4.3% – How To Protect Against Inflation & Buy I Savings Bond

Are you feeling the squeeze of inflation on your finances? With interest rates on bank CDs and savings accounts at near-zero levels, it can be difficult to find a safe place to grow your money. In fact, according to bankrate.com, the average yield for a 5-year CD is just 1.23% APY. That’s barely enough to keep up with inflation, which has been steadily rising in recent years. For retirees living on fixed incomes, this can be especially challenging.

But fear not! There is a solution that can provide both safety and inflation protection: the I Savings Bond. Backed by the U.S. government, I Savings Bonds offer a competitive interest rate that adjusts for inflation every six months. And with the recent rate decrease announced, the current rate is still a whopping 4.3% APY (as of May 1, 2023), much higher than the average CD rate.

As a financial expert with years of experience, I understand the challenges of protecting your finances against inflation. I’ve seen firsthand the impact it can have on people’s retirement savings and how it can force them to take on more risk than they’re comfortable with. That’s why I highly suggest people look into I Savings Bonds as a safe and effective way to grow your money.

If you’re looking to protect your savings from inflation and earn a competitive interest rate, consider investing in I Savings Bonds. They’re easy to purchase and can be bought directly from the Treasury Department’s website. Plus, they offer tax advantages for certain types of investors.

Don’t let inflation eat away at your savings. Take action today and invest in I Savings Bonds to protect your finances and secure your future. Bes sure to read more to learn who you too can take advantage of inflation and I Bonds today,

• 1-year CD yield: 1.63% APY
• 3-year CD yield: 1.32% APY
• 5-year CD yield: 1.37% APY
• Money market account yield: 0.23% APY
  • According to bankrate.com, rates as of August 15th, 2023

US Treasury I Bonds may be exactly what you need.  With inflation rising, this little known secret is getting more attention.  Learn how an I Bonds can give you the safety of a US savings bond, with the protection against inflation.

If you don’t have the time to read the whole article, here is an

I BONDS SUMMARY:

• As of May 1, 2023, the current TOTAL interest rate for I bonds is 4.30%.
• The actual rate of interest for an I bond is a combination of the fixed rate and the inflation rate, which can change every 6 months.
• This includes a fixed rate of 0.90% for I bonds issued from May 1, 2023, to October 31, 2023.
• The current semi-annual inflation rate is 3.38%.
• I bonds earn interest until the bond is cashed in or reaches 30 years old.

The good:

Inflation hedge with a great, safe risk versus other traditional safe savings methods, can hold for up to 30 years, no state taxes, interest cannot go below 0%

The bad:

Limited to $10,000 per year, per social security number, must hold for at least one year, penalty if withdrawn in years 1-5, federally taxable, interest can go to 0% (happened in 2009)

• Currently4.3% rate annualized (5/23=11/23)
• Minimum $25 investment, maximum $10,000
• Electronic bonds can be purchased through Online Treasury Direct
• Paper Bonds can only be purchased via tax refund (up to $5,000)
  • Source: U.S. Treasury

How Do Bonds Work?

Let’s start with the most basic question first.  What exactly are I Bonds?

The US Government is considered one of, if not THE safest, entity to lend to in the world today.  That is why they are perceived as low risk.  Low risk bonds typically pay a much lower interest rate since you are confident they will pay you back.

What Are Bonds? 

Bonds are simply when a borrower lends money to someone (company or government).  They agree when the borrower will pay the lender back.  The risk is determined by the ability of the borrower to pay the lender back. An interest rate is determined as well, depending on the risk and how long until the borrower pays back. 

What are I Savings Bonds?

If you are interested in protecting against inflation while being backed by the US Government, I Bonds may make sense for you. 

What are the details of an I bond?

• I bonds are a great safe place for part of your emergency fund money.
• Series I bonds are issued in amounts between the minimum of $25, and maximum of $10,000 per Social Security number.
• You can only buy up to $10,000 per person, per year, and you have to do it at TreasuryDirect.gov
• I bonds can be held for as little as a year. You have to hold them for 12 months minimum. You can’t cash out before then.
• U can hold an I Bond as long as 30 years. The I Bond will mature in up to 30 years. 
• If you cash it in between 1 year and the 5th year, you will forfeit three months of interest as a penalty. 
• After five years, there is no longer a penalty.
• You will get an interest rate (currently zero) PLUS an inflation rate (currently 4.3% for six months). 
• Currently yielding over 4.3%, and if inflation stays high – so will the yield. 
• The inflation rate is reset every May and November.

