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FILIGHTER Episode 14 – I-Bonds

SHOW NOTES

Lets learn about I-Bonds from the US Treasury that are currently yielding 9.62% in May 2022

Treasury Direct Website

May 2022 I BOND RATE CHART.XLSX (treasurydirect.gov)

*Gotta hold them at least 12 months

*Three month penalty if held less than 5 years

*Rates are set 2 times per year and hold for 6 months (Base Rate, currently Zero, and Inflation Rate, currently 9.62%)

*Must purchase from TreasuryDirect.gov

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What is a Series I Savings Bond?

A savings bond that earns interest based on combining a fixed rate and an inflation rate for up to 30 years.

Twice a Year Rates are set and there are TWO Rate Components to a Series I Savings Bond:

• Fixed Rate
• Inflation Rate

The Composite interest rate combines these two separate rates:

A fixed rate of return, which remains the same throughout the life of the I bond.

A variable semiannual inflation rate based on changes in the Consumer Price Index for all Urban Consumers (CPI-U). The Bureau of the Fiscal Service announces the rates each May and November. The semiannual inflation rate announced in May is the change between the CPI-U figures from the preceding September and March; the inflation rate announced in November is the change between the CPI-U figures from the preceding March and September.

Because it combines two rates, the interest rate on an I bond sometimes is called the composite rate or the overall rate.

0.0% + 3.54% May 2021

0.0% + 7.12% Last November 2021

0.0% + 9.62% May of 2022

While the inflation rate can be negative, the composite rate floor is set to never be less than zero.  The only two periods since 1998 that negative rates for inflation were used took place in 2009 and 2015.

Using our 20/20 hindsight vision, Say between May 2000 and October 2000 you were buying an I-Bond, your two combination rates would be a FIXED RATE of 3.6% plus an Inflation Rate of 3.89% for a combined rate of 7.49% at the time.  ROLL THE CLOCK FORWARD TO TODAY, and that base rate bond of 3.6% and the new 9.62% Inflation Rate would take you to 13.39% composite rate for your bond.

How would you like more than 13% rates on a US Government backed savings bond?

Just FYI the last time you could have bought a bond with a fixed rate above zero, was November 2019 through April of 2020.  During that 6-month period, the fixed rate was zero point two percent. 0.2% or 20 basis points in financial rate lingo.  A basis point is 1/100^th of one percent.

May 2022 I BOND RATE CHART.XLSX (treasurydirect.gov)

If you purchase a bond during the 6-month window your bond will receive the current rate for 6 months then interest at the end of the period will be compounded to your balance semi-annually and invested at the then new rate for the next 6 months.

If you bought a bond today, May 24^th, 2022, your bond would reset rates every May 1^st and November 1^st

If you bought on 4^th of July, your rates would reset each July 1^st and January 1^st

There are some opportunities to either report income earned annually, or all at the time the bond is cashed out.

There are some key points to know before buying a Series I Savings Bond:

1) You must hold it for at least a year.

2) If you cash out in less than 5 years, you forfeit the last 3 months interest.

3) When the bond is 30 years old, or at maturity, the bond no longer earns interest.

Sounds great right?  So want to buy some?  Easy does it wrangler….

How do you buy a Series I Savings Bond, or I Bonds for short….

• Go to Treasurydirect.gov and research the I-Bond (There are other types of bonds, notes, and bills but we are going to limit our scope today to I-Bonds)
• Create an Account
  1. Your account when set up will be linked to a bank account that transactions will utilize. When you purchase a bond, the funds will be drafted from the account, when you redeem or cash out of a bond, the funds will be deposited into your account.
• Once your account is created, you have several options to purchase I bonds:
  1. LIMITS – There is a $10,000 limit per person per calendar year.
  2. The only way to buy more than $10,000 is to utilize an IRS Refund to purchase a paper bond up to an additional $5000. This may be the ONLY good reason to overpay your federal income taxes. When you file your tax return include IRS FORM 8888 and purchase as little as $50 or as much as $5000 in multiples of $50 increments.
  3. MIMIMUMS, $25 on Electronic and $50 on Paper – remember paper can only be purchased with a Federal Tax Refund
  4. Lump Sum Purchase, Log in and decide on an amount and buy it all at once.
     1. This is the method I used and frankly it was probably the simplest, one and done for the year.
  5. Payroll Savings Plan
     1. Like direct deposit in your checking or savings account, you can purchase I-Bonds directly by payroll deposit. There are more instructions on the Treasury Direct site if you are an individual or employer and want to better understand the set up.  If I still had W-2 Income, this may be a great way to automate the purchases.  The other nice though on the back side when selling each of these bonds will mature at a different time and can be used to meet expenses later, say when funding a child’s education or your own retirement expenses.
  6. Schedule Purchases
     1. Recurring options:
        1. Weekly,
        2. Biweekly, every other week
        3. Monthly,
        4. Bi-monthly, every other month
        5. Quarterly,
        6. Semi-annually, every 6 months
        7. and Annually
     2. Schedule your own dates
        1. Birthday every year
        2. Monthly except June and November when Property Taxes are due (in Texas) and funds are needed elsewhere

• Basically, you can automate and utilize the site to buy whenever you want.

