Some people think sugary processed foods are why we get soft. Other people argue transitioning from a labor-intensive to a capital-intense economy makes us less active. I'm going to argue high I Bond returns are the real reason for making us not try so hard!
Investing in an I Bond today is almost too good to be true. How amazing is it that we can borrow at a negative real rate, yet earn a positive real guaranteed rate? This is an anomaly that won't last forever. Take advantage.
From May 1, 2022 through October 31, 2022, every person could have bought $10,000 worth of I bonds with a 9.62% interest rate! This is was up from 7.12% at the beginning of 2022. After six months, the interest rate will float, depending on inflation. But with inflation elevated, you might as well take advantage.
If you're married, you can buy $20,000 worth of I bonds in December and buy another $20,000 of I bonds in January the following year. If you each own a business or trust, now you've got four entities able to buy $10,000 worth of I bonds each year. In other words, your combined unit could purchase $80,000 worth of I Bonds in a short period of time.
Just know I bonds can't be redeemed for one year. You can cash them after one year. But if you cash them before five years, you lose the previous three months of interest.
I would invest ~80% of my net worth for a guaranteed 9.62% return if I had the option. After such a massive run-up in risk assets, locking in a guaranteed 9.62% return feels nice!
Therefore, at the very least, I'm going to be buying the maximum amount of I bonds this year and next. You can check TreasuryDirect for more I Bond info.
From November 1, 2022 through April 30, 2023, the new Series I Bond interest rate is 6.89%. Not bad as the third highest rate. But more importantly, the drop in I bond returns signifies inflation has peaked.
What High I Bond Returns Means For Your Investments
The implicit assumption from I Bonds paying 9.62% is this: Your investments better return more in 2022 or else why bother taking more risk? Further, why bother working so hard? This is how we get soft.
I've touched upon the topic of what to do when your investment returns make more than your active income. When this crossover point happens, it's natural to want to slack off a little bit.
To clarify, I don't mean going to the extreme like only working two hours a day like some in tech do. But maybe you take more vacations or slow down your responsiveness to requests.
Sure, earning a 9.62% I Bond interest rate is due to temporarily elevated inflation. However, it's still a real positive return. Further, if lower return assumptions for stocks and bonds come true, then all the more reason to appreciate a 9.62%, risk-free nominal return.
The entire American active investing world will look at this I Bond hurdle to beat. If they don't, what use are they? They might as well change careers for providing negative alpha. Of course, there are no guaranteed returns.
When you've got a high guaranteed return, you take less risk. Offering high government bond yields is one way the government soaks up excess liquidity in the system. At the margin, liquidity stops chasing speculative investments to find more safety in government bonds.
An Investment Exercise To Conduct Due To High Guaranteed Returns
The true risk-free rate is the 10-year bond yield since there is no cap on how much one can purchase. However, the I Bond yield is also a worthwhile risk-free rate. Use it to think about how you will asset allocate going forward.
Take all your risk assets and multiply their value by 100% + the I Bond rate. In this case 109.62%. For example, if you have a $1 million in stocks and real estate, you'd get $1,096,420. Now ask yourself whether you'd be satisfied with this much money 12 months from now or not. And if you're not, then you've got to take more risk to try and earn a greater return.
Now let's say you have a $10 million in investments. Would you be happy with $10,964,200 in 12 months? I would assume more of you would be happier with $964,200 versus $96,420, even though the percentage increase is the same. $964,200 is big bucks for doing nothing.
In other words, the wealthier you get, the more you should enjoy lower risk or risk-free returns. Because losing money on a $10 million portfolio is far more painful than losing money on a $1 million portfolio. Given the government understands this loss aversion reality, it limits the amount of I Bonds each individual can purchase.
Remember, the first rule of financial independence is to not lose money. The second rule of financial independence is to never forget the first rule. The third rule is to live as long as possible.
Once you've built your financial nut large enough where it is generating a steady amount of livable passive income, you're set! Don't lose money because you will ultimately lose time.
More Logic Behind Investing In I Bonds
We know the average return for the S&P 500 is about 10%. We also know the average return for the aggregate bond market is around 5%. Therefore, if you construct a simple 60/40 portfolio, the expected return based on historical figures is about 8%. But of course, there is risk involved and the portfolio could lose value.
