Series I Savings Bonds or “I Bonds” have been all over the news…and for good reason. As of May 2022, I Bonds started offering a “guaranteed” interest rate of 9.62%. In fact, we can’t get through a meeting without a client asking if this is real. In this post, I am going to explain 3 reasons I Bonds might not be worth the hassle.
What are I Bonds?
I Bonds are savings bonds that are guaranteed by the US government making them as risk-free as you can get. They are designed to help protect your money against inflation.
The interest rate on these bonds is directly tied to inflation. If inflation goes up, the interest rate increases. If inflation goes down, the interest rate decreases. While the interest rate is quoted in annual terms, the stated rate only applies for a-six month period.
OUR TAKE: The current interest rate of 9.62% is actually a 4.81% interest rate for the six-month period May 2022 through October 2022 (4.81 x 2 = 9.62). For some context, this is a really good rate. According to Bank Rate, the average rate for a one-year CD is 0.52%.
On November 1, the interest rate will reset. I Bonds earn interest monthly, but you only “see” the interest added to your account in May and November. Unlike most bonds, the price of an I Bond is fixed and cannot change. So, the only measure you need to worry about is its interest rate.
OUR TAKE: We see a lot of confusion when it comes to understanding a bond’s performance. Many times, people will make the mistake of conflating its interest rate to its performance. However, most bonds (not I Bonds) can decline in value and completely offset any yield.
There are some details you should be aware of:
- When you purchase an I Bond, you cannot sell for a period of one year after purchase.
- If you sell before five years, you forfeit the last 3 months’ worth of interest.
- The only place you can buy an I Bond is directly through the government at Treasury Direct.
- Interest on I Bonds are subject to federal income tax, but free from state or local income tax.
- Lastly, the maximum purchase is $10,000 per calendar year per person.
Should you buy I Bonds?
It depends on who you are.
1. How large is your portfolio?
If you are single and your investment portfolio is over $500,000, then it might not be worth it. Remember you can only buy $10,000 in any calendar year. Even if you receive 9.62% (the highest interest rate ever offered), this only amounts to $962 in interest. On a $500,000 portfolio, this adds 0.20% to your total return. The going rate of 9.62% is the highest inflation rate since the I Bond was first introduced back in 1998. Rates will undoubtedly come down, thus further decreasing the 0.20% added value.
The same math applies to married couples. Assuming each spouse buys $10,000 worth of I Bonds on a $1 million portfolio, this only adds 0.20% to your total return. (Of course, the smaller your portfolio, the larger the value add.) All that being said, I don’t think it is worth the hassle with portfolios around these levels.
2. Are you a trader or investor?
This high rate only exists today. Therefore, I Bonds seem to make more sense for the trader (focused more on short-term) rather than the investor (focused more on long-term).
3. What is your price for I Bond “clutter?”
You cannot buy I bonds through your bank or financial advisor. This means you would need to open another account directly with Treasury Direct. At the end of the day, you need to ask yourself what “Return on Hassle” (ROH) you need to justify another account.
OUR TAKE: Most of our clients are nearing retirement or have just entered retirement. Their goal is typically to simplify and consolidate their financial lives… not open more accounts!
To put this another way, you can think of not buying I Bonds as a 0.20% “convenience fee” to keep your assets in as few places as possible. This “convenience fee” is one I would gladly “pay” to have less financial clutter in my life. How about you?
