I-Bonds

[Shredder]

I've been reading a bit through the forum archives and finished reading Fail Safe Investing quite some time ago.

It appears that the general consensus is that I Savings Bonds or EE/E Savings Bonds are the preferred vehicle for the cash portion of your PP. Is this correct?

I came up with a basic Pros/Cons list here:

Pros:
1. Higher interest than most money market treasury funds due to them being inflation protected.
2. Very liquid (redeemable at any time after 1yr holding period for full face value plus interest)
3. Can be purchased in any amount to the penny as long as it's $25 or more.
4. You can defer the federal income taxes on the interest earned until redemption, final maturity, or other taxable disposition. (Like an IRA almost, but you don't have to wait until 59.5 to redeem!)
5. The Savings bonds are US Treasury Securities backed by the US Government. In other words - they are not very likely to default.
6. The earnings rate can never go below zero and your bond will always be redeemable for at least face value (You can't lose your principle ever).
7. Exempt from State and Local Income Tax
8. No fees to management (unlike a money market fund).
9. Less Institutional Risk (ie: MF Global,etc). If this institution goes belly up (The US Government), then we all need to stand away from the fan, because it will be throwing the poo everywhere.

Cons:
1. Can't redeem your bonds for 12 months after purchase.
2. If you redeem your bond within the first 5yrs of ownership, you will forfeit 3months of interest.
3. Not sure if this is really a con, but the inflation rate of I Savings Bonds is determined by the CPI. This basically means you are trusting the government to decide how much they want to pay you based on their own number of inflation (like TIPS). They currently seem to be pretty reasonable with the 2.20% return.
4. You can only put in $10,000 a year maximum (not an issue for me currently as I'm not investing that much).
5. Rebalancing may be tough within that first year as you can't redeem the bonds.


Did I miss anything? This almost seems like a no brainer to use I Bonds instead of money market treasury funds. This seems especially true for those of us that have cash emergency funds outside of their PP that would negate the issue of not being able to redeem the bonds for 1yr.

Thanks for any comments, critiques, and corrections.
Matt

[MediumTex]

It's a great tool for probably 50-70% of your PP cash holdings if you don't bump into the savings bond limits before then.

You will always need some cash in your PP that is more liquid than savings bonds for rebalancing.

[Bean]

It's a great tool for probably 50-70% of your PP cash holdings if you don't bump into the savings bond limits before then.

You will always need some cash in your PP that is more liquid than savings bonds for rebalancing.

In the accumulation phase, would it not make sense to put 100% of your cash contributions into IBonds until a better cash equivalent becomes available?  Rebalancing would still being possible via your monthly contribution (w/ Value Cost Averaging) or IBonds past 1 year.

[smurff]

I bonds are great for the Deep Cash part of the PP.

In the accumulation phase some people, especially those of us investing via IRAs and other self-directed retirement accounts, add new funds as cash in the account and use that cash to balance the other three categories. You can't do this if all of your cash is in I bonds.  It helps to spread the cash among different types--I bonds, FDIC bank accounts, T-bills, even currency (the paper stuff).

[TripleB]

It's a great tool for probably 50-70% of your PP cash holdings if you don't bump into the savings bond limits before then.

You will always need some cash in your PP that is more liquid than savings bonds for rebalancing.

In the accumulation phase, would it not make sense to put 100% of your cash contributions into IBonds until a better cash equivalent becomes available?  Rebalancing would still being possible via your monthly contribution (w/ Value Cost Averaging) or IBonds past 1 year.

That seems totally reasonable. Although I would like to keep at least 1 to 2 months of living expenses in physical paper cash or in a checking account, because if your job income for some freak of nature (or not so freak of nature) reason stops coming in, I want super liquid money to pay bills for a month or two.

[sophie]

It's a great tool for probably 50-70% of your PP cash holdings if you don't bump into the savings bond limits before then.

You will always need some cash in your PP that is more liquid than savings bonds for rebalancing.

In the accumulation phase, would it not make sense to put 100% of your cash contributions into IBonds until a better cash equivalent becomes available?  Rebalancing would still being possible via your monthly contribution (w/ Value Cost Averaging) or IBonds past 1 year.

That seems totally reasonable. Although I would like to keep at least 1 to 2 months of living expenses in physical paper cash or in a checking account, because if your job income for some freak of nature (or not so freak of nature) reason stops coming in, I want super liquid money to pay bills for a month or two.

