New I Bond Rate 11/1/18 to 4/30/18

Discussion of the Cash portion of the Permanent Portfolio

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sophie
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by sophie » Thu Nov 08, 2018 8:53 am

barrett wrote:
Wed Nov 07, 2018 10:38 am
Because of how many savings bonds I have (relative to other assets, that is) I have come to think of my EE and I-Bonds as sort of separate from my core PP-inspired holdings... almost a different asset class.

At age 60 and pretty much retired, I am planning to hold off until age 70 to take SS benefits and will of course have RMDs kicking in a few months after the SS spigot opens. I have a bunch of EE-Bonds that mature 2021-2023 (ages 63-65 roughly) and then a bunch of I-Bonds that mature 2029-2032. Despite their sassy fixed yields, I'll likely cash those in 2026-2028 just to avoid pushing me and my wife way up the tax ladder after I turn 70.

I guess I am just saying that there are cases where savings bonds are owned in such concentrations that they can't really be thought of as cash or even "deep cash". At a certain point the potential tax consequences just completely outweigh other factors (and this is without even considering the taxable interest impact on ACA subsidies).

Mine is a good problem to have but I've long been uncertain just how to fold these bonds into my overall AA.
Definitely a first world problem! Some thoughts...

I say focus on Roth converting to reduce those RMDs, and don't worry so much about the I bonds. 401K withdrawals are the real poison for you, since 100% of the withdrawal incurs ordinary income tax.

I kinda agree with Kbg and others who have said they expect both federal and state tax rates to go up in future - even beyond letting the current rate cuts expire. At the risk of getting a bit into a political topic - I see very little real chance of curbing low-skilled immigration (legal or otherwise), which means that the underclass will constitute an increasingly large share of the US population, and the taxpaying middle and upper classes will (relatively) shrink. This will provide great benefits when you want to hire a housecleaner or contractor, but their food stamps, medical care, education, subsidized housing, bilingual services, and other benefits will cause increasing pressure on local, state, and federal budgets.

Whatever you think of this situation, I think it means you want to pay taxes now in order to minimize taxable income later. In other words, consider Roth converting 401K money instead of selling I bonds early. Once you are out of the Obamacare woods, you might want to consider topping out the 22% bracket, especially if you think you'll be in that bracket after age 70 anyway. Then you can fit your I bond shedding plan into this framework.
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by barrett » Fri Nov 09, 2018 1:21 pm

sophie wrote:
Thu Nov 08, 2018 8:53 am
I say focus on Roth converting to reduce those RMDs, and don't worry so much about the I bonds. 401K withdrawals are the real poison for you, since 100% of the withdrawal incurs ordinary income tax.

I kinda agree with Kbg and others who have said they expect both federal and state tax rates to go up in future - even beyond letting the current rate cuts expire. At the risk of getting a bit into a political topic - I see very little real chance of curbing low-skilled immigration (legal or otherwise), which means that the underclass will constitute an increasingly large share of the US population, and the taxpaying middle and upper classes will (relatively) shrink. This will provide great benefits when you want to hire a housecleaner or contractor, but their food stamps, medical care, education, subsidized housing, bilingual services, and other benefits will cause increasing pressure on local, state, and federal budgets.

Whatever you think of this situation, I think it means you want to pay taxes now in order to minimize taxable income later. In other words, consider Roth converting 401K money instead of selling I bonds early. Once you are out of the Obamacare woods, you might want to consider topping out the 22% bracket, especially if you think you'll be in that bracket after age 70 anyway. Then you can fit your I bond shedding plan into this framework.
Thanks Kbg and sophie for chiming in. Good food for thought.

Though I understand the reason for Roth conversions, sometimes the whole process feels a bit like chasing one's tail around in a circle. I wonder (TBD by actual math!) if I might not be almost just as well off by spending down my tIRA and solo 401(k) between the ages of 65 and 70.

I find that not only am I tax averse, I am even more tax averse in the moment. In other words keeping myself in a lower bracket now seems like the intuitive thing to do. As a self-employed person for 40 years, I've just used every (legal) trick in the book to keep my yearly tax bill low. It's a tough habit to break.

Am I being charged for this therapy session?
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by sophie » Sat Nov 10, 2018 9:52 am

Nah, we're all tax averse! It's just a matter of your time frame for optimization.

You've tried running simulations with the iORP calculator, right? What did that program recommend?
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by jhogue » Thu Nov 15, 2018 10:12 am

barrett,

1. I think my situation is similar to yours: retired; holding off to 70 to claim social security; concerned about rising (and mandatory) RMDs after 70. After working through the options on a year-by-year spreadsheet, I am convinced converting my traditional IRA to a Roth IRA before I reach 70 is the most remunerative long term tax strategy. To put it in a nutshell, redeeming savings bonds is a one-time tax event, but paying taxes on RMDs will be forever.

