U.S. Series I Savings Bonds Simplified featuring David Enna
Check out Jeremy’s latest podcast on U.S. Series I Savings Bonds by listening on “Apple Podcasts” or “Google Podcasts” or read below for a simple breakdown of how U.S. Series I Savings Bonds work, their benefits, and potential pitfalls.
#55 – As interest rates continue to remain low, it can be difficult to cope with inflation.
This can lead to a negative real rate of return. In other words, your money might be losing value every day!
But don’t worry. Your search for greater interest rates ends here.
Update: I Bonds rates in November will be 3.56% for 6 months – a 7.12% annualized rate! This podcast was recorded before the October 13th announcement of the new rate so we were making estimates during the conversation.
Today, we’ll introduce you to a lesser-known government security that can help you cope with inflation with minimal risk. It’s called the U.S. Series I Savings Bond (I Bond).
In this episode, Jeremy Keil talks to David Enna, the founder of TIPSWatch.com. Join Jeremy and David as they explain the basics of I Bonds, their key benefits, and why October 2021 might be the best time to invest in them. Plus, they also provide a brief overview of Treasury Inflation-Protected Securities (TIPS).
- Estimated interest rates that I Bonds and TIPS can offer over the next 12 months
- Why Series I Savings Bonds can act as an effective emergency fund
- Potential drawbacks of Series I Savings Bonds that every investor must keep in mind
- Places where you can trade Series I Savings Bonds
- 3 secrets to maximizing the return on your Series I Savings Bond investments
- And more
Series I Savings Bonds Simplified
What Are U.S. Series I Savings Bonds?
U.S. Series I Savings Bonds, also known as I Bonds, are a type of U.S. government bonds that offer a fixed interest rate, plus an inflation-adjusted rate. These two rates combine to form a “composite rate.”
Due to the inflation-adjusted component, the real interest rate (net of inflation) can never be negative. In simple terms, this means that I Bonds can keep your money from losing value every day due to inflation!
The current fixed interest rate for I Bonds is 0.00% and it’s likely to renew at the same rate in November 2021.
However, this 0% is still better than the current interest rates on nominal bonds and TIPS if you look at the real interest earned net of inflation.
Read below to learn why the November rate will be 7.12% annualized, and why buying in October 2021 would get you 5.39% over the next 12 months!
Benefits of Investing in Series I Savings Bonds
One of the major benefits of I Bonds, as discussed above, is the protection against inflation.
I Bonds can also help you save taxes in two ways:
- They are tax-deferred. You pay taxes on any interest earned only after you redeem the bonds. If you redeem your bonds during a low-income year, there can be significant tax savings!
- They’re exempt from state and local taxes. You only pay federal taxes on any earnings from I Bonds.
Finally, I Bonds can also serve as an effective emergency fund.
The interest rates on I Bonds are expected to be high for at least the next 12 months. Why not use it to earn a decent interest income on your emergency fund?
To learn more about using I Bonds as an emergency fund, check out this highly informative article by David Enna: I Bond Manifesto: Why inflation-linked savings bonds can work as part of your emergency fund.
Why October 2021 Might Be the Best Time To Invest in Series I Savings Bonds
If you’re holding your excess cash in a checking account, or even a nominal bond, it’s likely that you’re earning close to 0% interest on your money.
However, the current composite interest rate on I Bonds is approximately 3.54% for the next six months. And guess what? The just announced November 2021 rate is 7.12%.
In general, you only know what the next 6 month rate will be, but right now you know that buying in October you would get 1.77% for 6 months, followed by 3.56% for the next 6 months.
So, if you buy I Bonds in October 2021, you are locking in a combined 5.39% rate for the next 12 months!
Are you reading this between November 2021 and April 2022? Don’t worry! The high initial six month rate of 3.56% is still way better than other alternatives, and you would still want to consider I bonds as a good place for your short term money that you don’t need for 12+ months.
Potential Downsides To Keep In Mind
Like every investment, it’s important to understand the downsides too.
First, you can’t cash out in the first 12 months. if you cash out your I Bonds prior to 5 years, you’ll lose the last 3 months’ interest of your holding period.
There is also a limit on the amount of money you can invest in I Bonds, which is $10,000 per person per year.
Finally, the fixed interest rate is 0.00%. In such a situation, the best I Bonds can offer is an interest rate that is at par with the inflation rate. If you’re looking for even greater returns with greater risk, I Bonds might not be attractive to you.
How To Maximize Your Returns
There are 3 strategies you can implement to optimize your returns on I Bonds:
- You can exceed the $10,000 per person per year limit and invest more through your federal tax returns. If you’re eligible for a tax refund, you can get it in the form of up to $5,000 worth of I Bonds.
- Reduce your minimum holding period to 11 months by purchasing at the end of the month and selling at the beginning of the month. For example, even if you purchase I Bonds at the end of October 2021, you’ll earn interest for the full month of October! Then, you can redeem them right at the beginning of October 2022 and still earn the full interest for that month too.
- If the new interest rates are low, don’t cash out right away! Wait for at least 3 months. By doing so, the 3-months’ interest that you’ll lose will be computed using the lower interest rate.
Make sure you check out the resources below to learn more about U.S. Series I Savings Bonds.
If you have any questions regarding your retirement, investment, or tax planning, feel free to contact us!
- Treasury Direct
- “October 2021 Will Probably Be the Best Month Ever in History to Buy I Bonds” by Jeremy Keil
- “I Bond Manifesto: Why inflation-linked savings bonds can work as part of your emergency fund” by David Enna
- “Ready to open a TreasuryDirect account? Here are some tips.” by David Enna
- Seeking Alpha
- Zvi Bodie (The “Father” of I Bonds)
- IRS form to deposit your refund as an I Bond purchase
- 3 Things You Should Know Before Choosing A Financial Advisor
- Subscribe to Retirement Revealed on Google Podcasts
- Subscribe to Retirement Revealed on Apple Podcasts
Connect With David Enna:
Connect With Jeremy Keil:
- (262) 333-8353
- Keil Financial Partners
- LinkedIn: Jeremy Keil
- Facebook: Jeremy Keil
- LinkedIn: Keil Financial Partners
About Our Guest:
David Enna is a long-time journalist based in Charlotte, N.C, and the founder of TIPSWatch.com. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer’s website. He has been writing on inflation-protected investments since 2011, and investing in Treasury Inflation-Protected Securities (TIPS) since 1999. Through his blog on TIPSWatch.com, David explores ideas, benefits and cautions about TIPS and U.S. Series I Bonds, inflation-protected investments that David believes are under-appreciated and under-used.
Listen to Retirement Revealed on:
Ask Jeremy a Question
Download your retirement planning guide now.
Download our Retirement Guidebook
7 Questions That Could Make or Break Your Retirement