I HOPE you do!!  Although it's unlikely any of us would starve if we were suddenly laid off, there's a case to be made to hold an emergency fund either in a Roth or in taxable, and to consider it as deep cash - i.e., not for rebalancing.

Using I-bonds to rebalance would be kind of annoying, because you'd owe taxes on money that might have been accumulating for years.  What do people do for the 25% or so in cash that you need to keep liquid and accessible?  I hesitate to buy SHY at Fidelity because it seems silly to have to pay commissions on something that is so low yield (and I'm not quite ready to open a Vanguard account just for that purpose).  Short term bond funds in general are probably not ideal, because if cash is needed for "dry powder", it's likely that bonds have gone down along with everything else.  T-bills with auto rollover, perhaps?

[Pointedstick]

What do people do for the 25% or so in cash that you need to keep liquid and accessible?  I hesitate to buy SHY at Fidelity because it seems silly to have to pay commissions on something that is so low yield (and I'm not quite ready to open a Vanguard account just for that purpose).  Short term bond funds in general are probably not ideal, because if cash is needed for "dry powder", it's likely that bonds have gone down along with everything else.  T-bills with auto rollover, perhaps?

This is why I like TDAmeritrade: they don't charge commissions for SHY, VTI, TLT, EDV, and other popular Permanent Portfolio-compatible assets. I'm comfortable keeping my cash in SHY because the short-ish duration means that if interest rates rise (and I doubt they will for a while) it won't get hit too hard and will adjust within a year or two anyway. If I was really concerned about that year or two, I'd use SHV instead (alas, not commission-free at TDA).

Also, like many others, I still have some cash in savings accounts that I consider to be outside of a PP. I could probably sell some PERM too if need be.

[WildAboutHarry]

I bonds are great for the Deep Cash part of the PP.

I like the term "Deep Cash" in the context of I Bonds.  They are about the best "cash" deal out there today.  No, they are the best cash deal out there today.  For comparison, 5-Year TIPS are yielding -1.5% real.  But you really need to plan to hold them for a long time to take full advantage of all their attributes.

I Bonds do have a put feature after one year, but that is something of an illusion.  Savings bonds, like IRAs, 401(k)s, etc. have a fixed amount that can be invested every year.  So if real rates on I Bonds do rise you have limited ability to capture those new rates using funds from old I Bonds.  And taxes would be due on cashed I Bonds, etc.

[MeDebtFree]

Greetings,

Anyone aware of any techniques (e.g., fund, etf, other) for investing larger sums in I-bond based investments beyond the 10k/yr limit?

Continued thanks to all those who contribute to this forum.

MDF

[smurff]

Anyone aware of any techniques (e.g., fund, etf, other) for investing larger sums in I-bond based investments beyond the 10k/yr limit?

You can put extra money in the names of family members and their social security numbers. 

Also, if you have a small business (C- or S-corporation, LLC, sole proprietorship, partnership) or a trust, that entity can also buy electronic I-bonds, but I think is subject to the same $10,000 limit:  From the Treasury Dept's website:

Effective April 2009, individuals 18 or older and various types of entities including trusts, estates, corporations, partnerships, etc. can open TreasuryDirect accounts and purchase electronic savings bonds. See Learn More about Entity Accounts for full information on the new registration types.  Gift bonds purchased for minor children may be delivered to the Minor linked account.

http://www.treasurydirect.gov/indiv/res ... s_ibuy.htm

[BearBones]

Anyone aware of any techniques (e.g., fund, etf, other) for investing larger sums in I-bond based investments beyond the 10k/yr limit?

Another 5K in paper bonds by overpaying in taxes and filing form 8888.
http://www.treasurydirect.gov/indiv/res ... eature.htm

Had it not been for this forum, I would never have thought about iBonds, and I certainly would not have discovered this trick.

[sophie]

If you yet bought your complement of I-bonds for the year, you might want to do it before the end of the month.  It looks like the next I-bond rate will go down to 1.76%, from the current 2.2%:

http://www.savings-bond-advisor.com/cpi ... on-update/

[Bean]

If you yet bought your complement of I-bonds for the year, you might want to do it before the end of the month.  It looks like the next I-bond rate will go down to 1.76%, from the current 2.2%:

http://www.savings-bond-advisor.com/cpi ... on-update/

I still have a hope we get a fixed rate of more than zero. 

Also, even if you buy them now, you will still have a six month period of 1.76%.