If you can earn a guaranteed 9.62% return through an I Bond, then most investors who invest in a 60/40 portfolio would probably choose the guaranteed return. Based on my asset allocation model between stocks and bonds, we can assume the target I Bond investor is age 40 and over.
Even for people who prefer real estate, a 9.62% return without having to do any work is very attractive. Cap rates on the coasts are around 2% – 4%. While cap rates in the heartland are around 6% – 10%. Negative real mortgage rates will remain a tailwind for the real estate market.
Be On The Lookout For Getting Too Soft
High I Bond returns are great. Just be careful taking things too easy due to easy money.
Perhaps the greatest challenge for personal finance enthusiasts is not slacking off too much. Because some of us have diligently saved, invested, and earned side hustle income for so long, life has become much easier. Don't forget the thrill of a difficult challenge!
One of the reasons why retiring early and doing nothing is a bad idea is because your mind gets weak. When you don't constantly challenge your mind it begins to get hazy. Further, once you lose purpose, the will to live tends not to be as great. Again, we go back to the, why bother, attitude.
Therefore, we need to seek out failure by continuing to try new things. By doing so, we will stay motivated to be more productive. Of course, we should relax once in a while and lock in those free guaranteed returns. But the real fun about financial independence is not fearing the devastation that sometimes comes from taking new risks.
Finally, if you have kids, they tend to observe everything you do whether we realize it or not. If we lose our work ethic, the side effect might be raising spoiled and entitled children.
In addition to buying I Bonds, investors should also consider buying U.S. treasury bonds. Treasury bonds don't yield as much as I Bonds, but there is no limit to how much treasury bonds you can buy. If you want to buy $100 million worth of treasury bonds, you can!
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Readers, how do you stay motivated to keep earning and producing when I Bond rates are so high? The government is also providing so much support that it feels harder to work harder. Are all developing nations destined to get soft? How do we teach our children to better appreciate their opportunities?
Latest Series I Bond Rate May 2023
On Friday, April 29, 2023, the Treasury raised the fixed interest rate for I bonds from 0.40% to 0.90% but dropped the semiannual inflation rate to 1.69%. This resulted in a combined interest rate of 4.3% for newly issued bonds. In other words, the Series I Bond rate is over.
[Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
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I bought ibonds in late 2022. Should I buy more now in 2023?
I am.
Thinking about buying some more. Invested $10k at the end of last year at 7.12% Now it looks like I’m getting the current 9.62%. Way better than leaving it in a savings account! Thanks for the heads up.
Hi Sam, I have a question. So if my wife and I both contribute $10k each, can we contribute another $10k each for both our our minor children? It looks like you can as a gift for them. Thoughts?
Chris-
Best risk free real on the planet. Load up!!
Am I the only one running into this need to mail in a form after setting up the account at Treasury Direct. Got this message for both myself and my wife. No way to get this done before year end now it seems.
The following error(s) have occurred:
We haven’t received your TreasuryDirect Account Authorization form (FS 5444E) so a hold has been placed on your account. To remove the hold, print and mail us the completed form which can be found at http://www.treasurydirect.gov/pdf/rs/acctauth.pdf.
In mid December I opened a personal account and one for my business. The personal account opened up fine and I purchased my I bonds. The business account had the issue you reported and I needed to take that authorization form to a bank. My business bank no longer does guarantee signatures so I had it done at my credit union and mailed the form on the 20th. They still haven’t unlocked the account so I won’t get to purchase through my business until they review it. SO dumb.
Just note if interest rates increase the fixed rate of I-bonds may increase above zero. I own some with a fixed rate of 0.5 so I get this plus the every 6 month adjustment. At the time they looked like not that great but the fixed rate was the good part as I’m always earning above inflation with almost zero risk.
For the $10,000, up to $15,000 if you use your tax refund. I wonder if one could make an estimated tax payment now to make sure you’re getting at least $5,000 back, to ensure you can buy at least $15,000 in 2022?
Done. Thanks Sam.
Personally, I am not seeing this as stocks vs bonds, but bank account vs bonds.
When you view it like that, no brainer.
