Update: The official announcement states that effective May 1st, the new fixed rate on Series I savings bonds is 0.1%. The variable inflation-indexed rate is 1.84% (as predicted), making a composite rate of 1.94% for the first six months. After that, you will earn a composite rate of 0.1% plus the current inflation-indexed rate updated every 6 months.
Original post below:
Since inflation-linked savings bonds (“I bonds”) are based on CPI numbers announced two weeks earlier, we can make predictions about upcoming savings bond rates before their official announcement. This also allows us the opportunity to know exactly what a current bond purchase will yield over the next 12 months, instead of just 6 months.
New Inflation Rate
September 2013 CPI-U was 234.149. March 2014 CPI-U was 236.293, for a semi-annual increase of 0.92%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be approximately 1.84%. The new fixed rate won’t be announced until May 1st (speculation below). You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be different.
Purchase and Redemption Timing Reminder
You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time though, since if you wait too long your effective purchase date may be bumped into the next month.
Buying in April
If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.2%. You will be guaranteed the current variable interest rate of 1.18% for the next 6 months, for a total rate of 0.2 + 1.18 = 1.38%. For the 6 months after that, the total rate will be 0.2 + 1.83 = 2.03%. Let’s say we hold for the minimum of one year and pay the 3-month interest penalty. If you buy on April 30th, 2014 and sell on April 1, 2015, you’ll earn a ~1.31% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. That is better than any 1-year bank CD that I can find right now, keeping in mind the liquidity concerns and the purchase limits. If you hold for longer, you’ll be getting the full 1.705% over the first year.
Given the combination of current low rates and the fact that you lose the last 3 months of interest (again, for holding less than 5 years), it might be better to wait long enough to grab 12 full months of interest by holding for 15 months (14 buying late). If you buy on April 30th and hold until July 1st, 2014, you’d achieve a annualized return of ~1.46% over 14 months.
Buying in May
If you wait until May, you’ll give up the opportunity to lock in the 0.2% fixed rate from April. Instead, you will get 1.83% plus an unknown fixed rate for the first 6 months. The next 6 months will be the sum of the same unknown fixed rate plus an unknown rate based on future inflation. If there is high inflation for the next 6-month period, buying in May may get you a higher rate sooner. My best guess for the fixed rate is that it will be somewhere between 0.0% and 0.4%.
Inflation appears to be picking up, so I’m not sure if it is best to lock in the guaranteed above-market rates for 12 months by buying in April instead of May. You could always wait all the way until in October for the next rate announcement, but if you have the cash now you’ll have the opportunity cost of lower rates until then. Besides, if rates spike, you’ll eventually get the benefit of any higher rates eventually in the future anyway.
Existing I-Bonds
If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate + variable rate. Even at a low or even zero fixed rate, your existing savings bonds are paying more than current savings accounts and will continue to be hedged against inflation, so weigh carefully whether or not to redeem them.
Annual Purchase Limits
The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.
For more background, see the rest of my posts on savings bonds. I’m keeping all of mine for the foreseeable future, due to their tax deferral possibilities and other unique advantages. Compare the rates on these savings bonds to what you’re earning on your FDIC-insured bank deposits or even your TIPS and bond mutual funds, and you may find them a good addition to your portfolio.
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Thanks. I always look forward to your post on I-Bond.
As I think you live in California and have a child, I’m guessing you have your assets in a trust. If you hold I bonds in a trust, does that effectively reduce a married couple’s purchasing power from $20,000 per year to $10,000 per year?
Actually, it increases your purchasing power, because you can purchase $10K under each of the spouse’s social security numbers and another $10K under the trust’s name. $20K of the purchases would have to be held outside the trust, however.
That is true, except for two issues:
1. Our trust doesn’t have its own tax id; I use my SSN for trust accounts
2. (As you alluded to) the point of creating the trust was to move our assets into it
Just to close the loop here, you don’t need to have a separate tax id number for the trust; we don’t, either. You just use the trust’s name in signing up with Treasury Direct and your own SSN. But I do understand your second point; in our case, we don’t hold every penny of our assets within the living trust, and we hope to live long enough to cash out the ibonds before the trust takes effect, anyway.
I appreciate this post and recognize that I-bonds offer much juicier one-year yields at low to no risk relative to anything else out there. But the investment limits are discouraging. I could put $20k to work and earn $366 of interest. If I could put a material part of my savings in this it would be more interesting.
As an aside, a guy I worked with in the early 2000s, when TIPS and I-bonds were new was a big advocate. He was trying to convince me what a steal I-bonds were. I had zero interest because the stock market was soaring. Anyone care to guess what the real (what you call “fixed”) yield was at that time? 3.6%!!! I totally should have maxed out on them!
Yep, I bought some I-bonds in late 2001 with a 3% fixed rate. For most of the decade of the 2000’s, they were the best performing assets I owned.
Way to go Larry!
We’ve been setting aside about $650/month for I-bonds as part of our savings goals for this year, and buying right near the end of each month. I’m now thinking that maybe I shouldn’t buy any at the end of this month and wait until, though have to decide how I feel about risking losing the fixed %. But, more generally, is there some reason to buy I-Bonds once a year instead of spread out? I can provide more specifics of our particular situation if anyone has helpful advice.
The fixed rate needs to be 1% or higher for the bond to keep up with inflation after taxes. There are also some banks that give over 2% for a 5-year CD.
Hi Jonathan,
Shouldn’t the last sentence in the “Buying in April” section read “July 1st, 2015” instead of “2014”?
And a question:
I’ve re-read your article several times but I continue to wonder whether you recomment buying in April or in May. Your articles usually state the recommenation clearly & I have followed your recommendation for several years now. Can you let us know whether you recommend April or May purchase?
Thanks again for all your posts… they have always been superb!
Thank you for regularly providing us with I-Bond updates. It is really very useful for our planning.
Looks like the official rate is 1.94% composite. They lowered the fixed portion to .1%. Those who bought in the prior 6 months will get 2.04% composite (1.84% inflation + .2 fixed).
You were right again Jonathan! But since the fixed rate is lower than the prior six months, I am happy enough to have bought $2000 worth before May 1. I will consider buying in November $1000 or $2000 worth if the fixed rate is 0.4 or more. As a previous poster wrote, I would not max out on series I savings bonds until the fixed rate is decent. For me that would be 2%.
Why would anyone even bother with I bonds these days? With a fixed rate so low, I remember when it was 0 for a while, and a variable that still lives in 1% land you are better off buying a high quality blue chip and collect or re-invest the dividends. Many high quality companies are paying over 3% like Clorox, GE, P&G, Kraft etc.
I dont see why people are excited for 1.84%
I am thinking about putting some of our emergency savings in an I bond to earn more interest than leaving in a checking account; has anyone done that? is it easy to take out money from a savings bond in case of emergency?
Sarah,
Forget I-bonds. Put you money in any online savings account. There are so many that will pay .85% to over 1%. It’s totally liquid, access your money anytime.
Jonathan,
Can you give me some advice on when to buy I-bonds? Should I buy now or wait until November for a better interest rate? Thanks
Erica
In a few days after the most recent inflation numbers are announced (one calendar says 10/22), I’ll post an update as to whether you should buy in late October or wait until November. Hope that helps.
Ah! Great! I’ll check back later then. Sold a bunch of stocks and did very well. Need to take a breather and return to buy and hold I bonds.