JUST PLAIN TALK: I bonds, why not? The 'best-kept secret in America'

Buz Livingston
Buz Livingston

Zvi Bodie taught finance and investment management at Harvard and MIT and is currently Professor Emeritus at Boston University, where he finished his career.  According to Dr. Bodie, I-bonds are "the best-kept secret in America" (Wall Street Journal, May 28, 2021), with a minuscule percentage, less than .2% of total debt held by individual investors. I-bonds don't trade in the secondary market, so advisors can't charge fees or collect commissions, so there little incentive for investment advisor hoopla. 

I-bonds are issued directly by the United States Treasury. The I in I-bonds is an acronym for inflation. The yield combines a rate for the bond's 30-year life and a variable amount, which adjusts every six months with the Consumer Price Index changes. The fixed amount is guaranteed to never go below zero. While it remains constant for the life of the bond, it adjusts bi-annually for new purchases. Thus, any purchase is almost risk-free and guaranteed to keep up with inflation. It's not a free lunch, but it's close. For example, last spring, when everything collapsed, I-bonds had a positive return as they did in 2008. 

In today's low-interest environment, I-bonds offer not just a ray of hope but bright sunlight, financially speaking. Money market rates currently max out south of .5%, but I-bonds issued from May to October will pay 3.54%, annualized. With inflation being a concern, I bonds offer a way to maintain purchasing power.

What are the downsides? I'm far from a cyber-ninja, but setting up an online Treasury Direct account is cumbersome, and I understand the struggle. Once established, purchases are as easy as buying anything online. Also, I-bonds have a 12-month lock-out period on subsequent sales. Plus, sales within five years lose three months of interest. I-bonds are limited to $10,000 per SS number, annually. Initially, I-bonds had no limits on purchases, but Treasury officials changed regulations during the George W. Bush administration. It should be higher or eliminated, but we have to play by the rules.  If you look to simplify your finances, it does require another account to manage and monitor.

Owning I-bonds is a way to make sure at least some of your money keeps up with inflation. I-bonds are an ideal vehicle, once you get past the 12-month lock-out, for an emergency fund. Maintaining purchasing power is what you want for an emergency fund. Another option is to make monthly purchases during your working years then redeem them every month during retirement. Whether they are part of your emergency or retirement fund, since they can't lose value, cash them in if you need the do-re-mi.  

Even with the hassles, people should consider using I-bonds. The future is always around the bend  Some of the ones I bought back in 2001 currently yield 6.59%. I purchased them anticipating inflation, but no complaints from this corner, even with two decades of low inflation.   

You can't always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.