What is the WORST that could happen with an I Bond?

How Does an I Savings Bond work?

What’s the worst case scenario?

• The worst case scenario currently, is you bought the bond in May 2023 and earned 2.15% for the first 6 months. 
• Your $10,000 would turn into $10,215 six months later in November 2023.
• Inflation is then 0% in November 2023.
• The bond would earn zero interest the next six months and still be worth $10,215. 
• You cash in your bond after one year.
• You forfeit the last three months of interest, which was zero.
• So the worst case scenario is a $215 gain, or 2.15% interest for the year.

The new rate in November 2023 is 0% and you don’t like it.  You cash in the bond and forfeit the last three months of interest.  Which is $0.  So you would cash in $10,215, and have earned 2.15% for the year.  In today’s environment, that is an incredible short term, safe rate of return.  It is more likely that inflation won’t go to zero in May, and you will earn more.  After all, the reason you are buying this is because of inflation.  And as of May 2023, it looks like the November 2023 inflation calculation may not be going down anytime soon!!

Keep in mind, in the history of the I Bond, I believe there have only been two negative rates. 

Even if inflation goes to a negative number, the I Bond rate will never go below 0%

As you can see, it is difficult to predict the future rates of the I Bond.  We cannot predict the interest rate, nor the inflation rate.  Keep in mind that the interest is not paid as it is earned though.  It acts like a zero coupon bond.  The interest is paid when you cash it in or at maturity.

An inflation hedge for the average person

Each individual can purchase up to $10,000 in I Bonds per year. A married couple can buy up to $20,000 then. You can also buy an additional $5,000 of paper I Bonds with your tax refund. You and your spouse may also be able to setup a living trust and purchase up to another $10,000 each. In this scenario, you may be able buy as much as $45,000 per year of I Bonds.

Buying as much as $45,000 in I Bonds is material for most of us but not worth the time for the ultra-wealthy. The best they can do is buy something similar known as Treasury Inflation-Protected Securities (TIPS), or a TIPS Funds. While they are more liquid than I Bonds, I Bonds have key advantages over TIPS.

Compare EE vs I Savings Bonds vs TIPS

I won’t even bother discussing Treasuries since they pay near zero currently…  See rates here if you are curious

Are Savings Bonds a Good Investment?

Take Action

Have you paid attention to the interest your bank has been paying you lately?  More like the interest rate that they aren’t paying you?

Until recently, most people have never heard of or paid attention to an I Bond.  In 2021, people first started to pay attention to them when rates reached 4.5% annualized. Now that inflation is kicking in, people are first learning about them. 

Coverage began in earnest in May 2021 when the 6-month ‘inflation rate’ of 1.77% was announced (which is 3.54% annualized!).  Here are two articles from 2021, one from the Wall Street Journal and the other from the New York Times:

New York Times: With Inflation Rising….

Wall Street Journal: Investors Flock To I Savings Bonds….

I Bonds are even more attractive now – since they are currently paying over 4.3% annualized rate of return. 

If you do like the idea of investing in I Bonds – keep in mind the limit is $10,000 per social security number.  Per year.  And that is if you choose to buy them digitally through the website.  

You can also buy paper bonds, but only through your tax refund. 

• You can buy up to $5,000 of paper I Bonds without it impacting your $10,000 annual limit from Treasury Direct. 
• You would need to use IRS Form 8888. 
• The paper bond will be mailed to your mailing address on file with the IRS, after your return is processed. 

From what I understand, you may be able to have your Trust (LLC, S Corp, revocable living trust, etc) buy an I Bond as well, up to $10,000 per year.  So a wealthy couple MAY be able to purchase up to $45,000 I Bonds per year.  One for each of them.  One for each Trust.  And one paper bond via a tax refund.  SPEAK WITH YOUR TAX ADVISOR AND INVESTMENT ADVISOR – this is not tax or investment advice.

How Do I Bonds Compare to Investing in The Stock Market?

