Are I Bonds a Good Idea?
Many of you have read Lucy’s blog about I Bonds, and we’ve been answering lots of questions about buying I Bonds and whether they are a good idea or not…so, we wanted to send a quick note to answer some of the questions we keep hearing…
First of all, we scooped the Washington Post… 😉
The Post had a great article yesterday that answered most of the basic questions about how to buy I Bonds and some other pros and cons…we highly recommend it for a great summary of what you should know. Click here to read it: Michelle Singletary’s article on I Bonds.
After reading the Post article, most clients have been asking us if we think I Bonds are a good idea for them. Our answer has been yes, but that comes with a caveat, which is if you have extra cash in savings accounts that is earning very little. I Bonds are not good for money that you may need to access in the next 12 months because you must hold an I Bond for at least a year, no exceptions. But, if you have been accumulating emergency savings funds in a bank savings account or money market fund, and have 3-6 months set aside in cash, then I Bonds are a great option for some of that money.
A key point to understand is that I Bond rates are made up of a fixed interest rate and an inflation rider. The fixed rate is guaranteed for the life of the bond (and is currently 0%). The inflation rider is only guaranteed for 6 months and then resets. So, right now, what we know is that I Bonds will accrue interest of 4.81% from May 2022 until November 2022, and then that rate will reset. If inflation starts to recede, than the interest rate from November 2022 through May 2023 may be lower. We do not anticipate inflation levelling off to under 2% by November, so most likely the rest inflation rider will still be in the 2-3% range. So, your actual yield on the bond will most likely be somewhere between 4-6%. Still a fairly decent return on your cash.
Other consideration…you have to buy these bonds yourself through Treasury Direct – here is the link: https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm.
No financial advisor can buy them for you. You are also limited to a maximum purchase of $10,000 in a calendar year. Given that amount, the most interest you will make will be about $400-800. Not a bad return, but you do have to spend time to earn it. That interest is federally taxable, so something also to factor in.
Generally, Meridian’s advice has been that if you have excess cash reserves in the bank that you will not need to access for 12 months or more, and you are willing to put the effort into buying and record keeping the bonds on their own, they are a great option. If any of those assumptions are not accurate for you (i.e. you may need to access the cash or you don’t have time/inclination to open an account online and link your bank account), then maybe I Bonds are not a great fit.
Hopefully that helps to clarify the I Bond decision a little bit!