Savings accounts and bank CDs are generally yielding somewhere between zero and 1 percent annually, which means that when inflation runs at 6.2 percent, as it has the past 12 months, you’re losing spending power. If you’re a retiree seeking income, that’s just not an option. Generally speaking, if you want to earn more interest, you’ll need to take on more risk — and for many retirees, that’s not a good option, either. You can safely earn far more with I Bonds, a type of savings bond issued by the U.S. Treasury, and protect against future high inflation.
I Bond basics
I Bonds are inflation-protected savings bonds, issued and guaranteed by the United States Treasury. Because of the recent high inflation, I Bonds purchased before the end of April 2022 will yield 7.12 percent for the next six months. If inflation stays high, so will the yield.
An I Bond has a 30-year maturity, which means it will pay interest for the next 30 years. It pays a fixed interest rate, which stays the same for 30 years. The fixed rate is currently zero percent. But I Bonds also pay an inflation adjustment that is reset twice a year in May and November. The inflation rate is based on the Consumer Price Index for all Urban Consumers, or CPI-U. This includes the volatile food and energy components.
You don’t have to hold I Bonds for 30 years. You do have to hold them for one year. If you hold your I Bond for one year and fewer than five years and you redeem your I Bond, you’ll get dinged with a small penalty of three months’ interest. You can redeem after five years with no penalty.
The worst-case scenario if you buy before the end of April is that inflation is zero over the second six-month period. If you redeem at one year, you’ll earn an annualized rate of 3.56 percent. That’s far better than any government-guaranteed savings rate around. And that zero percent inflation rate is unlikely. If we hit double-digit inflation, you will get a double-digit return.
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I spoke with Mel Lindauer about I Bonds. Lindauer is the founder and former president of the John C. Bogle Center for Financial Literacy (disclosure: I am a former board member) and one of the authors of the I Bond Manifesto. He has been an advocate for I Bonds since they were first introduced in 1998. Some key points:
Complexity — the one downside
No investment is perfect, and complexity is the one downside for this one. Later on in life, we are all subject to cognitive decline, and decluttering the number of accounts helps protect our nest egg. Unfortunately, you’ll likely need a Treasury Direct account, which adds to clutter. They do not send out statements or 1099-Int forms, so make sure your spouse and heirs are aware you have this account. Many executors discover accounts of the deceased by reviewing statements and tax returns, and these I Bonds won’t show up for them. And, of course, keep your Treasury Direct password secure.
An inflation hedge for the average person
Buying as much as $45,000 in I Bonds is material for most of us but not worth the time for the ultra-wealthy. The best they can do is buy something similar known as Treasury Inflation-Protected Securities (TIPS), or TIPS Funds. While they are more liquid than I Bonds, I Bonds have key advantages over TIPS.
The bottom line
If you want to earn a risk-free return and protect against the possibility of future high inflation, then I Bonds may be right for you. When something looks too good to be true, most of the time it is. But occasionally, something checks out, and I put I Bonds in this rare category today.
I Bonds at a Glance
7.12 percent for bonds issued November 2021 – April 2022
Electronic bond: $25. Paper bond: $50
Maximum purchase per year
Electronic bonds: $10,000. Paper bonds: $5,000
Electronic bonds: $25 and up. Paper bonds: $50, $100, $200, $500, $1,000
Electronic bonds: Online in TreasuryDirect
Paper bonds: By mail after you buy with your tax refund
Source: U.S. Treasury
Allan Roth is a practicing financial planner who has taught finance and behavioral finance at three universities and has written for national publications including The Wall Street Journal. Despite his many credentials (CFP, CPA, MBA), he remains confident that he can still keep investing simple.