Fitting I-bonds into asset allocation

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Hoosier CPA
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Fitting I-bonds into asset allocation

Post by Hoosier CPA »

I’m thinking through buying I-bonds for my wife and me and specifically how to fund them. With a risk-free rate nearing 10% (perhaps around 7% after tax), it seems a no brainer to buy some, perhaps the full $20K. We don’t have $20K sitting around doing nothing but I’ve identified some options to come up with the cash. I think this is a different question than the other threads on ibonds.

Below are some options:
1. Fit these into our asset allocation as bonds (perhaps they are not exactly bonds but they fit under fixed income). We have a 90/10 asset allocation across our various investment accounts. We have about $50K in a taxable account. There are no bonds in that account, but since I harvest gains out of that through a DAF, I could pull $20K out of that without paying any gains, buy the i-bonds and then reduce my bond holdings in our tax-deferred accounts accordingly to get back to the 90/10.
2. Pull some of the money from our emergency fund. Our emergency fund is about $10K, which is about 1/3 of what I’d like it to be. We have been building it a little bit each year (I have a job that provides 6 months of severance at my position which makes me a bit less concerned about it not being as high as I’d like, and we could also pull ROTH contributions if needed). If I parked our e-fund here, we could still access it after a year, just with the loss of some interest income.
3. We refinanced a few times during the pandemic, and our minimum payment is now $300/month less than it was prior to that. On one hand, I’d still like to keep these funds allocated towards the mortgage, just to keep progress on paying down, but on the other hand, it’s not optimal to focus on 2.5% debt. We itemize every other year, so the effective rate is less than that. Since the refi's, we've kind of split the difference between paying on the mortgage and buying mutual funds. Having not purchased i-bonds before, it is practical to buy $300 a month or it is a hassle for the effort to be purchasing and tracking smaller amounts from Treasury Direct like this (i.e., is it easier to go all in at once)? From what I’ve read on here, the website isn’t very user friendly.
4. Reducing retirement contributions – this seems suboptimal as the ibond returns presumably won’t last forever.

Perhaps this is all mental accounting but I’d appreciate any input on how to think through this and act. I wish we could hold these in tax-deferred but still the risk-free after tax return of say 7% seems hard to pass by.
Tooth
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Re: Fitting I-bonds into asset allocation

Post by Tooth »

Regardless of the rate, I bonds are a zero real return investment unless the fixed rate goes up. I consider them cash instrument that maintains some buying power. I would not change other elements of the portfolio based on the current rate as the real return has not changed.

Also they are tax deferred until you sell.
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Re: Fitting I-bonds into asset allocation

Post by HeelaMonster »

In terms of AA, I view I-bonds as something of a hybrid cross between bonds ("...it's right in the name!") and CDs. The rate can vary over time, but no downside with potential loss of NAV (like we're seeing with regular bonds). Put another way, as good as cash but with better rates at present.

However you label, they obviously fall into your fixed income allocation, and I agree they are worth holding. I intend to hold mine for long term, so no experience with using as EF, but there are other threads on that topic.

I have only ever purchased in $10k installments (other than $5k this year via tax refund, which I'm not entirely sure was worth the hassle). So I can't speak to the smaller purchases, though it's possible. The website is admittedly awkward, and the display/tracking of separate purchases could get to be annoying over time. But that may not be strong reason to hold off smaller purchase(s), if that's what you can afford. You would presumably want to load up as much as possible between now and next rate change in Nov, to take advantage of current rates.
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rob
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Re: Fitting I-bonds into asset allocation

Post by rob »

I just lump them into the short-term "bond" allocation... technically wrong but it's what I do anyway. I also do that for the stable value stuff....
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Re: Fitting I-bonds into asset allocation

Post by Jack FFR1846 »

As your emergency fund is 1/3 of what you want it to be, you have some time and work to do before looking into buying iBonds. Personally, I've always wanted at least a year of emergency funds in an immediately accessible place. As your emergency fund gets to the level you're happy with, start buying iBonds. Once those iBonds reach a year old, they're immediately available, so you can buy more. Repeat until iBonds are where you want them.

