Why is it that time to buy I Bonds?

Why is it that time to buy I Bonds? ...

CFP's Jeremy Keil

The Bureau of Labor Statistics announced the CPI inflation rate on April 12th, and they did more than clue you in how high inflation has been over the past year. They also indicated keen observers what the inflation rate will be on Series I Savings Bonds in the United States in May 2022.

Jeremy Keil is the subject of a series of debates.

The current 6-month rate of 7.2 percent remains on April purchases, and the 6-month renewal rate of 6.22% is also noted, indicating that buying I bonds in April 2022 will increase your profits by 8.54% over the next 12 months.

If you buy I bonds by April 28, you must act immediately.

Because given the current purchase rate for April, when you purchase a savings bond today on Treasury Direct it is effective for the next business day. With the 30th on a weekend, Thursday, April 28th, is the last day you can buy an I bond and know the rate you'll get over the next 12 months.

Knowing that a 12-month rate is applicable for approximately two weeks per year, and this is incredibly important because I bonds have a minimum 12-month commitment.

How do I get bonds?

I bonds have a monthly interest rate of two components:

  • A fixed interest rate (currently 0%) that lasts for the entire 30-year length of the bond.
  • An inflation rate that is announced and updated semiannually.

If your fixed rate is 0%, and your inflation rate is 2%, then you'd earn 2% interest at your semiannual rate.

If there are any interest rates, the bond may be added to the bond monthly, and the amount may be paid when you cash the bond.

When you buy an I bond, you'll get your initial rate for 6 months. After six months you'll receive a new six-month rate, and your money will increase by that new rate.

Just six months later, your April 2022 I bond purchase will convert your $100 to $103.56. This is a 7.12% annualized rate.

You'll start getting 9.5 percent at the 6 months mark, and your $103.56 from above will become $108.54.

That's an average of 8.54% annual rate! Compared to the average 12-month CD with 0.14% and 1-year Treasury rates of 1.7 percent, the I bond offers a competitive rate.

What's the Difference Between the World and the Future?

  • You have to hold them for 12 months minimum. You cant cash out before then.
  • If you cash out between the end of year one and the end of year five, you lose your prior three months interest as a penalty.
  • You can only buy $10,000 per person (or entity), per year, and you have to do it at TreasuryDirect.gov

Many people are quite defying the concept of a penalty, but here's how to look around what would happen if you cashed out immediately at the 12-month mark.

The prior 3 months of interest would be lost (which would be based on the most recent interest rate).

In April 2023, your $100 would be converted into $108.54. Subtracting the three-month interest penalty into $106.05. That's still a 6% annual interest rate!

I bond should be held for 15 months instead of 12. Chances are you'd only cash out the bonds if you don't like the renewal rate 12 months from now, which means it is lower than your rate you were getting. Since you lose the'prior' three months interest, wait until month 15 and lose the three months of interest from the rate you don't like!

Buying in April 2022 converts your $100 into $108.54 in 12 months. Losing that next three months of interest as a penalty means you still have the same $108.54 if you cash out at 15 months. Your annualized rate over the 15 months would be 6.78%! Imagine today a 15-month CD (certificate of deposit) at 6.78%!

Other people may think that $10,000 per year is too low of a cap and it's not worth their effort to acquire the I bonds. It's a personal decision, but you should consider other approaches to increase your purchases.

If there are two of you in the family, you might each hike the $10,000 cap. If you have a revocable living trust, or perhaps an LLC, then each of those organizations may hike the $10,000 cap.

Imagine a couple with a rental property in an LLC and a revocable living trust. They might go up to $40,000 each year between those four accounts!

Before you begin increasing your risk through the bond and stock market, check out bank rates that are too low and are contemplating strategies to boost your yield.

chasing this yield appears to be a good idea when it comes to the rules and returns on I bonds over the next 12 months.

Jeremy Keil is the author of a book.

Jeremy Keil, CFP, CFA, is a retirement-focused financial planner with the, and host of the blog and podcast.

This material is intended for educational purposes and is not as a recommendation, nor a recommendation. Before making any investment decision, please consult your financial advisor.

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