[AgAuMoney]

If you yet bought your complement of I-bonds for the year, you might want to do it before the end of the month.  It looks like the next I-bond rate will go down to 1.76%, from the current 2.2%:

http://www.savings-bond-advisor.com/cpi ... on-update/

I still have a hope we get a fixed rate of more than zero.   :'(

Also, even if you buy them now, you will still have a six month period of 1.76%.

I keep hoping for that >0 base rate also.  My existing bonds are 1.2% and 1.4% base.  I liquidated the 1.0% base and replaced them with the 1.2% (I think).  Never thought there would be years of 0%...

BTW, if you buy I-Bonds next week, you will get 6 months of 2.2%, and then if you like, you can sell after 5 months of 1.76% (and give up 3 months of that so effectively 2 months of 1.76% and 3 months of 0%).  Of course by that time you'll know what the next rate will be, so if it is 0% on 0% then you might want to wait for 3 months of that before you sell (for a net of 6 months of 2.2%, 6 months of 1.76% and 3 months of 0%).

[sophie]

If you yet bought your complement of I-bonds for the year, you might want to do it before the end of the month.  It looks like the next I-bond rate will go down to 1.76%, from the current 2.2%:

http://www.savings-bond-advisor.com/cpi ... on-update/

I still have a hope we get a fixed rate of more than zero. 

Also, even if you buy them now, you will still have a six month period of 1.76%.

I keep hoping for that >0 base rate also.  My existing bonds are 1.2% and 1.4% base.  I liquidated the 1.0% base and replaced them with the 1.2% (I think).  Never thought there would be years of 0%...

This is the very definition of optimism!  I thought the chances of that were somewhere between nil and hell freezing over, but I guess we'll find out.  And I'm completely jealous of your 1.2% and 1.4% fixed rate bonds.

If you buy before November 1, you'll get the 2.2% rate for the next 6 months (November - April), then the bonds will revert to the prevailing rate.  Not a bad deal. 

[AgAuMoney]

BTW, if you buy I-Bonds next week, you will get 6 months of 2.2%, and then if you like, you can sell after 5 months of 1.76% (and give up 3 months of that so effectively 2 months of 1.76% and 3 months of 0%).  Of course by that time you'll know what the next rate will be, so if it is 0% on 0% then you might want to wait for 3 months of that before you sell (for a net of 6 months of 2.2%, 6 months of 1.76% and 3 months of 0%).

If you buy before 1 November, the above description is the interest rates you will receive for the next 11 months.  Buying before the end of October gives you full credit for the month of October, so you'll actually get 6 months of 2.22% after the next 5 months.  Then next April you will start the (1.76% + BaseRate) period which will also last at least 6 months and two-three weeks later we'll be able to predict your next six months, letting you know if you want to sell after 11 months or after 15 or keep holding.

[edamat]

I just start to pay attentions to I Bonds as cash part.
May I ask what's the best way to buy I Bonds? at www.treasurydirect.gov? or local banks? or Fidelity, Vangaurd?

thanks in advance.

[sophie]

Only two ways to buy them:

- Treasury Direct (electronic)
- Federal income tax refund (paper)

Warning:  think carefully when designating an account to link to Treasury Direct.  I discovered that if you want to change it or add a new account, you need to send in a form with a medallion stamp.  Talk about irritating.

[akratic]

Another con to I Bonds is that it's harder to keep track of their appreciated value in a spreadsheet.  I just punted on this issue and pretend they're still worth whatever I paid for them.

You could speculate that EE Bonds with their 3.5% guarantee over twenty years are superior to I Bonds.  I personally like both I Bonds and EE Bonds, and try to max them both, although I do I Bonds first.

[Greg]

Another con to I Bonds is that it's harder to keep track of their appreciated value in a spreadsheet.  I just punted on this issue and pretend they're still worth whatever I paid for them.

Someone correct me if I'm wrong but shouldn't the value of the bond be pretty easy to calculate because you know what the rate is for the previous 6 months and I believe the interest accrues every 6 months. I would think if you put $1000 into an I-Bond with 2.2% interest right now, in 6 months it would be worth $1000*exp(2.2%*.5 years) = $1011.06. Then you do the 6 months again at the new rate, etc.

They also I believe for paper bonds had a way of determining what they are worth on their treasurydirect site. Not sure if they have that available for electronic bonds however.

[sophie]

Use this to calculate the value of paper savings bonds:

http://www.treasurydirect.gov/BC/SBCPrice

For electronic bonds, the value pops up on the website if you click through the right places (fairly intuitive).