If one wanted to invest a more sizeable sum and either werent married or didnt have a business, couldn’t they legitimately circumvent the $10k limits by just creating EINs and register more accounts as Sole Proprietorships? Sole props don’t complicate taxes at all since it goes right onto your personal 1040 return… and no requirement for business bank account either. EINs can be created for free in like 10min via IRS website. I know it would be kind of a pain to manage the separate Treasury Direct accounts, but simply keeping track of account numbers in a spreadsheet with uniform password should solve that.
Am I missing something? Is this not allowed for some reason?
Hi,
We have most of our bank accounts under the ownership of our revocable family trust – my wife and I are the trustees of this trust.
I bought I bonds for $10k max each for me and my wife last week. Can I buy additional $10k for our family trust?
Thanks
Ravi
My wife has $5,000 in I bonds from 2016. Not sure what it’s worth now. 7% is really good! I think the previous rate was around 3.5% so it’s a huge jump.
I’ll try to free up $20,000 to buy some more I bonds before the end of the year.
Hey Joe, the good news is that all I Bonds adjust every 6 months, so your wife’s I Bonds bought in 2016 are not earning 7%.
Bought some for myself and my wife and studyin’ on buying one as a gift for my college age son to help fund the remaining years of formal education/development.
Now for my LLC: if I buy one under the LLC, and shut down the LLC, can I transfer bond ownership to myself, my beneficary, or as a gift, and what is the tax implications of said transfers?
When can I cash (redeem) an I bond if I need the money?
You can cash your Series I bonds any time after 12 months. You receive the original purchase price plus interest earnings. I bonds are meant to be longer-term investments; if you redeem an I bond within the first 5 years, you’ll lose your last 3 months interest. For example, if you redeem an I bond after 18 months, you’ll receive the first 15 months of interest.
So, you are locked in for a year, and to not lose part of the interest…5 years.
Emergency fund in it? What if you need it in 2 months?
I would think it should be a portion, but not a great portion.
Looking at the past rates when the fixed is zero…it is about 2%. ok, but not great for a 5 year investment.
For my lack of knowledge, question: how can they afford to offer such an attractive rate?
They are the U.S. government, so technically it is the tax players that pay the rate.
The rate formula is tied to the inflation and it is determined many years ago, so it is not like anyone recently come up with this high rate.
What came first: tax or currency?
Hello all,
I just made my 10k ibond purchase on my TD account and I was hoping to purchase the 10k for my wife. Question – do I have to create a “registration” with her name or a completely seperate account?
If I do create a separete registration, do I select Sole Onwer, Primary registraant or Beneficiary?
thanks for any help.
I have both EE and I bonds and I had to create a separate registration for each of us as Primary Owners of our own account and name each other as beneficiaries of those accounts.
Does the interest compound? For example, if someone had invested $10k in Nov 2021 they would earn $357 in interest for the No 2021 – Apr 2022 timeframe (correct?), so let’s say that the interest rate is the same for May 2022 – Oct 2022, then does the investor receive $357 in interest for this time period or more due to compounding?
It compounds semiannually.
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#interest
I set up our Treasury Direct accounts a few days ago and transferred $20,000 from Vanguard to checking. Today the transfer stopped being “pending” and I was able to buy $10,000 in my name and $10,000 in my wife’s name of I bonds. Will do the same in January. Only bad part is I was going to post about it and now it looks like I’m copying you. Fair is fair you were first but I think I’ll still do it. It was very easy. Sadly I closed out my HSA today too, since we went on Medicare we no longer can contribute and some recent health issues used up what we had in there. The I bonds are a bargain now. And even if its only $20K a year that’s not much of our net worth its just a good practice to take advantage of a deal like this I think. Good service you are providing reminding people of this Sam.
Hi Steve, don’t let my writing discourage you from writing what you want. If this article inspired you to write about the topic, then simply write about it and link back. Those are always appreciated!
Nice job optimizing a portion of your idle cash.
Using I-Bond ladder to keep some of the cash reserve / emergency fund seems like a really good idea to me especially in retirement where you want to have larger cash equivalent assets than 3-6months.
Bought $20K in I Bonds as a result of the Sunday newsletter! I never knew they existed before then. Our emergency fund for our needs is around $200K. It’s been painful to watch the inflation rate this past year and consider the lost value of that cash.
