I get a lot of questions about money. These questions usually vary depending on the applicant and her needs, but I have one question that I get more often than any other: “What is a safe, high-yield investment?”
I haven’t had an answer to that question in the last decade. Savings accounts and certificates of deposit are certainly safe, but they are no longer an attractive investment. Since the great recession of 2008/2009, interest rates have remained shockingly low. This is according to plan. The government doesn’t want you to park your money in a savings account. They want that money circulating in the economy.
In the long run, the stock market offers excellent returns. But when people ask for “safe” investments, they want to avoid short-term volatility, which means stocks are out of the question. (And things like Bitcoin and precious metals are even more out of the question!)
Today, however, as I caught up reading my blog, I stumbled upon it a link from Michael Kitces ’weekly review for financial planners. The story he shared surprised me. Entry in The Wall Street Journal, explains Jason Zweig a safe, high-yield store that hides in sight. (This article is behind the pay wall.) This safe high-yield store? U.S. Government I-Series Savings Bonds
These inflation-adjusted bonds currently yield 3.54% per annum!
Economists say there is no free lunch, but the bonds offer a guarantee from the U.S. government that you can get your original capital back and a possible increase in official living expenses along the way. The only problem is that this is not a buffet you can eat: the maximum purchase is $ 10,000 per year per account holder (unless you choose to receive a tax refund in the form of a bond I).
Ironically, the less you earn and have to invest, the more powerful tool are I bonds.
Since I didn’t know I Bonds, I read about them for a few hours today. I think I will start adding them to my investment portfolio. You might want to too. Let me share what I learned.
Basics And Bonds
Series I savings bonds (or simply “I bonds”) are variable rate bonds indexed to inflation. This variable rate consists of two components.
- Fixed rate. On the first business day in May and the first business day in November, the U.S. Treasury Department adjusts this fixed interest rate for new bonds. However, when you buy a Series I bond, this fixed interest rate never changes. If the fixed part of your bond I at the time of purchase is 2.10%, it will remain at 2.10% for thirty years (or until you sell it).
- Variable rate indexed to inflation. This rate also adjusts in early May and November. It is based on changes in the consumer price index. Currently, the “half-yearly inflation rate” (as officially known) is 1.77%, or 3.54% annually to assess.
The fixed and variable interest rate components are added together to create the current compound interest rate. As inflation can be negative (aka deflation), the variable interest rate may also be negative. When this happens, the current yield on your I bonds may fall below a fixed interest rate. However, interest can be on these bonds never yield below zero. They can never lose value.
Interest is charged every six months. I Bonds are exempt from state and local taxes, but are subject to federal income tax upon redemption.
Does all this sound complicated? It’s not true.
When you buy a Series I bond, you lock in your fixed rate. Thereafter, the variable rate is adjusted for inflation every six months.
Currently, the fixed interest rate for Series I savings bonds is zero percent. In fact, the fixed interest rate has remained below one percent for all Series I bonds issued since May 2008. Then why would you consider adding them to your portfolio? Because despite the low fixed interest rate, these things still go beyond savings accounts and certificates of deposit.
After that, the money you invest in these bonds is much less liquid than the money you invest in the bank.
- you must keep the bond for at least one year. You certainly can’t redeem a Series I bond until it’s twelve months old.
- You can redeem the bond after one year. However, if you have not had the bond for at least five years, you lose the last three months of accrued interest.
There are a few other drawbacks you need to know about. First, I Bonds can only be purchased electronically Treasury Direct. (This is the official website of the U.S. government, so it’s safe. Or it should be.) Second, you can only buy $ 10,000 in bonds I each year.
Did I say “only”? I lied. Somehow. You are also allowed buy I Income Tax Bonds. With this, you can get up to $ 5,000 more each year in bonds I. And so are the bonds purchased paper bonds, not electronic.
There are other minor things you might want to know about these investment vehicles. For more information, visit the official Frequently Asked Questions about Series I Savings Bonds. (And you might also like it this table compares I Bonds with TIPS, Treasury securities protected against inflation.)
Links to numbers
Because I’m a nerd for money – and because I was curious – I created a spreadsheet documenting the historical yields of Series I bonds since they were issued in September 1998. (This is based on official table from Treasury Direct, but I made it nicer and easier to update in the future.)
It’s a wide spreadsheet, so it won’t be readable here on this screen. You will want to open the image in a new tab. (Click on the image I should do it for you.) Even then, you may need to manually resize the image to read it.
Here’s how to read this spreadsheet.
- Each line monitors the interest rate on Series I bonds issued for dates in this range. For example, the line “05/08 – 10/08” monitors how the interest rate for bonds issued between May and October 2008 has changed. The first number in each line (“fixed rate” in the green column) shows a fixed fixed interest rate for bonds issued during this time period. For “05/08 – 10/08” bonds, this fixed interest rate was 0.00%.
- Each column monitors half-yearly interest rate changes. The Treasury adjusts interest rates on 1 May and 1 November (or shortly thereafter). The top row of each column shows the official inflation rate used to calculate total bond yields. Thus, you can see that the “May-08” column shows that the half-year inflation rate was 2.42% (meaning that the annual inflation rate was 4.84%), and the rest of the column shows the effective rates for the various bonds.
- I also tried to compile historical data on average interest rates for certificates of deposit. However, I have not found a source I trust and love for this information, so I am open to recommendations. (I’d also like to find a source for past savings account information. I’ve been searching for years and I’ve never found anything I like.)
If you look at this spreadsheet, you can see that I Bonds do not constantly exceed five-year application certificates – but they are usually. And there have been a few instances where even a one-year CD offered a better return for a few months.
I never bought a savings bond. That will soon change.
I like the idea of using I Bonds as a medium-term investment tool – saving for a house, saving for a higher education, and so on. If your time period is longer than five years but shorter than, say, fifteen years, they are an attractive option, especially if it’s money, you can’t afford to lose. Right now, I like them more than a savings account or a CD!
For longer periods of time and money to risk more, you are on the better side investing in index funds. Series I bonds will not earn as much in the long run as stocks. Certainly not based on historical averages. But that’s not the point. These ties are not meant to grow your nesting egg. They are designed to protect your nesting egg.
Even if you’re not attracted to them right now, you need to keep an eye on Series I bonds to see where their fixed interest rates are going. If they climb to a 3% range (as they did 20+ years ago), they are a remarkable business.
Upgrade: Chris Mamula at Can I still retire? just published an article comparing two inflation-protected government bonds: Series I bonds compared to TIPS. There is useful information there if you are interested in this type of investment.