component).
Backtests without cash flows are meaningless. Returns without dividends are lies.
LittleMaggieMae
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Re: When to incorporate I bond in portfolio?

Post by LittleMaggieMae »

I think the OP should review the purpose of I-Bonds and their target audience/market. I do not mean this in a bad way. I'm a "form follows function" kind of girl. I think the OP most likely has better places to invest money than in I-Bonds especially with a 20 or 30 year horizon.

I-Bonds suddenly burst into the news only because of the high variable interest rates (due to inflation).

I think I-Bonds are a great place to stash some of your EF right now due to the high interest rates (due to Inflation). Since I-Bonds are intended to keep up with inflation - even once the high interest rates drop - it may still be a good place to keep some of your EF. EF money needs to be liquid-ish and that means it often doesn't keep up with inflation. And that is what I-Bonds do... keep up with inflation. :)

I don't think it's good idea to start buying them for retirement that's 20 or 30 years in the future. It would probably be better to use the 10K/20K per year in some other investment (that can potentially earn you more than "keeping up with inflation").


ADDED: I confess I used EE bonds (purchased in the late 80's and early 90's) as part of my EF ($25 and $50 and $100 ones...) but then I stopped. In the mid 2000's I started buying I-Bonds ($50 or $100 a month as I had money) with the idea of using them as part of my EF (the money kept up with inflation). It wasn't a bad plan. But my "treasury direct" money never grew as quickly as my tax advantage invest money grew. or even my after tax money == heck, I bought 3K of an individual dividend stock (that's not one of those one's that makes you rich) in the late 2000's and that 3K blossomed into quite a large sum - way more than the 5K of EE bonds and I-Bonds I purchased over the years (20 to 30 years ago). FWIW: I also lost all of the 3K I used to purchase a second individual stock that I thought would be good long term... so of course your mileage may vary. :) I don't recommend buying individual stocks unless you have money to burn (literally - if you wouldn't set fire to the paper bills for fun and amusement - don't use them to buy individual stocks. )
Last edited by LittleMaggieMae on Thu Sep 22, 2022 3:49 pm, edited 2 times in total.
Jack FFR1846
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Re: When to incorporate I bond in portfolio?

Post by Jack FFR1846 »

For me, iBonds didn't recently burst onto the scene. I started buying in the 90's as I had been burned in the stock market and was averse to anything beyond my 6% 401k investment that was 50% stable value fund. Later, Treasury Direct opened buying with a credit card with no fee. My Aruba trips on American Airlines became a major reason to buy these things as it upgraded my family annually to first class, buying $30k each and cashing in at the first available time of 6 months to afford this $120 per year purchase which was more than my annual salary. As we went forward, I kept buying iBonds (only paper, mind you) and even after finding Bogleheads and getting more comfortable with the market, upping my 401k contributions and even opening Roths and taxable accounts, I still get $5k in federal tax returns in the bonds. I'm this close (my fingers showing milimeters of distance) to retirement and the sureness and safety of over $400k in iBonds is pretty nice to know I can back up my overly high cash position with. The current high interest rate is nice, but I was buying even when it was at record lows. I'll reiterate, I ONLY do paper bonds.
Bogle: Smart Beta is stupid
Topic Author
iamfinethanku
Posts: 29
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Re: When to incorporate I bond in portfolio?

Post by iamfinethanku »

Jack FFR1846 wrote: Thu Sep 22, 2022 3:43 pm For me, iBonds didn't recently burst onto the scene. I started buying in the 90's as I had been burned in the stock market and was averse to anything beyond my 6% 401k investment that was 50% stable value fund. Later, Treasury Direct opened buying with a credit card with no fee. My Aruba trips on American Airlines became a major reason to buy these things as it upgraded my family annually to first class, buying $30k each and cashing in at the first available time of 6 months to afford this $120 per year purchase which was more than my annual salary. As we went forward, I kept buying iBonds (only paper, mind you) and even after finding Bogleheads and getting more comfortable with the market, upping my 401k contributions and even opening Roths and taxable accounts, I still get $5k in federal tax returns in the bonds. I'm this close (my fingers showing milimeters of distance) to retirement and the sureness and safety of over $400k in iBonds is pretty nice to know I can back up my overly high cash position with. The current high interest rate is nice, but I was buying even when it was at record lows. I'll reiterate, I ONLY do paper bonds.
Thank you all for the responses. I think buying $5k-10k/year of I bond makes sense to function as EF + inflation hedge if I have "left over" money. In the mean time, wondering reason for only doing paper bonds - is it for security reason? Treasurydirect.com potentially hacked?
ILResident
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Re: When to incorporate I bond in portfolio?

Post by ILResident »

I learned about I bonds earlier this year and invested in May, $10K each for our individual trusts. After learning more about the history of I bonds these last few months, I plan to invest another $10K each under individual accounts in November, in essence building a bond ladder. I plan to repeat this $40K process each year for several more years before retiring in the next five years. Goal is to build up enough funds to pay for my kids (currently in 7th grade) college education and have funds, in addition to non-retirement investments, available in early years of retirement prior to RMDs at 72.

I think building an emergency fund using a similar strategy is fine but I believe there is better ways to invest your money if you have a 20 to 30 year time horizon.
er999
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Re: When to incorporate I bond in portfolio?

Post by er999 »

I’m interested in this topic too. I’d consider loading up each year if you think you might have a use for them before retirement and want safe savings (such as toys like a boat or rv, second home, large emergency fund, etc) as ibonds are likely a better interest rate than high yield savings (and if not can cash out after 1 year and change). They are also easier to access then a 401k in an emergency as no penalty.