I only have ever done paper bonds. I can go to DCU and cash as many as I want and if I wanted to could walk out with cash in my pocket. There's no wait and no hold. So perhaps consider getting paper from your federal tax refund. It's all I do now. I will be retiring in the next year and am quite happy that my bonds are paying me over $1100 a month and that I won't pay any state tax ever and won't pay federal tax until I sell them in a calculated fashion at a rate far lower than my working tax rate.

While I do consider my savings bonds to be part of my bond allocation, I know that I can't rebalance with them. Or I should say, I can't sell equity and easily buy savings bonds. I could certainly sell bonds and buy equity during downturns (like now), but tend not to as it's so difficult to buy savings bonds of any real amount. Hopefully, someday, treasury direct will go back to the 2000 time frame when each person could buy $30k of paper bonds a year and they could be sold 6 months later. Of course added bonus if they sold with a credit card for no fee like they did when I bought the majority of what I hold.
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Re: Fitting I-bonds into asset allocation

Post by Ryzan »

I’m also having trouble rationalizing how they fit in due to the 1-way ratchet effect (money can be pulled out but strict limit to putting back in). That negates much of the ability to rebalance.

I’m starting to lean towards incorporating I bonds into my emergency fund. This implies 2 things:

- For EF use, I bonds should not be purchased at max every year in perpetuity, but only until the EF goal is reached.
- What percentage of my EF would I want in I bonds? 100% 50% etc.
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Re: Fitting I-bonds into asset allocation

Post by mega317 »

Wait you have a DAF and are considering making extra mortgage payments but don’t have an adequate emergency fund? I think you’re doing this backwards.
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Re: Fitting I-bonds into asset allocation

Post by er999 »

I bonds can be part of your emergency fund after 1 year. If you don’t want to consider your $50k taxable as part of your emergency fund and tie up $10k for a year maybe do a smaller amount of ibond purchases like $1k per month.
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Re: Fitting I-bonds into asset allocation

Post by secondopinion »

I count it as a tax-deferred hedged inflation-protected long-term bond. Counting it as cash is a mistake because we lose the long-term nature it does provide. I am not using it as a short term holding but a very long term holding with a lot of built in convexity.
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Re: Fitting I-bonds into asset allocation

Post by ivgrivchuck »

Hoosier CPA wrote: Mon May 16, 2022 8:08 am I’m thinking through buying I-bonds for my wife and me and specifically how to fund them. With a risk-free rate nearing 10% (perhaps around 7% after tax), it seems a no brainer to buy some, perhaps the full $20K. We don’t have $20K sitting around doing nothing but I’ve identified some options to come up with the cash. I think this is a different question than the other threads on ibonds.

Below are some options:
1. Fit these into our asset allocation as bonds (perhaps they are not exactly bonds but they fit under fixed income). We have a 90/10 asset allocation across our various investment accounts. We have about $50K in a taxable account. There are no bonds in that account, but since I harvest gains out of that through a DAF, I could pull $20K out of that without paying any gains, buy the i-bonds and then reduce my bond holdings in our tax-deferred accounts accordingly to get back to the 90/10.
2. Pull some of the money from our emergency fund. Our emergency fund is about $10K, which is about 1/3 of what I’d like it to be. We have been building it a little bit each year (I have a job that provides 6 months of severance at my position which makes me a bit less concerned about it not being as high as I’d like, and we could also pull ROTH contributions if needed). If I parked our e-fund here, we could still access it after a year, just with the loss of some interest income.
3. We refinanced a few times during the pandemic, and our minimum payment is now $300/month less than it was prior to that. On one hand, I’d still like to keep these funds allocated towards the mortgage, just to keep progress on paying down, but on the other hand, it’s not optimal to focus on 2.5% debt. We itemize every other year, so the effective rate is less than that. Since the refi's, we've kind of split the difference between paying on the mortgage and buying mutual funds. Having not purchased i-bonds before, it is practical to buy $300 a month or it is a hassle for the effort to be purchasing and tracking smaller amounts from Treasury Direct like this (i.e., is it easier to go all in at once)? From what I’ve read on here, the website isn’t very user friendly.
4. Reducing retirement contributions – this seems suboptimal as the ibond returns presumably won’t last forever.

