Brendan spoke about Series I Bonds in an earlier video, and he’s back with an update. He reviews how I bonds work, what they’re currently paying, and why they’re still a relatively attractive investment vehicle, especially when compared to cash.
What Series I Bonds Are
The Ground Rules of I Bonds
Current I Bond Interest Rates
Why I Bonds Are Still Attractive
Hi, and welcome to another edition of coffee with Brendan. Today we're going to revisit something that we talked about back in April 2022, which is series I bonds. So today is November 3. And the new I bond rate was declared a couple of days ago. There was a big rush to buy these I bonds at the end of October to try to lock in a historically high high-interest rate that had been declared between April and November, which is the reason why I shot that video six months ago. It was kind of funny though, throughout that six-month period, yes, every time I met with a client, we talked about Series I bonds. But then there were a number of questions that I got at the very tail end of October. Asking me, you know, should we invest in I bonds. So it was kind of funny that even though I shot that video, people were still asking me about these series I bonds. So apparently, my subscriber list is not at the Kim Kardashian level where everyone's hanging on every single word that comes out of my mouth. So hopefully enough of you watch this one so that it's a little bit helpful.
But things have changed a little bit, but it's still a pretty good investment to consider. So we're going to talk about that today. And let's jump in with just a kind of refresher course on what Series I bonds actually are. So let me go to the Treasury Direct website. And on that Treasury Direct website, they actually talked about all the things that you need to be aware of. So long story short, when it comes to Series I bonds, they pay interest on a semi-annual basis. And that interest rate is comprised of two different interest rates. One is a fixed rate, which lasts for as long as you actually keep the bond. And the other is an inflation or interest rate that's pegged to the rate of inflation. That one changes every six months. And that was, again, one of the reasons why everyone was jumping on the train at the end of October.
So as you know, with a series I bond, you have to wait until you cash it in to actually get the interest. And technically, this is a 30-year note, but you can cash it out after one year. Now, if you cash it out somewhere between one year and five years, there is - I don't like to call it a penalty, but it's more of a fee - that you have to give back for three months’ worth of interest. So it says right here. However, if you cash the bond in less than five years, you lose the last three months of interest. So a lot of people actually recommend that if you're going to hold on to one of these you hold on to it for 15 months of you get the full 12 months of interest. And then, you know, months 13 through 15, you have to give back if you cash it in within that one to five-year period. And the other big thing with regards to this, these series I bonds is that there's a maximum that you can only purchase up to $10,000 per calendar year and in addition, reallocate $5,000 of your tax refund to them as well. So those are the ground rules of the series I bond.
And so let's take a look at how things have changed since we last spoke. So I'm gonna open my screen up. And yes, it'll probably get a little bit small. But we'll talk about what actually has changed since November 1st when they declared the new rate. So now I'm showing my full screen here. And what you see here is that it used to be 9.62% for savings bonds that were issued May 1 to October 31. Now it's a mere 6.89 for savings bonds between November and April of next year. So yes, it's a little bit of a downer that the rate has come down and come down so significantly. The good news associated with that, just from a macroeconomic standpoint, is that there's a reason why it's come down and the reason is that the government is sensing that inflation is starting to come down. And so, therefore, the part of the combined rate that, again, is a combination of a fixed rate and an inflation rate, the inflation rate part of things has come down pretty significantly since April of 2022. And that's why we see such a big difference between the 9.62 and the now 6.89. Now, am I telling clients don't look at these notes anymore?
I'm not, you know, this is one of those places where if you have a bunch of cash sitting around and a bunch of cash is $10,000, loss, you know, obviously, you don't want to put all your emergency fund all your all the money that you need for the next 12 months, you do not want to be putting into this. This is truly money that if you put it in, you can't get it out for 12 months, so only put money in that you can bear to be away from for 12 months, but a lot of people have, you know, 50 to $100,000, in their checking account, making .1%. Well, you're not going to need 50 to $100,000. For most people - most people don't need 50 to $100,000 sitting in a checking account. And so as a result, if you carve off $10,000 per person, remind you. So if you're a husband and wife, you can actually open an account for the husband $10,000 wife, $10,000, for a combination of two of $20,000. So that's pretty, you can get 6.89% on that money that's making again, less than 1% at the bank. So right then and there, that's a pretty significant bump.
When it comes to the rate, once again, this is something that not enough people fully appreciate. They feel like 6.89, that's the rate. Well, no, technically, that's a combined rate, it's actually a combination of the inflation rate, which changes every six months and the fixed rate, which lasts the entire time that you have the bond. So technically, you could be getting bonds today that have a fixed rate that's going to last for the 30 years that you could hold on to this. But then the inflation adjustment changes. So how does this actually work in real life, and more specifically, with this specific brand, or this specific tranche of notes? Well, it's right here. So right now the fixed rate is .4%. The semi-annual rate is 3.24%. So all that simply means is semi-annual rate that's once every six months. So the full year is 6.48%. You add that to the .4%. And you get this 6.89% combined rate. Now, as I mentioned, every six months, that inflation rate, which is this guy here, the bigger one changes. Now, again, if we compare the 9.62, you can actually make the argument that these bonds are actually a little better, just simply because the fixed rate which never changes actually, actually went from zero. This is what the prior year was. So this was the May 22 to October October 22, you had a fixed rate to zero but a very high inflation rate. Now we have a fixed rate of .4 and a much lower inflation rate. Now, you know, truth be told, you know, the Fed is working aggressively to actually reduce this rate. So, you know, these I bonds might not be as attractive one year from now, which is, you know, a little bit of a reason why, yeah, the .4 is a nice rate that you're going to have for as long as you keep these, but this rate will probably come down if the Fed has its way and successfully reduces inflation. And so long story short, with this new bond that we're talking about this new 6.89% bond, it's going to have the .4 and it's going to have the 3.24. And then every six months is going to change. So if you bought one today - so it says if we issued your bond in November - the next time that inflation adjustment will change as May 1. So that pretty much means that from November 1 when you buy it to May 1 2023. You're going to have a point 4% plus the 3.24% interest rate. And if you keep it from May to November of 2023, you'll still have the .4 but the 3.24 will change. And again, if the Fed has its way that's actually going to come down.
So that's a quick little refresher course on what's going on with these I bonds. Yes, it's come down. There are good reasons for that that are reasons to celebrate. But with that said, it is a little bit of a downer because we had had such historically high rates at that 9.6% And now it has come down, but remember, today's bonds actually have that fixed component to it, whereas the older bonds that you could have purchased before October 31 don't. So there's a little primer on what's going on in the world of series, I bonds. Still not a terrible thing to consider for your investment portfolio, especially for your more conservative money. Hope this was helpful and explained a few things about the magical mystical world of series I bonds, and I look forward to the next time we get together. Take care
Brendan is the Managing Director for Waymark Wealth Management. He has extensive experience in comprehensive wealth management. His focus includes retirement planning, behavioral finance, investment portfolio construction, education funding, insurance & risk management, taxes, charitable giving, and estate planning. Brendan has an ability to take clients' complex visions and distill them down to simple action plans, helping them move from where they are today to where they want to be tomorrow.
Series I bonds are guaranteed by the US government as to the timely payment of principal and interest and offer a fixed rate of return and fixed principal value. Minimum term of ownership applies. Early redemption penalties may apply.
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