If not, here’s some questions to consider:
1. What’s your current bond percentage
2. Do you have any assets outside of tax deferred?
3. Do you currently have a large emergency fund? If so, where and could it be moved to I bonds over a few years?

I think in your 30s it would be reasonable to be all stocks with a large emergency fund (so no new for ibonds beyond the emergency fund), assuming you will retire in your mid 50s or older. Over a 10 year period a couple could buy up a large stash of ibonds $200k or $250k if they use the tax refund for paper ibonds method without using a trust so might not need to start buying ibonds until your mid 40s or older. This should be a significant bond portion, not sure if you need $500k in ibonds starting buying 20 years before retirement.

Assuming you already have a decent emergency fund, I suspect building up a taxable account with a total market fund would be better to do starting in your 30s.

I’m in my mid 40a and am currently building up ibonds as an emergency fund / kids high school savings but am considering buying for more years as part of my bond allocation but have a few years before need to decide (as I’m targeting $80k in kids ibonds + $40-80k in ibonds in my and my wife’s name as an emergency fund).

I bonds have a big advantage of the principal not declining (as we saw this year) but might lag total bond over a 10 year period.
Topic Author
iamfinethanku
Posts: 29
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Re: When to incorporate I bond in portfolio?

Post by iamfinethanku »

er999 wrote: Thu Sep 22, 2022 4:04 pm I’m interested in this topic too. I’d consider loading up each year if you think you might have a use for them before retirement and want safe savings (such as toys like a boat or rv, second home, large emergency fund, etc) as ibonds are likely a better interest rate than high yield savings (and if not can cash out after 1 year and change). They are also easier to access then a 401k in an emergency as no penalty.

If not, here’s some questions to consider:
1. What’s your current bond percentage
2. Do you have any assets outside of tax deferred?
3. Do you currently have a large emergency fund? If so, where and could it be moved to I bonds over a few years?

Thank you much.
1. Current bond percentage is about 15% overall portfolio, and that is in VBTLX Vanguard Total Bond Market Index Fund Admiral Shares(ER 0.05%)
2. Asset outside tax deferred includes: home (but ~27 years of mortgage to pay off at interest rate of 2.85%), and small fund about 10k in taxable (Vanguard VFIAX 500 ER 0.04%). not much else. STill trying to maximize tax deferred + Backdoor Roth IRA and plan to use taxable for leftover fund.
3. I do not have a large emergency fund (about $20000), but again, plan to utilize I bond as semi-emergency fund after 1 year.

er999 wrote: Thu Sep 22, 2022 4:04 pm I think in your 30s it would be reasonable to be all stocks with a large emergency fund (so no new for ibonds beyond the emergency fund), assuming you will retire in your mid 50s or older. Over a 10 year period a couple could buy up a large stash of ibonds $200k or $250k if they use the tax refund for paper ibonds method without using a trust so might not need to start buying ibonds until your mid 40s or older. This should be a significant bond portion, not sure if you need $500k in ibonds starting buying 20 years before retirement.
Yeah, this is what I was wondering. Based on info I gathered, I probably will keep $30000 - 40000 as I bond as emergency fund (or more if needed, for bigger purchases such as downpayment for car or home improvement project) until my late 40s, then consider $10000 to 20000 annual contribution for 10-15 years until retirement to have a sizable retirement saving.

er999 wrote: Thu Sep 22, 2022 4:04 pm Assuming you already have a decent emergency fund, I suspect building up a taxable account with a total market fund would be better to do starting in your 30s.

I’m in my mid 40a and am currently building up ibonds as an emergency fund / kids high school savings but am considering buying for more years as part of my bond allocation but have a few years before need to decide (as I’m targeting $80k in kids ibonds + $40-80k in ibonds in my and my wife’s name as an emergency fund).

I bonds have a big advantage of the principal not declining (as we saw this year) but might lag total bond over a 10 year period.
Yeah, so I think this makes more sense for me at this stage. will probably use total bond market as portfolio now, and consider I bond more like emergency fund/savings and start buying I bond more seriously 10-15 years prior to retirement.
Jack FFR1846
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Re: When to incorporate I bond in portfolio?

Post by Jack FFR1846 »

iamfinethanku wrote: Thu Sep 22, 2022 3:51 pm In the mean time, wondering reason for only doing paper bonds - is it for security reason? Treasurydirect.com potentially hacked?
Bad experience dealing with e bonds my dad took out in my kids' names. When he passed, it took my mom and me 8 hours on the phone with TD in total to cash 2 $50 bonds. With my paper bonds, I go to Digital Credit Union where I've been for over 30 years and before I even leave the lobby, the money is available to me with no hold.
Bogle: Smart Beta is stupid
dbr
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Re: When to incorporate I bond in portfolio?

Post by dbr »

As a source of retirement income a 0% real return zero volatility asset supports a 3.3% withdrawal rate for 30 years, 2.5% for 40 years, etc.
Iorek
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Re: When to incorporate I bond in portfolio?

Post by Iorek »

I started buying ibonds as combination e-fund and taxable investment I wasn’t willing to lose (i.e., when I was younger I had more tolerance for risk and volatility in my tax sheltered retirement savings than I did in my after tax savings).

That said, many of us have never been 100% equities in retirement savings and I think ibonds are worth considering as the bond portion of long term savings because they expand your tax deferred space, track inflation and avoid capital losses in a rising interest rate environment.
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