Perhaps this is all mental accounting but I’d appreciate any input on how to think through this and act. I wish we could hold these in tax-deferred but still the risk-free after tax return of say 7% seems hard to pass by.
Option 1 sounds like the way to go.
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Re: Fitting I-bonds into asset allocation

Post by Call_Me_Op »

I place them in my "safe" bucket.
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Re: Fitting I-bonds into asset allocation

Post by KingRiggs »

mega317 wrote: Mon May 16, 2022 9:33 am Wait you have a DAF and are considering making extra mortgage payments but don’t have an adequate emergency fund? I think you’re doing this backwards.
+1 to this head-scratcher...
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Topic Author
Hoosier CPA
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Re: Fitting I-bonds into asset allocation

Post by Hoosier CPA »

KingRiggs wrote: Mon May 16, 2022 10:51 am
mega317 wrote: Mon May 16, 2022 9:33 am Wait you have a DAF and are considering making extra mortgage payments but don’t have an adequate emergency fund? I think you’re doing this backwards.
+1 to this head-scratcher...
DAF is just a tool to process our giving, which is a priority to us.

I agree extra mortgage payments are not optimal for us. We haven't made them in the past, prior to refinancing. Our minimum payment is now lower and I'm working on figuring out what is best to do with the savings.
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Re: Fitting I-bonds into asset allocation

Post by mega317 »

I'm not judging your charity which is admirable, but I imagine the gift recipient(s) would prefer a donor protect him/herself against financial catastrophe and would be willing to miss a year of donations for that insurance.
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Re: Fitting I-bonds into asset allocation

Post by harikaried »

Hoosier CPA wrote: Mon May 16, 2022 8:08 amWe have about $50K in a taxable account… Our emergency fund is about $10K, which is about 1/3 of what I’d like it to be
Our taxable account is basically all equities except for a few months of expenses as cash/money market to avoid the potential stress of spiking monthly credit card autopayment, e.g., yearly insurance. If we need more cash for some reason, we sell equities and exchange bonds for equities in tax advantaged accounts, so effectively we use fixed-income portion of our asset allocation as our emergency fund, which then is a combination of cash + bonds + I-bonds, etc.

Basically we're Placing cash needs in a tax-advantaged account. So far we've had excess "other" fixed-income to exchange not needing to tap into I-bonds, and maybe similarly your taxable account is large enough with fixed-income in other accounts.
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Hoosier CPA
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Re: Fitting I-bonds into asset allocation

Post by Hoosier CPA »

mega317 wrote: Mon May 16, 2022 1:55 pm I'm not judging your charity which is admirable, but I imagine the gift recipient(s) would prefer a donor protect him/herself against financial catastrophe and would be willing to miss a year of donations for that insurance.
I appreciate that. In my case it's more a matter of not prioritizing having funds sitting in an emergency fund vs funding retirement accounts. We are on track on total funds in investments and I don't consider an e-fund to be an investment. In other words it's not our giving that is keeping us from reaching our emergency fund goal. Mid-40s now, and to be honest it wasn't until a few years ago that I saw any need for an emergency fund at all, and now I'm building it.
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Re: Fitting I-bonds into asset allocation

Post by Raycpact »

Here is my use of I bonds in addition to establishing a EF for my business. I have some student debt for my youngest that I could pay down to zero. The expected rate when Biden stops the freeze is about 3 to 4%. The spread between the rates and the potential for forgiveness is my motivation for holding off payments. I am placing as much as I can toward the I bonds. Once the I bond rates drop below the student debt rate I will cash them in and pay down the loans.

If the higher inflation persists I will continue to max out I bonds to cover a 4% mortgage on a rental property.
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Re: Fitting I-bonds into asset allocation

Post by scamper »

Option 1.
Booper
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Re: Fitting I-bonds into asset allocation

Post by Booper »

HeelaMonster wrote: Mon May 16, 2022 8:32 am In terms of AA, I view I-bonds as something of a hybrid cross between bonds ("...it's right in the name!") and CDs. The rate can vary over time, but no downside with potential loss of NAV (like we're seeing with regular bonds). Put another way, as good as cash but with better rates at present.

