We’re in a transition period with the economy. Markets are volatile, geopolitical pressures are driving the price of oil higher, and the US inflation rate is near a 40-year high.
With inflation on the rise and a stock market influx, the Federal Reserve is working to cultivate a strong economy – one that maximizes employment and stabilizes moderate long-term interest rates – to curb inflation. In the meantime, investors that are aware of the economic shift are looking at their investments for alternative ways to weather the storm.
Inflation can erode your savings. This is why you may want to include I bonds in the safer end of your long-term investment portfolio.
I'm going to explain what I bonds are, what the estimated return on I bonds really are, and help you identify if I bonds are a good investment vehicle for your wealth building journey. Lastly, I’ll share how you can buy I bonds.
What are Series I Bonds?
Series I bonds, known simply as I bonds, are issued by the U.S. Treasury and backed by the full faith and credit of the U.S. government. This makes them pretty much the gold standard for risk-free investment vehicles. Think of the “I” in I Bonds being short of inflation. They offer investors a variable rate of return, currently 9.62%. This is based on a published inflation rate which is reset twice a year.
I Bonds are long-term investment vehicles. This means your investment may not be immediately available to you once you decide to invest and you may need to pay a penalty if you withdraw your funds early. I bonds require a twelve-month commitment, so you’ll be locked from accessing those funds for one calendar year. And if you liquidate after twelve months but before 5 years, you’ll forfeit 90 days of interest.
There are investment limits for I Bonds. Each person can purchase $10,000 worth of I bonds annually electronically and may purchase up to another $5,000 through their tax refund.
What is the estimated return on Series I Bonds?
The inflation-adjusted rate is reset twice a year in May and November, based on the Consumer Price Index. Since inflation is running hot right now, the variable inflation rate is currently paying 9.62%!
You may be thinking to yourself, “That’s amazing! 10% on risk-free government-backed security!” And you’d be right; it is amazing. However, there are several things to consider before liquidating your Bitcoin for the safety of Uncle Sam.
How do I know if Series I Bonds are a good investment strategy for me?
What is your time horizon?
I bonds are a long-term investment. If you are prepared to not touch this money for the next 12 months minimum (and ideally 5 years to avoid any penalty), then this may be the right next step for you.
What are the penalties to withdrawing money early?
If held for more than 5 years there is no penalty. If you cash it in within 5 years, you forfeit 90 day of interest.
How can I be confident not to touch this long-term investment?
Having an appropriately diversified portfolio and adequate savings for short-term needs and emergencies will provide the confidence needed to commit to a longer term investment.
If you have children or grandchildren, you may want to consider using I Bonds as an alternative investment vehicle for college savings.
If the bonds are used for educational purposes the interest earned may be exempt from federal income tax.
What are the benefits of I Bonds for estate planning?
Savings bonds can be useful in estate planning because, on the death of the original bond owner, the co-owner or beneficiary becomes the owner. It's important to register your bonds correctly. Registrations for Series I Bonds, both electronic and paper bonds, can vary, so it's a good idea to find out how to register each type of bond.
How can I buy I Bonds?
I bonds are pretty simple to set up. You can go to TreasuryDirect.gov and open a free account to purchase these federally-backed securities directly from the U.S. Treasury.
You can begin purchasing I bonds after you’ve created an account. Here are a few things to keep in mind. I bonds earn interest for 30 years unless you cash them in. You can do this after a year has passed from the time of purchase, but you'll lose the previous three months of interest. However, there is no penalty if you let them mature for five years or more. The maximum amount you can invest is $10,000 total per calendar year. To increase this amount, you might consider opening one account for yourself and another for your spouse or partner.
Ready to invest in series I bonds? Peak Wealth Planning is happy to help walk clients through the process.
Final thought.
Your overall investment strategy should consider that there will be transition periods in the economy. A wise investor will have a cash reserve in a high-yield savings account to alleviate stress and worry that can come with unexpected expenses and to create a cushion for the future. If you want to build security into your long term investment plans and are curious how to integrate I bonds into your investment strategy, the Peak Wealth Planning team can assist you.
Peak Wealth Planning specializes in helping high-net worth individuals and families plan for the future.
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About the Author
Nathan Gale is a CFP® candidate and holds a Master of Science in Personal Financial Planning from Kansas State University. He joined Peak Wealth as a Financial Planner in 2022 and is passionate about holistic financial planning and therapy.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.