How would you categorize these savings bonds?

Discussion of the Cash portion of the Permanent Portfolio

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barrett
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How would you categorize these savings bonds?

Post by barrett » Sun Mar 04, 2018 3:44 pm

Hey all,

I know that a lot of people on here like savings bonds for "deep cash" but I have a question.

I loaded up on EE-Bonds in the early 1990s and again on I-Bonds in the early aughts. Nearly all the bonds I have are paying at least 4% so I have been happy with them and plan to hold most to maturity. My issue in terms of figuring out a proper AA for all 'taxable" assets is that these bonds represent a little over 25% of all my taxable money. To add to that, just over 60% of the current value of the bonds is interest.

How would you all categorize these? As cash? Doesn't seem right with all the interest that is just waiting to be taxed. Also, selling them to buy something else is not at all the same as just using money from, say, a money market fund. In some ways I think of the I-Bonds as part LTTs because of their deflation protection (ditto for the EEs), and part gold for their inflation protection. But obviously they are neither of those assets.

The only approach that seems to make sense is to think of them as a sort of VP. Any attempt to fold them into a taxable PP just makes me way cash heavy even without considering the tax implications.

I also need to consider this... in order to take full advantage of the tasty 4% yield on the EEs, I would be cashing in a bunch of bonds in 2021 and again in 2022. Again, the interest they'll kick off in those years makes them very un-cash-y.

I realize this is a first-world problem but am curious to hear feedback.

Any thoughts? Thanks.
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ochotona
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Re: How would you categorize these savings bonds?

Post by ochotona » Sun Mar 04, 2018 3:47 pm

I think of these as cash, because zero "duration". My portfolio categories I want to use to describe the kind of risk, I don't care if they're not genetically correct. They are very cash like because there is no default risk, either. They're just CDs with a special tax deferred feature and one has inflation adjustments.
Last edited by ochotona on Sun Mar 04, 2018 7:21 pm, edited 1 time in total.
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Xan
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Re: How would you categorize these savings bonds?

Post by Xan » Sun Mar 04, 2018 5:08 pm

Agreed, I consider them cash. Maybe it isn't quite as simple as normal cash, because you have to figure out how much you'd own after taxes if you cashed them out, but that amount is a cash amount.
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Re: How would you categorize these savings bonds?

Post by barrett » Mon Mar 05, 2018 5:39 am

Thanks Xan & ocho...

Let me fill in a few details. I'll be retiring in three months at age 59.7 and hope to withdraw from taxable at a rate of, say, $4,000 per month, at least until I cash in those big whacks of 2021 and 2022 EEs. How would you set up a PP-like portfolio if we assume the numbers are $1M total and $270K in savings bonds? I'm using nice round figures so they are easy to work with.

AND, of that $270K, $170K is taxable interest.

I guess what I am imagining is a sort of Cash Butterfly portfolio where one wing is deep savings bonds cash, and the other is my dry powder as well as money that is available for living expenses.

And let's also assume that I am OK with holding stocks, long treasuries and gold in equal proportions.

With my retirement accounts, the most I would likely do for now is some Roth conversions in years when it makes sense to do so (wife is still working).

Again, thanks.
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sophie
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Re: How would you categorize these savings bonds?

Post by sophie » Tue Mar 06, 2018 8:22 am

I see your problem: no matter what you don't want to rebalance out of those savings bonds! And you don't want to start dipping into them for another 10 years - and certainly not before Medicare eligibility. I'd suggest setting up a Desert Portfolio, with the savings bonds substituted for part of the intermediate bond allocation.

Your tax bracket means that qualified dividends and gains won't cost you a cent for Uncle Sam, whereas interest from the bond ladder is going to be hit with the full ordinary income rate. If you go with the Desert Portfolio, you might consider dialing up the stock allocation for two reasons: the tax treatment will be way better, and you have those savings bonds to back you up in case of a stock market crash in the setting of inflation (i.e. 1970s style stagflation, where the 10% gold won't be enough to keep you out of the red) or deflation.
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Re: How would you categorize these savings bonds?

Post by barrett » Tue Mar 06, 2018 5:31 pm

Thanks for your input, Sophie! I was hoping you might stumble on this thread. Some version of the Desert Portfolio is in fact what I have been contemplating and the savings bonds seem to fold into it nicely.

With the treasury yield curve being so flat and the Fed talking about raising rates at least another couple of times this year, I am tempted to go heavy on the short end of the curve. Still some things to ponder but I am getting closer.
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jhogue
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Re: How would you categorize these savings bonds?

Post by jhogue » Wed Mar 07, 2018 7:14 pm

barrett,

After reading your post several times, I don’t think that you are describing a portfolio allocation dilemma. I think you are describing a tax efficiency dilemma.