However you label, they obviously fall into your fixed income allocation, and I agree they are worth holding. I intend to hold mine for long term, so no experience with using as EF, but there are other threads on that topic.

I have only ever purchased in $10k installments (other than $5k this year via tax refund, which I'm not entirely sure was worth the hassle). So I can't speak to the smaller purchases, though it's possible. The website is admittedly awkward, and the display/tracking of separate purchases could get to be annoying over time. But that may not be strong reason to hold off smaller purchase(s), if that's what you can afford. You would presumably want to load up as much as possible between now and next rate change in Nov, to take advantage of current rates.
I agree with this. But I'd also add: I think they are fine to count towards your AA as well. Does it really need to be just one or the other (Fixed Income or Emergency Fund)? Perhaps double-counting in this situation is fine.

Think about the problem that an emergency fund solves: A few months worth of living expenses that you can access quickly, regardless of market conditions. It's hard to argue that I-Bonds don't fit the bill for that.
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Re: Fitting I-bonds into asset allocation

Post by HeelaMonster »

Booper wrote: Mon May 16, 2022 4:12 pm
HeelaMonster wrote: Mon May 16, 2022 8:32 am In terms of AA, I view I-bonds as something of a hybrid cross between bonds ("...it's right in the name!") and CDs. The rate can vary over time, but no downside with potential loss of NAV (like we're seeing with regular bonds). Put another way, as good as cash but with better rates at present.

However you label, they obviously fall into your fixed income allocation, and I agree they are worth holding. I intend to hold mine for long term, so no experience with using as EF, but there are other threads on that topic.

I have only ever purchased in $10k installments (other than $5k this year via tax refund, which I'm not entirely sure was worth the hassle). So I can't speak to the smaller purchases, though it's possible. The website is admittedly awkward, and the display/tracking of separate purchases could get to be annoying over time. But that may not be strong reason to hold off smaller purchase(s), if that's what you can afford. You would presumably want to load up as much as possible between now and next rate change in Nov, to take advantage of current rates.
I agree with this. But I'd also add: I think they are fine to count towards your AA as well. Does it really need to be just one or the other (Fixed Income or Emergency Fund)? Perhaps double-counting in this situation is fine.

Think about the problem that an emergency fund solves: A few months worth of living expenses that you can access quickly, regardless of market conditions. It's hard to argue that I-Bonds don't fit the bill for that.
Agree 100%. I definitely count I Bonds toward AA. We don't have a separate EF (keeping too much cash on hand is longstanding problem, so there's never been a need!)... but if we did, it would simply be something earmarked and subsumed under fixed income allocation.
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Re: Fitting I-bonds into asset allocation

Post by Booper »

HeelaMonster wrote: Mon May 16, 2022 4:19 pm
Booper wrote: Mon May 16, 2022 4:12 pm
HeelaMonster wrote: Mon May 16, 2022 8:32 am In terms of AA, I view I-bonds as something of a hybrid cross between bonds ("...it's right in the name!") and CDs. The rate can vary over time, but no downside with potential loss of NAV (like we're seeing with regular bonds). Put another way, as good as cash but with better rates at present.

However you label, they obviously fall into your fixed income allocation, and I agree they are worth holding. I intend to hold mine for long term, so no experience with using as EF, but there are other threads on that topic.

I have only ever purchased in $10k installments (other than $5k this year via tax refund, which I'm not entirely sure was worth the hassle). So I can't speak to the smaller purchases, though it's possible. The website is admittedly awkward, and the display/tracking of separate purchases could get to be annoying over time. But that may not be strong reason to hold off smaller purchase(s), if that's what you can afford. You would presumably want to load up as much as possible between now and next rate change in Nov, to take advantage of current rates.
I agree with this. But I'd also add: I think they are fine to count towards your AA as well. Does it really need to be just one or the other (Fixed Income or Emergency Fund)? Perhaps double-counting in this situation is fine.

