By Robert E. Quittner, Jr. CFP® & CMFC™
Investment Advisor Representative
[email protected]
It seems like 4th of July was just a few weeks ago and now we are heading into Labor Day weekend. How time flies. Anyway, let’s take a look back even further and talk about bonds, specifically I bonds. Three years ago, Series I Savings Bonds (better known as “I bonds”) were the hottest investment around. With inflation soaring in 2021 and 2022, these government-backed bonds were paying returns as high as 7% to nearly 10%—unheard of for a “safe” investment. Everybody rushed in, buying as many as they could.
Why were they paying such a high interest rate for such a safe investment? Let’s take a closer look at the calculations:
I bond interest is set by a composite rate formula that combines:
- Fixed Rate-the rate is set when you buy the bond and never changes.
PLUS
- Inflation Rate-the rate resets every May and November, based on the 6-month change in the Consumer Price Index for All Urban Consumers, or CPI-U.
But today, those same I bonds aren’t nearly as attractive, and we are asked quite frequently what to do with them.
Let’s review how the I bond interest rates are calculated.
Where Things Stand Now
- I bonds issued between Nov. 2021 and Oct. 2022 are now earning just 2.86% (fixed rate of 0% + inflation rate of 1.43% semiannually), and that rate won’t reset until the end of October.
- Meanwhile, other short-term investments like 6-month Treasury bills, money market funds, and high-yield savings accounts are offering closer to 4%.
- Newly issued I bonds are a little better because they include a 1.10% fixed rate, but even those currently pay about 3.98%—still less than many alternatives.
Given the meager rates on the Nov. 2021 and Oct. 2022 I bonds, what should you do?
Should You Sell?
If you sell before holding an I bond for five years, you’ll lose the last three months of interest. Right now, however, that penalty isn’t as painful as it sounds. At a 2.86% rate, the cost is often under $100 for most investors.
That’s why many advisors suggest it makes sense to cash out older I bonds and move the money into Treasuries, annuities, CDs, or savings accounts where you’ll earn more.
Reasons You Might Hold
Still, I bonds aren’t worthless. Here are a few situations where holding could make sense:
- Education savings: If the bonds are used for college costs, you may be able to avoid federal taxes on the interest.
- Safety and peace of mind: Some investors—especially retirees—like I bonds as a guaranteed, low-risk “emergency fund” bucket.
- Inflation hedge: If you think inflation might spike again, I bonds could become more valuable.
The Bottom Line
I bonds were unbeatable three years ago, but today they are not nearly as attractive considering the other options. For most investors, moving that money into higher-paying, safe alternatives makes sense. But if you bought them in modest amounts, keeping them as part of your rainy-day fund won’t hurt either.
As I look at the forecast for the holiday weekend it is nothing but sun for all 3 days. Enjoy the beach if you are heading there or a BBQ if you are sticking closer to home!
Rob