Savings accounts and bank CDs are generally yielding somewhere between 1 and 2.5 percent annually, which means that when inflation runs at 8.5 percent, as it has the past 12 months, you’re losing spending power.If you’re a retiree seeking income, that’s just not an option. Generally speaking, if you want to earn more interest, you’ll need to take on more risk — and for many retirees, that’s not a good option, either. You can safely earn far more with I Bonds, a type of savings bond issued by the U.S. Treasury, and protect against future high inflation.
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I Bond basics
I Bonds are inflation-protected savings bonds, issued and guaranteed by the United States Treasury.Because of the recent high inflation, I Bonds purchased before the end of October 2022 will yield 9.62 percent for the next six months.If inflation stays high, so will the yield.
An I Bond has a 30-year maturity, which means it will pay interest for the next 30 years.It pays a fixed interest rate, which stays the same for 30 years. The fixed rate is currently zero percent. But I Bonds also pay an inflation adjustment that is reset twice a year in May and November. The inflation rate is based on the Consumer Price Index for all Urban Consumers, or CPI-U. This includes the volatile food and energy components.
You don’t have to hold I Bonds for 30 years.You do have to hold them for one year. If you hold your I Bond for one year and fewer than five years and you redeem your I Bond, you’ll get dinged with a small penalty of three months’ interest. You can redeem after five years with no penalty.
The worst-case scenario if you buy before the end of October is that inflation is zero over the second six-month period. Ifyou redeem at one year, you’ll earn an annualized rate of 4.81 percent.That’s far better than any government-guaranteed savings rate around. And that zero percent inflation rate is unlikely.If we hit double-digit inflation, you will get a double-digit return.
I spoke with Mel Lindauer about I Bonds.Lindauer is the founder and former president of the John C. Bogle Center for Financial Literacy (disclosure: I am a former board member) and one of the authors of theI Bond Manifesto.He has been an advocate for I Bonds since they were first introduced in 1998.Some key points:
FAQs
I bonds benefit from the inflation surge as they pay both a fixed rate return, which is set by the U.S. Treasury Department, and an inflation-adjusted variable rate return, the latter of which changes every six months based on the Consumer Price Index. In other words, they can protect your cash against inflation.
Do I bonds beat inflation? ›
I bonds are great if you are looking for an investment that protects you from inflation, is backed by the U.S. government, and currently has a very high interest rate.
Is an I bond a good investment now? ›
The bottom line
While I bonds may still hold some appeal for certain investors, those people who missed out on the period of high interest rates for these securities are probably better off saving that money in other types of accounts now.
Is there a downside to I bonds? ›
The inflation-adjusted interest payment is straightforward as only the interest rate changes, not the principal value of the bond. Savings bonds are also available in paper form so they can easily be given as gifts. A disadvantage of I bonds is the maximum annual purchase amount of $10,000 is relatively low.
What will the I bond rate be in 2023? ›
The fixed rate for I Bonds issued in July 2023 is 0.90%. The semi-annual inflation rate is 3.38%. When you combine the two, and the fixed rate itself gets an inflation adjustment, you get the composite rate of 4.30%.
What is the catch for I bonds? ›
I bonds cannot be cashed for one year after purchase. Then, if a bond is cashed during years two through five after purchase, the prior three months of interest are forfeited. There is no interest penalty for cashing in the bonds after five years.
What happens to I bonds if inflation goes down? ›
Question: Will the value of a Series I bond decrease during periods of deflation, when the CPI-U declines? Answer: No. In periods of deflation, the bond's redemption value won't decline.
Are I bonds a good idea for 2023? ›
I bonds issued from May 1, 2023, to Oct. 31, 2023, have a composite rate of 4.30%. That includes a 0.90% fixed rate and a 1.69% inflation rate. Because I bonds are fully backed by the U.S. government, they are considered a relatively safe investment.
Are I bonds a good investment for seniors? ›
I bonds are a great idea for retirees and other investors looking for competitive inflation-adjusted returns. “They offer such a great deal that the government limits the annual purchase amount to $10,000 per Social Security number,” Reilly notes. “There are no coupon payments.
What investment is better than I bond? ›
Currently CDs Rule. Because an I bond can't be cashed in for one year after purchase, you must believe inflation, and I bond interest rates, will rise over the next year more than current 1-year CD rates that top out at 5.50%. With I bond rates at 4.30%, the better return over the next year appears to be CDs.
You're locked in for the first year, unable to sell at all. Even after that, there's a penalty of three months' interest if you sell before five years. So if you think you'll need any of the money before that, I bonds may not be for you.
Can I buy $10000 worth of I bonds every year? ›
Here are the annual limits: Up to $10,000 in I bonds annually online. Up to $5,000 in paper I bonds with money from a tax refund.
Can a husband and wife each buy $10000 of I bonds? ›
$10,000 limit: Up to $10,000 of I bonds can be purchased, per person (or entity), per year. A married couple can each purchase $10,000 per year ($20,000 per year total).
Do you pay taxes on I bonds? ›
Interest earned on I bonds is exempt from state and local tax but subject to federal tax. The interest is taxed in the year the bond is redeemed or reaches maturity, whichever comes first.
Can you buy I bonds at a bank? ›
Before that, you could purchase paper I bonds at banks and other financial institutions. Now, only one method remains: You must fill out IRS form 8888 to elect part or all of your tax refund money go toward buying paper I bonds — up to $5,000 and in multiples of $50 (i.e., $50, $100, $150, and so on).
Will I bond rates go down in 2023? ›
If you buy I Bonds between November 2022 and April 2023, you'll be guaranteed a total rate of 6.89% for the next six months (based on the previous six months formula). After that time period, your total rate will be 3.79% for the following six months (remember the fixed rate remains at 0.40% for the life of the bond).
What are the downsides of Series I bonds? ›
CONs:
- Amount – Each individual can only purchase up to $10,000 in a calendar year. ...
- Maturity – An investor must hold the bonds for 12 months, and if they sell the bonds before five years, they lose three months of interest. ...
- Purchasing – There are only two ways to purchase I bonds.
Currently CDs Rule. Because an I bond can't be cashed in for one year after purchase, you must believe inflation, and I bond interest rates, will rise over the next year more than current 1-year CD rates that top out at 5.50%. With I bond rates at 4.30%, the better return over the next year appears to be CDs.
What is the best month to buy an I bond? ›
Key Points
- The variable rate on I bonds will drop in May.
- Those who want short-term returns might prefer to buy I bonds in April to lock in higher rates.
- Long-term investors might be better served by waiting.
The 4.30% composite rate for I bonds issued from May 2023 through October 2023 applies for the first six months after the issue date. The composite rate combines a 0.90% fixed rate of return with the 3.38% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U).
