Fight Inflation with Series I Bond
Earn 9.62% through October and protect yourself against high inflation in the future.
when inflation is 8.5%, as it has been in the last 12 months, you lose purchasing power. If you’re already retired, that’s simply not an option. Generally speaking, if you want to earn more interest, you will have to take more risks. And for many retirees, that’s not a good option either. But with Series I bonds, a type of savings bond issued by the US Treasury Department, you can get a higher interest rate and protect yourself against fears of high inflation in the future, with little risk.
Basic concepts of series I bond
Series I bonds are inflation-protected savings bonds issued and guaranteed by the US Department of the Treasury. Due to recent high inflation, Series I bonds purchased before the end of October 2022 will yield 9.62% over the next six months. If inflation stays high, so will yield.
A Series I bond has a 30-year maturity, which means it will pay interest for the next 30 years. You pay a fixed interest rate, which stays the same for those 30 years. Fixed interest is currently 0%. But series I bond also pay an inflation adjustment that resets 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 its more volatile food and energy components.
You are not required to hold Series I bonds for 30 years. But you do have to keep them for at least a year. If you keep your I bond for between one and less than five years and redeem it, they will charge you a small penalty equivalent to three months of interest. After five years, you can redeem it without penalty.
In the worst case, if you buy before the end of October, inflation will be zero during the second semester. If you redeem it annually, you will get an annual interest rate of 4.81%. That’s much better than any government-guaranteed savings rate. And that a 0% inflation rate is unlikely. If we hit double-digit inflation, you’ll get a double-digit return.
I spoke with Mel Linaker about Series I bonds. Linaker is the founder and past 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 a proponent of Series I bonds since they were first introduced in 1998. Some key points:
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Complexity (the only drawback)
No investment is perfect and the complexity of this is its only disadvantage. Later in life, we are all vulnerable to cognitive decline, and simplifying the number of accounts helps protect our savings. Unfortunately, you will likely need a Treasury Direct account, which increases the steps. They don’t send statements or 1099-Ints, so make sure your spouse and heirs know you have this account. Many executors discover the accounts of the deceased by reviewing bank statements and tax returns, and these Series I bonds do not appear on those documents. And of course, keep your Treasury Direct password safe.
An inflation hedge for the average person
Buying up to $45,000 in Series I bonds is a significant investment for most of us, but not worth it for the very wealthy. The best they can do is buy something similar known as Treasury Inflation-Indexed Bonds (TIPS), or TIPS funds. Although they are more liquid than Series I bonds, the latter have key advantages over TIPS.
In conclusion
If you want to earn a risk-free return and protect yourself against the possibility of high inflation in the future, then Series I bonds may be the answer for you. When something seems too good to be true, it almost always is. But once in a while, something does seem as it seems, and today I’m putting Series I bonds in this rare category.
A look at series I bond
Current rate
9.62% for bonds issued between May and October 2022
Minimum purchase
Electronic voucher: $25. Paper Bonuses: $50
Maximum purchase per year
Electronic bonuses: $10,000. Paper Bonds: $5,000
Denominations
Electronic vouchers: from $25 and up. Paper Bonds: $50, $100, $200, $500, $1,000
Issuance method
Electronic Bonds: Online at Treasury Direct
Paper Bonds: By mail after you buy them with your tax refund
Source: United States Department of the Treasury
Taxes
Savings bonds are exempt from tax by any state or political subdivision of a state, except for estate or inheritance taxes. Interest earnings are subject to federal income tax.
Allan Roth is a working 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 (Certified Financial Planner [CFP], Certified Public Accountant [CPA], Master of Business Administration [MBA]), he remains convinced that he can still keep investing simple.