Think about the problem that an emergency fund solves: A few months worth of living expenses that you can access quickly, regardless of market conditions. It's hard to argue that I-Bonds don't fit the bill for that.
Agree 100%. I definitely count I Bonds toward AA. We don't have a separate EF (keeping too much cash on hand is longstanding problem, so there's never been a need!)... but if we did, it would simply be something earmarked and subsumed under fixed income allocation.
I'm actually in a very similar boat regarding keeping too much cash on hand. I've been redoing a lot of financial planning recently and realized that with my new job, financial planning is a heck of a lot easier (previously I was self-employed and had irregular income). And it's causing me to review a lot of things.

I've been thinking about the intersection of I-Bonds, Emergency Fund and Asset Allocation issue a lot lately. No great insights except what I mention above. I personally just realized that I now have ~6 months of living expenses in I-Bonds. Half of that is still within the 1 year window. After that window expires, I can totally see the value in having some cash around for unexpected expenses ... but would it make sense to keep several months of living expenses around in a cash-equivalent just so I could say "I have an emergency fund"? Would it really make sense to do that indefinitely, especially in a time of high inflation?

And since the I-Bonds are fixed income and currently earning over 7% (while VBTLX is down significantly), why not include them as part of my portfolio?

Perhaps this comes back to what some others have said. At some point, a portfolio can become big enough such that you don't need a dedicated EF. At least, if a portion of the fixed income is in something like an I-Bond where there's no interest rate risk, and once you hit the window you can redeem it whenever you want, maybe this is truly enough.
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Re: Fitting I-bonds into asset allocation

Post by Joey Jo Jo Jr »

I would think I bonds can at least partially replace anything you may have for capital preservation and/or inflation protection. E.g, cash and TIPS in particular, but maybe even nominal bonds, gold, and commodities.
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Re: Fitting I-bonds into asset allocation

Post by smectym »

Call_Me_Op wrote: Mon May 16, 2022 10:51 am I place them in my "safe" bucket.
I agree I bonds are the classic safety cushion. Partly for that reason, though we own a good deal of them, we don’t include them in our asset allocation.

We don’t plan to redeem them until they mature, barring some sort of cataclysm. Maturity is still a ways off. One (i.e. me) or both of us might even be dead by then.

Ironically, the lights-out current interest rates create a sort of golden handcuffs: the I bond rate is so implausibly above anything else available, unless you slum it down to the Triple Hooks (i.e., CCC-rated bonds, lowest tier of junk, high default risk) that we couldn’t think of selling the I bonds, unless the cupboard were otherwise bare and the wolf at the door. Not our current situation.

So, I bonds take on a mainly psychological function: in the back of our minds, we know that even if we’re hit by the seven plagues, we still have that fall-back at Treasury Direct.

Since we’ve compartmentalized I bonds in that way, we don’t include them in our asset allocation, which is reserved for the *risk assets* of the portfolio.
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Re: Fitting I-bonds into asset allocation

Post by Fremdon Ferndock »

If you have or are considering TIPS, then I-Bonds can be included in that allocation. They are probably better than TIPS in several ways and serve the same role as an inflation-linked bond allocation.
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Re: Fitting I-bonds into asset allocation

Post by invest4 »

The bigger question is whether or not I-bonds are worthwhile for your portfolio. Do you have a longer term plan for I-bonds in your portfolio or just chasing the current interest rate? How much would you have to accumulate over X years to make a difference in your portfolio? Of course, worst case is you jump through the hoops to invest in I-bonds, the Fed gets inflation under reasonable control and decide you don't want them anymore because the juicy interest rate has evaporated and sell them. It may make sense for you...just give it a thorough think.

Best wishes.
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Re: Fitting I-bonds into asset allocation

Post by Iorek »

Assuming you don’t need to get a medallion sig guarantee to open your account (and you don’t lose your login info etc) ibonds are very easy to purchase and hold.

I’ve had monthly purchasing set up at Treasury Direct for years— about once a year I go on and check my holdings and maybe tweak things depending on how much I have available for ibond purchasing but it is no problem to ask TD to buy $300 a month (or $75 a week or whatever you want) for the next year or two.

I think ibonds make a perfect e-fund (once you are past the year) and also make a good fixed income holding in the current environment.

