By Matt Stephens, CFP®
Over the past few months, many people have reached out to me with questions about I Bonds. If you’ve never heard of I Bonds before, you’re in good company. While inflation was unusually low over the last decade, they were not very attractive investments. You may have started hearing about them more recently, now that inflation has dramatically increased.
So What Are I Bonds?
I Bonds are a special type of U.S. Treasury bond that pays interest based partly on inflation and resets every six months. The U.S. Treasury recently confirmed that I bonds will pay an annualized interest rate of 9.62% on any bonds purchased between May and October of 2022. (1) This interest rate is locked in for six months, will then reset higher or lower for another six months, depending on the latest inflation numbers. The I Bond will continue earning interest for 30 years, but not necessarily at a favorable interest rate and there are some big caveats.
So What’s the Catch?
I Bonds are pretty straightforward and currently pay a very high interest rate, but there are a couple of caveats that you should be aware of. First of all, your money will be locked up for one full year and you will have no access to it during that time. If you cash it out within the first five years, you will lose the last three months of interest. (2)
There are also strict limits on how much you can put into the investment. An individual can only purchase a maximum of $10,000 worth of I Bonds each year. But, there are some ways around this limitation. For example, a married couple can contribute $20,000 if they each contribute the maximum and could increase that to $30,000 if they have a trust (because a trust can own the bonds as a separate legal entity). If you are owed a tax refund, you can put up to $5,000 of it into an I Bond, and business owners can buy an additional $10,000 worth in the name of the business. So, there are a few ways around the $10,000/year limit.
Another major caveat is how difficult it is to open, fund, and monitor the accounts through TreasuryDirect. It’s an antiquated website with an awkward user interface. When I first opened an account, I didn’t save the account number anywhere, got locked out, and had to spend almost two hours on hold to get it unlocked. It can be a real hassle and, unfortunately, I can’t buy these bonds for you–they can only be purchased directly from the U.S. Treasury.
I Bond Rates
Rates for new bonds are set twice a year—in November and May—which affects bonds purchased during the following six months. For any bonds that you buy, your rates will be locked in for six months, then adjust every six months after that.
For example, if you buy a bond in August of 2022, the rate will adjust on February 1, 2023, and again on August 1, 2023, based on the new rate at the time. (3) They currently yield 9.62% annualized, which is fantastic, but that number could drop in the future. They will only be attractive for as long as inflation remains high. If inflation drops low enough, they could end up paying less than regular short term Treasury bonds. In 20 of the last 24 years, for example, I Bond interest rates have been at or below 2%. (4)
Should I Buy I Bonds?
In most cases, yes. If it’s money you won’t need for at least a year and you’re willing to go through the hassle of opening and keeping track of the TreasuryDirect account, I think it’s a slam dunk. You won’t lose any of your principal and even if inflation were to plummet (the worst-case scenario for I Bonds), you’ll still likely be better off than leaving all of your cash in the bank only earning 1% interest. For more information, here's a great CNBC article that walks through how to buy them.
We Are Here to Help
A lot of people are thinking about how to shield their investments against inflation and are worried about how inflation could affect their retirements. The economy is in a strange place right now in many ways, so it’s understandable to have concerns. Our AdvicePoint team is available as your go-to resource when you need to talk things through or get a better understanding of your financial picture. If you have investment or retirement questions, schedule a 30-minute intro call today.
Matt Stephens is financial advisor at AdvicePoint, LLC, a financial services firm based in Wilmington, North Carolina, that specializes in retirement planning, tax-reduction strategies, and charitable planning. Matt spends his days guiding clients as they make the leap from career to retirement. He loves simplifying complex financial issues and giving unbiased answers in plain English. His team goes beyond just professional investment management with their client-focused and high-touch approach, building plans as unique as each client.Matt obtained degrees in Business Administration and Communication Studies from UNC-Wilmington, holds the Series 66 Investment Advisor License, Chartered Retirement Planning CounselorSM and CERTIFIED FINANCIAL PLANNERTM certifications, and was a 2019 recipient of the Wealth Management Thrive Award. Outside of work, Matt enjoys spending time with his wife, Brooke, and their two young children. They attend Port City Community Church, where Matt has volunteered since 1999. His favorite pastime is surfing. To learn more about Matt, connect with him on LinkedIn.