2. One way of dealing with your big slug of EE and I bonds is to earmark them for specific years and purposes (eg., early retirement fund, new car) and then move them from your PP to your VP. This is not just bookkeeping. Doing so will show you if you need to rebalance Cash in your PP, both to minimize overall portfolio volatility and to size up what size safe withdrawal rate you can sustain.
“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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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by barrett » Mon Nov 19, 2018 12:50 pm

sophie wrote:
Sat Nov 10, 2018 9:52 am
You've tried running simulations with the iORP calculator, right? What did that program recommend?
Just re-ran everything with varying parameters and it seems that i-ORP is recommending to NOT do Roth conversions no matter when we take our gains on savings bonds. Hmm. I guess maybe our tax-deferred accounts are just not that high relative to taxable and Roth accounts. To be continued.

ETA: Uh, nix that. i-ORP only tells me not to do Roth conversions if that is one of my inputs! It actually has me doing them quite aggressively (and paying less in taxes over the years) whether I cash those I-Bonds in before or after RMDs start. Looks like it's kind of a wash. Time to go find something else to obsess about!
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by ochotona » Fri Dec 07, 2018 6:53 pm

I'm wondering whether to buy my 2019 I-Bonds before May 1, if inflation expectations are receding.
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by sophie » Sat Dec 08, 2018 7:04 am

I bought my I bonds before the end of November. Not so sure about inflation receding.

So barrett, are you all good with your plans for your I bonds? They've turned out to be pretty darned good investments!
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by jhogue » Sat Dec 08, 2018 4:18 pm

ochotona wrote:
Fri Dec 07, 2018 6:53 pm
I'm wondering whether to buy my 2019 I-Bonds before May 1, if inflation expectations are receding.
ochotona,
Wait until mid-April 2019, when the latest figures on of the CPI-U are announced. That will give the new variable rate component for I bonds purchases for the next six months starting 5/1/19. It will probably also give the best indication of any change in the fixed rate component will be (if any).

Having said the above, I looked back up this thread where you expressed concern about a potentially shaky job situation in the oil business. If that is still the case in April 2019, I would forego “deep cash” in favor of a more liquid “shallow case” position.
“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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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by barrett » Tue Dec 11, 2018 5:06 pm

sophie wrote:
Sat Dec 08, 2018 7:04 am
So barrett, are you all good with your plans for your I bonds? They've turned out to be pretty darned good investments!
Hey sophie,

It seems that the best course of action based on current assumptions and multiple i-ORP runs is to keep income low for now to take advantage of ACA subsidies, and then go really aggressive on Roth conversions for five year after Medicare kicks in and before RMDs do. My best I-Bonds will in that scenario be held to maturity and cashed out in my early 70s. Some of them have 3.6% fixed yields but tax liabilities force us to think about doing things that aren't very intuitive. Too much information??
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by Kbg » Wed Dec 12, 2018 8:36 am

jhogue wrote:
Sat Dec 08, 2018 4:18 pm
ochotona wrote:
Fri Dec 07, 2018 6:53 pm
I'm wondering whether to buy my 2019 I-Bonds before May 1, if inflation expectations are receding.
ochotona,
Wait until mid-April 2019, when the latest figures on of the CPI-U are announced. That will give the new variable rate component for I bonds purchases for the next six months starting 5/1/19. It will probably also give the best indication of any change in the fixed rate component will be (if any).

Having said the above, I looked back up this thread where you expressed concern about a potentially shaky job situation in the oil business. If that is still the case in April 2019, I would forego “deep cash” in favor of a more liquid “shallow case” position.
Put this in the useless forecast bucket but...I have two macro economic tracking models I use and both of them have dropped significantly. One is even negative. Not a particularly good climate for expecting interest rate bumps.
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by jhogue » Wed Dec 12, 2018 2:56 pm

The great thing about buying I bonds right now is that the composite yield is fixed at 2.83% until 5/1/2019. That easily beats a 5 year Treasury at 2.76% (yesterday’s close). But if Treasury rates should continue to rise over the next five years, the I bond variable interest rate will reset upwards ten times. However, should rates decline-- as kbg’s models indicate-- you will know that by mid-April and still be able to lock in the current fixed rate component (currently 0.5%, the highest in about ten years).
“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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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by boglerdude » Wed Dec 12, 2018 11:02 pm

Who sets the fixed rate, and how. Why should they pay us anything...competing with foreign bonds? Private sector bonds?
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