I’d probably start by setting it up as your efund— either by moving the current efund over and relying on the taxable account as backup for the first year or by moving the $300/month to ibonds along with whatever else you were planning to save an an increased efund, but I could also see expanding your tax advantaged space and reducing some interest rate risk by shifting your fixed income to ibonds.
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Re: Fitting I-bonds into asset allocation

Post by harikaried »

Hoosier CPA wrote: Mon May 16, 2022 8:08 amour minimum payment is now $300/month less than it was prior to that. On one hand, I’d still like to keep these funds allocated towards the mortgage, just to keep progress on paying down, but on the other hand, it’s not optimal to focus on 2.5% debt
At least for the narrow comparison of mortgage prepayment vs I-bonds yielding an annualized 9.62% for 6 months, you could potentially earn ~$350 after-tax in 6 months with $10k invested (ignoring redemption-within-5-years penalty) or if instead paid down the 2.5% debt saving ~$100 interest after-tax. Is that $250 difference in half a year worth the effort in directing $10k differently?

Of course, if you put in more money and guess future rates for multiple years, that can lead to quite a bit more savings/earnings. Although $300/mo redirected from mortgage prepayment would be $3.6k out of the potential $20k/yr for a pair of max individual I-bonds, so you would still need to exchange some existing bonds and adjust cash flow to reach the max.

One potential benefit of I-bonds instead of mortgage prepayment is that after 1 year, you could have better liquidity than with less debt unless you have access to home equity via a line of credit. You could also redeem the I-bonds to pay down debt if you don't need that liquidity.
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Hoosier CPA
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Re: Fitting I-bonds into asset allocation

Post by Hoosier CPA »

harikaried wrote: Tue May 17, 2022 12:05 pm
Hoosier CPA wrote: Mon May 16, 2022 8:08 amour minimum payment is now $300/month less than it was prior to that. On one hand, I’d still like to keep these funds allocated towards the mortgage, just to keep progress on paying down, but on the other hand, it’s not optimal to focus on 2.5% debt
At least for the narrow comparison of mortgage prepayment vs I-bonds yielding an annualized 9.62% for 6 months, you could potentially earn ~$350 after-tax in 6 months with $10k invested (ignoring redemption-within-5-years penalty) or if instead paid down the 2.5% debt saving ~$100 interest after-tax. Is that $250 difference in half a year worth the effort in directing $10k differently?

Of course, if you put in more money and guess future rates for multiple years, that can lead to quite a bit more savings/earnings. Although $300/mo redirected from mortgage prepayment would be $3.6k out of the potential $20k/yr for a pair of max individual I-bonds, so you would still need to exchange some existing bonds and adjust cash flow to reach the max.

One potential benefit of I-bonds instead of mortgage prepayment is that after 1 year, you could have better liquidity than with less debt unless you have access to home equity via a line of credit. You could also redeem the I-bonds to pay down debt if you don't need that liquidity.
Yeah I value the liquidity. I bought $1K over the weekend just to try it out, and I'm going to work on a plan to purchase more, perhaps up the $20K limit for my wife and me for 2022. Appreciate all the opinions on here. To answer other questions - my plan would be to hold these until inflation subsides. I don't have a crystal ball but even it magical goes to zero over the next 6 months, I'm at least guaranteed 1/2 of the 9.62% current annual rate over the first six months and even if it earns 0% over the second six months, I'm ahead vs paying on the mortgage.
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Re: Fitting I-bonds into asset allocation

Post by harikaried »

Hoosier CPA wrote: Mon May 23, 2022 1:32 pmI'm going to work on a plan to purchase more, perhaps up the $20K limit for my wife and me for 2022
We sold lower yielding bonds to buy more than a single year's worth of I-bonds with future year gifts to get benefit of the current high rates. This was instead of selling bonds to pay down debt that has a rate higher than bonds but less than I-bonds. You can do something similar if you're okay with locking up some money for a year and whatever you project future 6-month rates to be.
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Re: Fitting I-bonds into asset allocation

Post by LTCM »

I'm 80/20.

I bought 10k I Bonds. Sold 8k long treasuries. Bought 8k stocks.