Do you have any guidance on the maximum % of an emergency fund could be in I Bonds? For an extreme example, it’ll take over take over 6 years for our household to 100% transition the emergency fund to I Bonds.
With the recent fed hint at three upcoming rate hikes in 2022, I’d imagine inflation will go lower and traditional savings will go back up which might make this whole point somewhat moot.
Any feedback and guidance is welcomed!
It doesn’t always make sense to put all your emergency funds into I-bonds! Sometimes the interest rate on savings accounts from regular banks are actually higher, as mentioned by RL below. There are times when the I-bond rate is zero!
I wish Sam had emphasized this point more in the post.
You need to adjust accordingly instead of just blindly shovel all your funds into I-bonds.
It’s a fair point. I have owned I-bonds since 2010 and my AAGR is just under 3%. This is emergency fund money for me so I’m OK with that.
Why is this I-Bond getting more attention now? How is it better now than the last 10 years in terms of Interest Rate that has been offered? What am I missing in this new attention? I fail to understand if someone could help me.
Please check the below 10+ years of Composite Rate History. **It has always been 7% or above.**
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#:~:text=Composite%20rates%2D%2DCurrent
Composite rate for your six-month earning period starting during November 2021 – April 2022
From Through
Nov. 2021 Apr. 2022 7.12%
May 2021 Oct. 2021 7.12%
Nov. 2020 Apr. 2021 7.12%
May 2020 Oct. 2020 7.12%
Nov. 2019 Apr. 2020 7.33%
May 2019 Oct. 2019 7.64%
Nov. 2018 Apr. 2019 7.64%
May 2018 Oct. 2018 7.43%
Nov. 2017 Apr. 2018 7.22%
May 2017 Oct. 2017 7.12%
Nov. 2016 Apr. 2017 7.12%
May 2016 Oct. 2016 7.22%
Nov. 2015 Apr. 2016 7.22%
May 2015 Oct. 2015 7.12%
Nov. 2014 Apr. 2015 7.12%
May 2014 Oct. 2014 7.22%
Nov. 2013 Apr. 2014 7.33%
May 2013 Oct. 2013 7.12%
Nov. 2012 Apr. 2013 7.12%
May 2012 Oct. 2012 7.12%
Nov. 2011 Apr. 2012 7.12%
May 2011 Oct. 2011 7.12%
Nov. 2010 Apr. 2011 7.12%
May 2010 Oct. 2010 7.33%
Nov. 2009 Apr. 2010 7.43%
May 2009 Oct. 2009 7.22%
Sure. Because stocks and other asset classes are expensive, and after a huge run and continued COVID worries, more capital is seeking safer returns. Further, the spread between the I Bond rate and the average savings rate and 10-year bond yield is at or near a historical high margin. Finally, the dichotomy between negative real borrowing rates and I bond rates is very attractive.
Everything is relative.
The return is made up of 2 components, a fixed one that doesn’t change (currently 0%) and a variable component that is tied to CPI. This variable component adjusts every 6 months, the list you provided is the current coupon rate for bonds purchased during those times. They haven’t always been 7+%
They have to list out the current yield depending on when you bought them because the fixed component doesn’t change. This is why you see a bunch of 7.12%s, those all have 0% fixed components. the ones higher have different fixed rates.
What you are listing here is not “composite rate history”. It is “composite rates — current”.
Bingo! I think, I get it. Thanks Sam, CK and Susan!
Can you validate my below calculation as an example?
If someone bought I-Bond on Nov 10, 2019, their fixed rate is 0.2% and inflation rate will vary every 6 months there after, the calculation would follow this way,
Nov 10 2019 to May 10, 2020: (0.2+1.01×2 Inflation Rate)=2.22%
May 11 2020 to Nov 10, 2020: (0.2+0.53×2 Inflation Rate)=1.26%
Nov 10 2020 to May 10, 2021: (0.2+0.84×2 Inflation Rate)=1.88%
May 11 2021 to Nov 10, 2021: (0.2+1.77×2 Inflation Rate)=3.74%
Nov 10 2021 to May 10, 2022: (0.2+3.56×2 Inflation Rate)=7.32%
So, It will follow future Inflation rate.
