I wrote a post about these bonds five years ago and they have never seemed more relevant. With low yields on bonds and savings accounts, these Treasury-issued options are especially relevant. You can buy 10K each per year of these bonds (so that's 20K I + EE per year). That limit is higher than some people need, lower than others want, but quite a lot of money per year you can put toward them if you want to in taxable (non-retirement) space.
1) Series I Bonds: These will track inflation and can be held from 1 to 30 years. Sometimes they offer a bit extra (a fixed rate on top of inflation), but that's moot given that TIPS have negative yields. So they are a lot like TIPS, but more flexible, offer tax deferral, are immune to interest rate risk, and: they pay more. These are a great deal IMHO.
2) Series EE Bonds: Don't be fooled by the low 'rate' on them - the key is that they double in value after 20 years, which is the equivalent of a 3.5% annual return. If that sounds low to you, check out what 20-year Treasuries are yielding. Plus if yields do go up, you can cash them out early, and invest in higher-yielding bonds.
The catches are few but to be complete: (A) you need to create a TreasuryDirect account, which means you have one more account to manage, and (B) you can only buy them in taxable, which may not make them ideal for people who are unable to invest beyond their tax-advantaged (retirement) accounts, then (C) they have some liquidity issues in terms of the one-year lock-up period, and not getting the EE doubling if you cash in early, but yields are so low right now that if they do go up and you do cash these out early you're not going to miss much.
But, you ask, "Zero percent real return from I Bonds and 3.5% nominal return from EE Bonds? That's not a great return!" Well, I could debate this, but I'll just say that compared to other bonds, these government-backed securities seem like the best deal out there by far. For example, as of today, 20-year Treasuries are yielding 2%. Compound that for 20 years and you get less than $5,000 versus $10,000 when your EE Bonds double.
But, you ask, "Won't stocks more than double over 20 years anyway?" Well, first, comparing stocks and bonds is a mistake, because their risk profiles and uses are so different. Second, bonds have indeed beaten stocks for 20-year periods before. Even taking the last 20 years as an example: it took US stocks 15 years to double and international stocks almost 20. So yes, over the last 20 years stocks came out ahead, but only in the final stretch ... the next 20 years, who knows? So think of it this way: are you going to hold bonds now and for the rest of your life of some type? Are you planning to live 20+ years? If you answered yes to both, you may benefit from EE bonds!
Anyway, I'm (obviously) a big fan of both of these bond types and would recommend considering them. Series I Bonds also work as good shorter-term savings vehicles if you have over a year before you need the cash.
Submitted November 01, 2021 at 11:28PM by misnamed https://ift.tt/3GAJNL8