I view them as long term bonds. If I sell them then I'll have to shift my stocks back into bonds.
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Re: Fitting I-bonds into asset allocation

Post by dbr »

LTCM wrote: Mon May 23, 2022 11:52 pm I'm 80/20.

I bought 10k I Bonds. Sold 8k long treasuries. Bought 8k stocks.

I view them as long term bonds. If I sell them then I'll have to shift my stocks back into bonds.
I bonds don't have the risk characteristics of long bonds and probably don't have the expected real return that one would presumably assign to long bonds although that depends on when.
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LTCM
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Re: Fitting I-bonds into asset allocation

Post by LTCM »

If you look at LTT, TIPS and inflation expectations real returns are very close to zero or even below. I think the 0% is more than fair.

The fact they have less risk is an advantage from my point of view.

edit> and theyre tax deferred which in my case makes more space for stocks in the IRA/401k.
55% VUG - 20% VEA - 20% EDV - 5% BNDX
dbr
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Re: Fitting I-bonds into asset allocation

Post by dbr »

The asset class I would invent for I bonds would be real cash in a mattress. That is not an asset class that gets discussed very much in terms of advantages and disadvantages of holding that in place of something else. The "in a mattress" comment describes the fact that for many years and currently the real interest rate for the duration of ownership is zero while nominal cash often earns positive nominal interest.
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Re: Fitting I-bonds into asset allocation

Post by aristotelian »

Tooth wrote: Mon May 16, 2022 8:17 am Regardless of the rate, I bonds are a zero real return investment unless the fixed rate goes up. I consider them cash instrument that maintains some buying power. I would not change other elements of the portfolio based on the current rate as the real return has not changed.

Also they are tax deferred until you sell.
Depending on inflation, nominal bonds may sometimes have the same or lower expected return as I Bonds (i.e. negative expected real return). I don't see why the expected return makes I Bonds fundamentally different than other bonds. I consider them all within a fixed income category that includes CD's, nominal bonds, and TIPS. I also track I Bonds within a specific inflation-protected sub category.
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Re: Fitting I-bonds into asset allocation

Post by dbr »

aristotelian wrote: Tue May 24, 2022 2:05 pm
Tooth wrote: Mon May 16, 2022 8:17 am Regardless of the rate, I bonds are a zero real return investment unless the fixed rate goes up. I consider them cash instrument that maintains some buying power. I would not change other elements of the portfolio based on the current rate as the real return has not changed.

Also they are tax deferred until you sell.
Depending on inflation, nominal bonds may sometimes have the same or lower expected return as I Bonds (i.e. negative expected real return). I don't see why the expected return makes I Bonds fundamentally different than other bonds. I consider them all within a fixed income category that includes CD's, nominal bonds, and TIPS. I also track I Bonds within a specific inflation-protected sub category.
I would say a permanent real return of zero that can't be exchanged or reacquired due to purchase limits is a unique instrument. You may be right that in the end the result is not significant. I am not impressed that different assets within fixed income are very different among themselves when combined in a portfolio of stocks and other assets. There may be a useful difference for unique applications, but those are by definition minor.
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Re: Fitting I-bonds into asset allocation

Post by BabaWawa »

My AA is 60/40. The 40% side (fixed income) includes bonds, cash, emergency fund. I feel my i-bonds are a bit of all three. I would have a more difficult time figuring where REITs or preferred securities go, although I don't own these.
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Re: Fitting I-bonds into asset allocation

Post by TenS2XS »

I include them in my AA as bonds, although I can see how they could be considered in other ways. My main reason for considering them to be bonds is that there are liquidity restrictions in the early years of ownership. They can't be redeemed for the first year and there are interest penalties until they've been owned for 5 years. I suppose I could consider the ones I've had for 5+ years as cash or short-term holdings.

However, my asset allocation conundrum is with how much inflation protection to have as a percentage of the entire portfolio and/or as a percentage of bonds. I haven't come across and guidelines or recommendations. In addition to I Bonds I have a TIPS mutual fund, so the total of the bonds and the fund are my allocation to inflation protected securities.
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