Well, it is literally night and day. One fluctuates, with a lot of short term risk. The other cannot earn less than 0% and is back by the US Government in terms of risk. One is meant as a safe invest to hedge against inflation, the other is a bet on the long term growth of companies and the economy. One can lose money, the other has as close to no risk as any other investment available. In the end, a well balances portfolio will have both. I Bonds can be considered as an alternative to other bonds within a well balanced portfolio.

Should I Buy I Bonds?

What’s The Catch?

We know that no investment is perfect, and not necessarily suitable for everyone.  So, what’s the catch?

Where Can I Buy Savings Bonds?

1. If you have decided to buy I Bonds,  simply go to TreasuryDirect.gov to open an account or sign into your existing account.
2. You use your federal tax refund to purchase paper I Bonds using  IRS Form 8888.  

A guided tour to opening an account

Historical Rates of an I Savings Bond?

 Series I Savings Bonds Rates & Terms: Calculating Interest Rates

• We know the current I Bond rate is 4.3% through November 2023.
• The new rate in November 2023 through April 2024 will be determined this fall
• The renewal rates after that will be determined every six months, the first week of November and May.  

If you want to try to be strategic with your I Bond purchase timing, consider this.

• You lock in your rate for six months at the time of your purchase.
• Buy an I Bond before the new rate in November of 2023, and lock in your rate for six months.
• Buy an I Bond near the end of the month.  In this example, the end of October.
• You will get credit for the entire month of interest. 
• Indirectly, you may be able to cut the minimum holding period from one year to a little over 11 months.

How to Value an I Savings Bond?

The actual rate of an I Bond is also called the composite rate. 

The composite rate is simply calculated by combining the fixed rate with the inflation rate. 

The rate of an I Bond cannot fall below zero though.  Even if inflation is negative.

What Are My I Bonds Worth? Savings Bond Calculator.  

• If you bought and hold your I Bond electronically, you can log into your Treasury Direct Account.
  • On the site, you can see what the current value of your bond is. 
  • Just visit the Current Holdings Tab within your account on the site.
• If you instead are holding a paper bond, you will need to visit this I Bond Calculator to figure out the I Savings Bond Value.
  • Click “Get Started” Link.
  • Choose the series/denomination of your paper bond from the drop down boxes.
  • Enter the issue date on the paper bond.
    • Two digit months (ex 01 or 12) and four digit year (ie 1999 or 2018).
  • Click the button that says “Calculate”.
    • Note: If your bond is less than 5 years old, the calculated amount includes the 3 month of interest penalty.

When Should I Cash In a Savings Bond?

How Long Does it Take For a Series I Bond to Mature?

• You MUST hold an I Bond for at least one year.
• If you redeem the I Bond between years 1 and 5 years, you will pay a penalty of the last three months of interest.
• After 5 years, there is no longer a penalty to redeem an I Bond early.
• I Bonds are issued at face value.
  • They act like a zero coupon bond. 
  • Interest is paid at the end when you redeem the bond.  Not as it grows. 
  • The maturity is up to 30 years.  A 20 year maturity, followed by an extended ten year maturity.

How To Cash In Electronic Savings Bond?

• Electronic Bonds:  Log in to your Treasury Direct account and use the link for cashing in the bonds in “Manage Direct”

Where Do I Cash In Paper Savings Bonds?

• Paper Bonds: 
  • Your local bank may cash in bonds for you, be sure to ask them.
  • You do not need to sign the bonds, but will need to prove your identity.
  • See Form 1522 for further information

• Cashing in a Bond While Outside of the US.
• Cashing in a Bond For a Child
• If You Inherited a Bond

Taxs and I Bonds

The bottom line

If you want to earn a risk-free return and protect against the possibility of future high inflation, then I Bonds may be right for you. When something looks too good to be true, most of the time it is. But occasionally, something checks out, and I put I Bonds in this rare category today. 

If you have further questions – here are some great resources:

• Series I Savings Bonds Q and A
• FAQ Series I Savings Bonds
• How To Give An I Bond As A Gift
• Using I Bonds To Save For College

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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.

*It is very important to understand:  I am not a licensed financial advisor nor stock broker.  I am in no way shape or form giving any investment advice.  Nor suggesting any specific investment.  I do not hold any of the above mentioned companies directly nor intend to add any holdings in the next few days.  Never take legal, tax or investment advice from a blog!!!