I Bonds: Hold Or Sell?

TFB — Fri, 16 Oct 2009 13:29:00 +0000

Savings Bond Advisor reported that the next inflation adjustment on I Bonds will be 3.07%. I bought some I Bonds in April 2008 when the base rate was 1.2%. They will earn 0% starting this month through March 2010. Based on the 3.07% inflation adjustment, these I Bonds will earn 4.28% between April and September 2010.

I had planned to sell them in January 2010 after they earn nothing for three months. Now it looks like I will hold them one more year until January 2011.

If I redeem them in January 2011 instead of January 2010, these April 2008 I Bonds will earn

0% for 3 months (1/2010 – 3/2010)
4.28% for 6 months (4/2010 – 9/2010)
0% for 3 months (10/2010 – 12/2010, last 3 months of interest forfeited)

Over the course of 12 months, they will earn 2.14%. Right now a good rate on a 1-year CD is slightly above 2% (Alliant Credit Union 2.15%, 2.30% if over $25k). The 1.2% I Bonds will earn about the same or slightly more because they are state income tax free.

I will revisit this decision in January. If there are better opportunities elsewhere, I still have a chance to change my mind.

Because of deflation in late 2008 early 2009, all I Bonds have to go through a period of earning 0%. If you are planning to sell your I Bonds before their 5-year anniversary, make sure you sell only after they earn 0% for 3 months. Because you forfeit the last 3 months of interest, you want to forfeit 0%, not your high positive rates. Here’s a table showing when the 3-month 0% period is over:

Issue Month	OK to sell on or after
January or July	10/1/2009
February or August	11/1/2009
March or September	12/1/2009
April or October	1/1/2010
May or November	8/1/2009
June or December	9/1/2009

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Software picked, likely related articles at The Finance Buff:

Not Too Thrilled About 1.2% I Bonds

TFB — Mon, 21 Apr 2008 17:50:00 +0000

A reader asked a few weeks ago if I’d write something about the Series I Savings Bonds (or “I Bonds” in short). I was thinking of doing it but I now see Jonathan at My Money Blog already did a very good job on this topic. There is also a long thread on the Bogleheads forum about it.

If you are not familiar with I Bonds, please read:

I’m not going to repeat what Jonathan and Bogleheads already wrote. The gist of it is that if you buy I Bonds at the end of April 2008 and hold the bonds until July 1, 2009, you will earn about 4.5% a year for holding the bonds for 14 months. Think of it as a 14-month CD at 4.5% APY, state income tax free. If you decide to hold longer, you will earn 1.2% plus inflation adjustment.

Is it a good deal? It is a good deal if you shift over existing money in bonds or if you would otherwise buy a CD. The highest yielding 1-year CD is about 4%. Money market funds yield less than 3% which may go up or down.

I will still buy the bonds but I’m not too thrilled about them for several reasons.

First you can’t really use I Bonds as an emergency fund because there is absolutely no possibility to redeem them in the first 12 months, not even if you are willing to forfeit interest. For I Bonds bought in April 2008, the earliest you can get your money back is April 1, 2009. You have to be sure you have adequate money elsewhere and you won’t need the money before that date.

Second if you are thinking of buying I Bonds but you are not contributing the maximum to your 401(k) and Roth IRA, you are better off increasing your contribution to your 401(k) and Roth IRA. Although I Bonds are tax deferred, they are like a non-deductible IRA. A non-deductible IRA should have a lower priority than 401(k) and Roth IRA. I Bonds are OK if the money is intended for short-term savings, not as a long-term investment for retirement.

Third, the purchase limit makes the difference really small versus a 1-year CD. The maximum amount a person can buy is $5,000 in electronic bonds and $5,000 in paper bonds, for a total of $10k. A married couple can buy $10k for each spouse. Even at $20k, an extra 1% over a 1-year CD is only $200, before federal income tax. After tax it’s $150 or less. It’s nice to have extra $150 but it’s hardly earth shattering.

Finally, if you are thinking of buying I Bonds because you are hesitant to invest in the stock market, that’s market timing which usually doesn’t work. Just last week, the stock market went up 4.3% in a week. It’ll take a whole year for I Bonds to do that. I know I’m comparing apples to oranges and it’s unlikely stocks will go up 4% every week, but it’s not inconceivable that in a few years you will find you would’ve been better off adding the money to your investment portfolio rather than chickening out into I Bonds.

Let me share some personal experience. I bought I Bonds in September 2001 at 3.0% plus inflation. These bonds are considered “golden” because many think rates will never be that high again (the current rate is only 1.2% plus inflation). A $100 3.0% I Bond bought in September 2001 is worth $144 today. If $100 was put into a balanced fund like Vanguard STAR Fund at the same time, it’d be worth $164 today, or 14% more. I also bought I Bonds in March 2003 at 1.6% plus inflation. A $100 I Bond bought then is worth $125 today. The same investment in Vanguard STAR Fund would be worth $173 today. That’s 38% more. I’m still holding these I Bonds with no regret. I’m just showing you that buying I Bonds should not be a substitution of investing in a diversified stocks/bonds portfolio.

In the end I will still buy some I Bonds before the end of April. I will shift some money currently in tax-exempt funds into I Bonds. In doing so I will pick up an extra $100 or so. But that’s it. It’s not something worth getting too excited about. My fresh cash will still go to the stock market.

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Software picked, likely related articles at The Finance Buff:

The Finance Buff » I-Bonds

I Bonds: Hold Or Sell?

Not Too Thrilled About 1.2% I Bonds