Got a question about Series I bonds or other fixed-income investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write me at firstname.lastname@example.org.
I bought I-bonds two years ago and haven’t kept track of them, and I even forgot about them for a while. Am I still making 6.89%? Should I hold on to these or cash them out?
Good that you remembered your Series I bonds! When you have an investment like these savings bonds, which are in a separate account that isn’t easy to access, it can be hard to keep track of. I-bonds are especially wonky, because there are a lot of rules involved, and you have to get past a triple layer of protection on your Treasurydirect.gov account to check on your balances.
For the I-bonds you bought two years ago, you should be able to log into your account and see your exact balance, which is based on how much you bought and how much interest your bonds have earned. You can also do calculations online — a particularly handy calculator, available at eyebonds.info, allows you to select the month of purchase and a round purchase amount and figure out the cumulative interest rate you’ve earned.
If you made the individual maximum investment of $10,000 in October 2021, exactly two years ago, you’d have $11,598 so far, and your cumulative rate of return would be 6%, compounded semiannually. But note that if you look up your balance on TreasuryDirect, it will show up as a little less, because if you cash in at any point before five years, you lose three months’ worth of interest. That currently would amount to about $64. You’ll also owe federal income tax on the gain unless you use it for certain conditions — like for qualified educational expenses, but for not state or local taxes.
I-bond interest rates reset every six months, and the next rate will go into effect for new purchases on Nov. 1. But the rate you personally get follows the calendar cycle of your purchases. You started in October 2021 at a rate of 3.54% that lasted for six months and then went to the new rate. You only earned the high rates that got so much attention — especially the 9.62% rate — for six months at a time. This October, you’d start the current composite rate of 4.3%, which was announced May 1, and that would run for the next six months.
Given where we are with inflation, the new rate is likely to be similar to that May 1 rate — maybe higher — but we won’t know for sure until the Treasury makes the announcement. Based on data so far this year, the inflation rate is rising slightly, but I-bonds also come with a fixed rate that has a less transparent formula. The I-bonds you bought in 2021 — and most of those bought before November 2022 — had a 0% fixed rate, and all of the headline-making interest rate being offered was made up of inflation protection.
What’s your plan?
You have a couple of choices when it comes to the I-bonds that you bought during the frenzy of high rates.
You can hold onto them. Your cumulative rate will likely steadily erode as inflation wanes, but it’s still not such a bad rate. If your goal is long-term preservation of capital, holding onto your bonds is worth considering, but it’s not your only move. “There are other things that look more attractive right now,” says Ted Erhart, a certified financial planner based in Minneapolis.
You can cash out your 0% fixed-rate I-bonds and buy I-bonds that have a fixed-rate component, so that if inflation goes up again, you’ll earn an even higher rate. The current offer has a 0.9% fixed rate, but David Enna of TipsWatch and other I-bond watchers think there’s a chance that fixed rate could go even higher come November, and that the new composite rate could top 5%. You can buy now or wait and see what happens.
The general rule of thumb that has developed about selling I-bonds since they peaked in popularity is that you have to wait out the one-year lockout period before you can sell, but you might also want to voluntarily wait out at least three months into a lower-interest-rate period before you sell, so that you lose the least amount of interest. For you, Jerry, that could mean selling in three to six months.
You could also cash out of I-bonds and invest in something else altogether, from other Treasury products to certificates of deposits to high-yield savings accounts, where you can at least match 5% to 6% for now.
Erhart is cashing out his I-bonds these days and buying TIPS, another Treasury product that offers inflation protection, but in a different way. You can buy TIPS through TreasuryDirect, but you can also buy and sell them on the secondary market, making them a little more flexible. Plus, as Erhart points out, the rate of return is better at the moment.
“You can get a real yield from 2.5% to 3%,” he says. “Real yield is the return on top of inflation, which means your purchasing power is growing by that amount a year.”
The way Erhart thinks about I-bonds is that you’re getting the rate of inflation plus a fixed rate, and that fixed rate is what compares to the real yield on TIPS. “I-bonds are at 0.9% right now and TIPS are at 2.5%, so you’re getting basically triple the real rate of return,” he says.