[AgAuMoney]

Someone correct me if I'm wrong but shouldn't the value of the bond be pretty easy to calculate because you know what the rate is for the previous 6 months and I believe the interest accrues every 6 months. I would think if you put $1000 into an I-Bond with 2.2% interest right now, in 6 months it would be worth $1000*exp(2.2%*.5 years) = $1011.06. Then you do the 6 months again at the new rate, etc.

You might think it was that easy.

It's not.  You can look up the current value of your electronic IBonds in Treasury Direct.  Or use the Savings Bond Calculator to calculate the value of a paper bond.

The rest applies to electronic IBonds at Treasury Direct.  I have no personal experience with paper bonds.

Interest is credited to your Ibond every month (I know).  It compounds (or is accrued) every 6 months (I think, but...).

The first 3 months you will not see any interest credited.  (It has been too long since I bought a new IBond.  The initial delay on interest credits might be the entire 12 months mandatory holding period instead of just the 3 months before you start to see credits, but I think 3 is correct so I'll assume that below.)

The rest of the first 60 months you will see interest credited every month that was earned 3 months previously.  (If you cash out before the 60 months is up you get the displayed value of the bond, forfeiting the last 3 months earned but not credited.)

After the 60th month you will be credited the previous 4 months then interest earned will be credited every month after that.  (When the combined rate is 0% you obviously won't see anything, but during the first 60 months of your bond, due to the 3 month holdback the first 3 months of 0% you will be credited what you earned before the 0%, but then you will see no credit the first 3 months after the 0% unless your bond ages out of the 60 month penalty period before the rate changes.)

In my spreadsheet I can enter the CPI-U and it will calculate the inflation component.  For each bond I've recorded the base rate and when I purchased it and the spreadsheet correctly applies the appropriate inflation component starting in the correct month in the correct formula to calculate the combined rate.  Then that combined rate multiplied by the current base balance for compounding (not the current balance) should result in the next month's interest payment.

I think I still haven't got the correct compounding start amount as my spreadsheet still doesn't calculate the next interest payment correctly (I'm always just a few cents to a dollar off).  It annoys me far beyond what the size of the discrepancy justifies. 

[ZedThou]

Another con to I Bonds is that it's harder to keep track of their appreciated value in a spreadsheet.  I just punted on this issue and pretend they're still worth whatever I paid for them.

There is a thread on the Bogleheads forum that explains how to do this, by scraping the Treasury Direct site. If bogleheads.org ever comes back online I'll get the reference for it. I also have a Finance::Quote submodule that does the same.

[MomTo2Boys]

Only two ways to buy them:

- Treasury Direct (electronic)
- Federal income tax refund (paper)

Warning:  think carefully when designating an account to link to Treasury Direct.  I discovered that if you want to change it or add a new account, you need to send in a form with a medallion stamp.  Talk about irritating.

You got that right. It is annoying as all get out!!! I had no idea this would happen when I closed a checking account I hadn't used in forever - turns out, it was the checking account I had used to set up TD a zillion years ago, and now I'm fifty ways to screwed. Someday I'll be able to get them whatever freaking piece of paper they want, but not in the foreseeable future, I can tell you that right now. Because: 1.) I'm overseas, but really 2.) Even if I were domestic, I do all my banking with online banks or institutions not in my area (re: places like ING or whatever). How the heck do you get the sealed-in-blood piece of paper TD wants from places like that?! You don't.

Which means I'm going to have to go to my hometown the next time I visit the US and open up a new checking account with a local bank JUST SO I can link it to TD. That just really ticks me off. I have a paltry sum in TD compared to, say, Vanguard, who I've never had to get a piece of paper like that for (duh) and who will electronically send money all over the place for me, to and from all manner of checking/savings accounts. I am so irritated.

(But not irritated enough, I guess, because I keep sending TD money for electronic I bonds. So I guess one could argue that my TD money is literally the most secure money I can imagine. Because no one can get at it, including me.)

[edamat]

I have a newbie question on I Bond's 10K per year limit:
say I bought 10K October 2012. The next Oct rate is better and I redeem this I Bond after 11 months and re-buy new one, I end up with 10K total;
If there is no rate change and I keep it, can I buy another 10K I Bond? if yes, then I would end up with 20K I Bonds, and years after that a lot more if I don't redeem the previous bonds?

Thanks in advance.