• OWNERSHIP – before you purchase a bond you will need to decide if the ownership will be either:
  1. Sole Owner
  2. Primary Owner
  3. Beneficiary
  4. In our case, I set up my I-Bonds as myself as First Named Registrant and my wife as Second-Named registrant Payable on Death
  5. You will need a Tax ID number for each owner listed, in my case that is my Social Security Number
• Other Options:
  1. GIFTS – you can set up a gift box and purchase bonds for someone else. Say your children, grandchildren, or anyone else.  They will need to set up a Treasury Direct Account and provide the number to you for your transfer of the bonds from your gift box into their account.
  2. The rate is set at the time you buy the bond for the gift, so if you want to lock in the 9.62% current rate, be sure to buy the gift bond before the end of October 2022.
  3. At the time the gift bond is transferred it counts against the recipients limit for the calendar year. It may be a good idea to let a recipient know you intend to purchase an I-bond and be sure they have not already used up their max $10,000 for the year.
     1. Some vloggers on you-tube get creative with the ways this can be manipulated. For instance, they buy bonds for their spouse as a gift to lock in rates but don’t transfer it out of their gift box until the following year.  Kind of like the gift box is LIMBO and those don’t count against the giver or receiver limits until they are transferred.  I AM NOT SUGGESTING anyone game the system, just that it is best to clearly understand the rules and complications and when you play with fire you might get burned if you don’t dot all the “I”s and cross all the “T’s”.

How do you know if these are something that fit into your portfolio?

1. Does your Strategic Asset Allocation include a Fixed Income Component?
   1. Most asset allocations include components for EQUITIES, FIXED INCOME, and CASH
   2. If a portion of your allocation goal is FIXED INCOME, consider if I-Bonds make sense as a portion of your target allocation.
2. Do your diversification goals within Fixed Income include Inflation protected components?
   1. For instance, if you hold the Vanguard BND ETF there is not specific inflation indexed bonds withing the portfolio, but if you hold VTIP Vanguard Short-Term Inflation Protected Securities Index Fund ETF shares, you already have exposure to inflation protected financial instruments.
3. If you routinely Rebalance your portfolio, these bonds may not be sellable (Less than 12 months, or less than 5 years (3-month penalty) so consider these as a longer term component of your allocation and perhaps sell a bond mutual fund or ETF to accomplish the goals of rebalancing by Asset Allocation.

I have been interested in I-bonds since the coverage started in May 2021 when the rate was 3.54%.  When the rate went to 7.12% we made our first purchases in November 2021.  Then again on the first of January, we purchased additional bonds.  The November purchases reset to 9.62% this month, May 2022 and the January purchases will reset in July to 9.62%.  Many bloggers published content as to whether you should buy at the old rate before the reset to push out the tail on higher rates as inflation declines.  It makes little difference to me, and I like to employ my Half Right Half Wrong philosophy, if you think it makes a difference buy half before and half after.  You will be “right” if there is such a thing on half of your purchase and can you really be “WRONG” for buying at 9.62%?  You will get 6 months of each rate once you buy as long as you hold the bonds up until 30 year maturity.

What are other factors to consider in your purchase decision?

1. You will have to set up ANOTHER account
2. You will need to let your financial advisor know you have holdings in a treasury direct account for purposes of any allocation or rebalance planning.
3. If you are very risk averse, the fact that the US Government stands behind these bonds will help you rest easy at night.
4. When you are in a drawdown stage, these will have to be sold separately from your other asset or investment accounts.
5. Liquidity, if you need your money back over the short term (less than a year) they are not for you, or at least the portion you need on the short term. It may make sense to buy and hold for 18 months and then liquidate, you will receive the interest and some compounding but give up the last 3 months interest. 

Look into I-Bonds, they could be a good fit, or not!  Hopefully this is now a topic that is no longer something you didn’t know you didn’t know. 😊

More Education is good!  Mind the Gap!  Lambo