Sounds correct?
Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
You missed the last part: fixed rate x semiannual inflation rate
Yes. That’s why we are talking about buying the I-bond now, because at least for the next 6 months you will get 7.12%.
Ok. Thanks Susan and Sabrina! I appreciate it.
Agree. I think you want https://www.treasurydirect.gov/indiv/research/indepth/ibonds/IBondRateChart.pdf for a list of historical fixed and variable rates.
This is incorrect. The past rates are here:
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/IBondRateChart.pdf
How is this worth it for anyone with a decent NW and annual savings rate when you can only put in 20k now and 20k in Jan? It doesn’t move the needle and it’s another account to manage. If you can transfer to a broker, it would be ok, even though small.
10k for me, 10k for the wife, 10k for the kid, 10k for the business, 10k for the trust times 2. December and January. Otherwise sitting in the bank earning .01 percent. Hell it could drop to 1 percent and I’m still doing better than my cash is now. Already have enough in stocks and real estate. Preservation of capital is what some of us want.
I thought the same thing. It’d be great if I could invest more, particularly if I could buy on margin at Interactive Brokers. But it’s not really worth the effort to manage another account.
I see no reason not to do this.
Alt: would be to buy a risk asset…and hold breath. I am not happy with buying tesla (as an example – fundamentals are so skewed) right now, would do VTI instead of this, but even vanguard is forecasting 3-4% return on stock next year…this I -bond is double that…
In this section…most are saying basically the same things I am…lemmings? Emergency fund stash….buy 10k now, 10k in Jan, then each year buy 10k more if its above 5% and then I would have rotating possibility to get cash each year until after 5 yrs have past, then it is effective emergency fund storage earning a helluva lot more than .5% (but those rates are not historic…so what is historic rate of return on savings account v. I Bond?)
‘course in 5 yrs that 10k / yr (50-60k) might have gone up not 25% as in I Bonds… but 50-60% as in VTI (5% pa ave v. 10% pa ave)…
BUT, as I am 100% stocks? maybe this is the time to take a position as a ballast? I am a disciple of JL Collins…100% VTI (well, I have a couple of robos too and they are “diversified” on max aggressive)
For me its a tougher call…I am not at the level where my investments earn more than I do in a year…so for rich guys maybe this is a good deal, but for HENRYs? stay the course of the long game in VTI and hold an emergency fund that can be tapped to buy dips v. lock up that excess cash in I Bonds?
If interest rates increase. What happens to the value on my bond if I liquidate end of year one? Can money be lost?
This is a Great Article, thanks you! Here’s a good video about upcoming inflation, which is good because that means I bonds will eventually pay even more!
https://goldsilver.com/blog/inflation-is-going-to-be-a-bch-to-get-under-control-wolf-richter-wealthion/?utm_campaign=20211215_Wealthion_Video_Wolf_Richter&utm_content=touchpoint_1_wealthion&utm_medium=email&utm_source=zaius
Let’s say that I want to move my entire emergency fund $30k to I-Bond with the below strategy.
– Each year move $6k to I-Bond so that, by end of 6th year onwards I’ll have entire emergency fund fully accessible and by end of 10th year onwards no penalty on Interest.
– Within Each year, invest $1500 every quarter so that they are evenly distributed within a year and will get a chance to expose to both rate changes of the year.
Any better strategy or improvements to the above plan? Thanks!
You can’t autopilot like that.
Sometimes the I-bond rate is actually LOWER than the savings account interest rate you would get from banks (such as Synchrony, Ally, etc.). Go look at the historical data.
Look at this and compare to interest rate offered by banks over the years:
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/ibondratechart.pdf
Thanks RL for the valuable feedback. As mentioned by Elizabeth and pbnotinSF, i guess it makes sense to build Emergency Fund in I-bond, but not as auto-pilot or ladder program; rather invest money only when the rates are better. e.g., 5% or more like this time or fixed rate is not usual Number “0%”. Even then check around for better opportunity before investing as it has some conditions to fulfill (1year locking period, unknown variable rate every 6 months, Holding for 5 yrs for better return etc.,). Any further thoughts?