Optimizing tax efficiency on maturing savings bonds depends on your retirement goals and your marginal tax rate. Some suggested uses:

1. Use savings bonds to fund higher education expenses for your children or 529s for your children and/or grandchildren. (Avoids all federal or state taxes).

2. Use savings bonds to pay off your mortgage. (If you still have a mortgage and your interest rate is higher than the 4% you currently get from your old EE bonds.)

3. Use savings bonds for current income for you and your wife rather than claim Social Security. (Current estimates are that each year you avoid claiming Social Security you increase your future benefits by 8% per year up to age 70.5).

4. Use savings bonds to pay taxes for Roth IRA conversions. (Lowers federal and state taxes on your annual Required Minimum Distributions for your traditional IRAs after you reach age 70.5).

5. Roll over your savings bonds, build a new bond ladder, and provide yourself another 30 years of inflation/deflation protected income.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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sophie
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Re: How would you categorize these savings bonds?

Post by sophie » Thu Mar 08, 2018 7:37 am

Those savings bonds are irreplaceable at the interest rates they're earning now, and there will be a big tax hit on selling them. Barrett, what dates and in what proportion did you buy those bonds? It would be useful to plan a selling schedule to follow jhogue's excellent suggestions.

If you wait until Medicare eligibility age in order not to miss out on Obamacare subsidies and delay social security, you should still have a 5 year window (age 65-70). That timing might work out perfectly for you. You can liquidate your savings bonds during that 5 years and stay in the <15% bracket, live off the proceeds, and let the rest of your investments grow undisturbed in the meantime. Then you just need a plan for getting from here to age 65. You could either go with the simple Desert Portfolio plan, or reserve a fixed amount of cash plus the savings bonds for living expenses, and invest the rest in a portfolio of your choice to wait until you turn 70 (and serve as an emergency reserve in the meantime).
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Re: How would you categorize these savings bonds?

Post by barrett » Fri Mar 09, 2018 7:22 am

sophie wrote:Those savings bonds are irreplaceable at the interest rates they're earning now, and there will be a big tax hit on selling them. Barrett, what dates and in what proportion did you buy those bonds? It would be useful to plan a selling schedule to follow jhogue's excellent suggestions.

If you wait until Medicare eligibility age in order not to miss out on Obamacare subsidies and delay social security, you should still have a 5 year window (age 65-70). That timing might work out perfectly for you. You can liquidate your savings bonds during that 5 years and stay in the <15% bracket, live off the proceeds, and let the rest of your investments grow undisturbed in the meantime. Then you just need a plan for getting from here to age 65. You could either go with the simple Desert Portfolio plan, or reserve a fixed amount of cash plus the savings bonds for living expenses, and invest the rest in a portfolio of your choice to wait until you turn 70 (and serve as an emergency reserve in the meantime).
Hey Sophie,

I plan to delay taking SS until age 70 as my wife is 8.5 years younger and didn't start really contributing to her own SS until she was in her early forties. We reevaluate once a year, but, so far it would make sense for her to take half of my benefit versus 100% of her own. Delaying as long as possible seems to be the best strategy for us unless she keeps working and earning a pretty good income.

But the maturity dates of the savings bonds don't necessarily line up with what you have laid out above. The EE-Bonds mature (hit the 30-year mark) between the ages of 62 and 64 for me, and the greatest concentration of I-Bonds mature from ages 70 to 73 as my RMDs would be kicking in. BUT your post got me to really look at what the numbers are. I'll have about $88,000 in gains from 2021 to 2023, but I can cash out some a few months early (in late 2020) to spread out the interest over four years. It's not an insignificant number of dollars per year, but it's hardly something that should by itself screw up our tax/health insurance planning.

Thanks, jhogue, for your post as well. Im just waking up and won't get to answering that for a few days as I have to rush off and act important!
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Re: How would you categorize these savings bonds?

Post by pugchief » Fri Mar 09, 2018 8:00 am

Could one of you savings bond experts clarify: What happens earnings wise if you hold I or EE bonds past maturity? I was under the impression that they continue to earn interest until some point beyond [30 years?] and then stop accruing any more. If so, does the interest continue at the original rate?

I have some I bonds from the mid 2000's that have a decent base rate. Will they keep the same base rate past the 20 year mark?
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ochotona
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Re: How would you categorize these savings bonds?

Post by ochotona » Fri Mar 09, 2018 8:39 am

They stop earning interest after 30 years.
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pugchief
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Re: How would you categorize these savings bonds?

Post by pugchief » Fri Mar 09, 2018 12:13 pm

So older I-bonds that are earning above market interest should be held for the whole 30 years then, correct?
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