Should You Consider Investing in I Bonds?

In this episode of Friends Talk Financial Planning, Bridget and I discuss the new rates for I bonds that changed on November 1, 2023. We dive into the components of the I bond rates and explain how the fixed rate is currently at 1.3%. We also discuss the benefits of I bonds as part of an investment portfolio and how they can be used for emergency funds or retirement savings. We cover the complexity of buying I bonds and how it requires engagement with the Treasury Direct website. 

   John: I bond rates changed on November 1. Should you think about buying them now? That's our topic on today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin. 

   Bridget: And I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois. Before we dig in with I bonds, don't forget to subscribe. It helps our credibility with YouTube and helps other people find us. And I'm in the process of moving, but we're still talking I bonds. So, John, why don't you tell us about the latest news?

   John: Yeah, yeah. So quick refresher on I bonds. They’re inflation-protected bonds issued by the Treasury Department, so the US government. And every six months they change what the rate is for bonds that are bought during the following six months. It's May 1 and November 1. So just recently, November 1, they announced the new rates. And for new I bonds bought today, the rate is about five and a quarter percent. And there are two components to that rate.

One is the variable component, so the inflation component is right about 4%. And there's also a fixed component to I bonds. In years past there has not been very much in the way of the fixed component. Right now, though, the fixed component is 1.3% and that 1.3% stays for as long as you have the I bond. And then the variable component adds on to that. So we got fixed of 1.3% and a variable of basically 4%. And so, we're getting 5.25% on new I bonds bought between November of 2023 and April of 2024. So that's sort of the big news is what's going on and why it's back on people's radar here.

    Bridget: Well, and so the fixed rate, it seems like that's the highest that the fixed rate has been. And that’s like your forever rate; you're always going to get this, at least for 30 years because I bonds are basically a 30-year bond. So that 1.37% kicker plus inflation for the life of this I bond, if you buy it now, and that's higher than it's been for something like 20 years. 

    John: For a long time. We first were really talking about I bonds for viewers about two years ago when the fixed rate was zero, so you're not getting any base rate, but the inflation rate was over 9%. So we started saying, “Hey, that's a slam dunk of a deal,” even on a short-term basis. Now we have this fixed rate. I had to look it up because I thought, “Golly, that is really high.” Just two years ago, the ten-year treasury bill, so lock money up for ten years, had a rate between 1.25% and 1.5%. Now we're getting that rate plus any inflation rate on top of it. So just a couple of years ago, you couldn't get that on a regular bond. And I think you're right, it goes back to the early 2000s, since the fixed rate was up in this area. 

    Bridget: Yeah. It's a gift that’ll keep on giving. So I want to talk more about how I bonds work as part of your whole strategy. You do have to keep it in for a year. But, then you have a lot of flexibility. So you can take it out and then it's out. But you wait until you take it out to get taxed on it. So that means it's tax-deferred for as long as you have it. And so, if it's earning this money, then you can wait until a good time to take the money out from a tax perspective or if you just need it. So I see it as a second emergency fund. If your emergency fund is run down for some reason, it's a second emergency fund. Plus, if you don't need it and you want to use it for a retirement vehicle, I would say it's good for that, too, especially during retirement years before you start taking Social Security. 

    John: Yeah, no, that's exactly right on it. And I'm glad you brought that up. There are certain limitations. You can buy $10,000 per person per year, so there are some things that go around it. A couple of years ago, I mentioned, and we've got some episodes that we can put links in the show notes, about how we were getting 9.5%, 7.5% for a while. And when CDs were paying 2% or 3% treasuries were paying much more. That was a screaming deal. Then the last year or two after that, things kind of cooled off. I think the last rate that we had previously here from over the summertime, if you bought the variable rate was something like 3.25% and 3.5%, which isn't bad, but we can get similar rates in CDs and even some money markings. 

    And it wasn't like, “Golly, here's a screaming deal. It was like, “It's not a bad place to have money.” Now we're starting to get into that spot again where you'll look at this and say, “Hey, this is pretty good.” You got that fixed rate. When you're getting 5.25% plus a pretty good base rate all the way along, you start to go, “Well, jeez, maybe we should be looking at that again if we haven't already done that.” And again, as you said, it fits into that position in your portfolio where you can't access the money for a year, and you can only buy $10,000 each year for that. 

    It's not a panacea. It's not that everybody should do this. It's got to fit in your situation, but I do think that this is a time when you say, “Listen, if I haven't bought I bonds yet in 2023, because CDs, other options have made more sense, but maybe I will take a look at these I bonds now.” And you can put in $10,000 per person before the end of the year, if you have already bought them this year, and you go, “Oh, jeez, I'd like to get that higher rate. Remember, this rate goes from November until next April. So come January 1 you can buy next year's edition of your I bonds and get that 1.3% rate locked in.

    So there are some opportunities here, and I really appreciate you saying that it's not like everybody should really be doing this, which was sort of the case a couple of years ago. There are few people that shouldn't, but most people should. Now it's more like saying, “Hey, evaluate this.” Does it fit your situation? Does it make sense to do? What are your opinions and feelings about having a long-term, nice base rate and a rate tied with inflation? There can be a place where it really fits in with that fixed-income side of the portfolio. 

    Bridget: Yeah, I agree. I think it's a great part of your fixed-income portfolio. It does come with some complexity, though. So we are both advisors and we're fiduciaries and we're fee-only, and we work on retainers, so the way that we advise people is always in their best interest as much as we possibly can. A lot of advisors don't even talk about these because, let me put it in the most positive way, it's hard to help clients with this. You have to do it yourself. So you have to go to the Treasury Direct website and engage with Treasury Direct to buy these yourself.

    As advisors, we can't do this for you. And some advisors then would say, “I'm not going to do this because I'm not going to get paid.” But then some would be like, everybody's going to have questions, and it's not super easy. And if you're somebody who forgets things, and can't communicate with people, they don't send you statements. It's like the opposite of all these other places that as soon as you click on the website, it seems like they have your email and they're constantly emailing you. It's the opposite of that. So you almost easily forget about it, which, again, is one of its charms. 

    John: Right. 

    Bridget: You have to have a little bit of the mentality of saying, “Okay, I'm going to engage with this.” It does take some small effort. 

    John: I wanted to pull out what you said on that. I was talking with other advisors, and again, a couple of years ago, this was one that we said, “Man, everybody should be looking at this stuff.” And I was at an industry event and talking with some other folks that I think do good financial planning and saying, “Hey, are you talking with folks about I bonds?” And there wasn't a single person who was doing it. And the answers I got were, “Well, basically, I can't manage the money. If it's not at my brokerage firm, I'm not going to talk about it with clients.”

    Or it was, yeah, you can only do $10,000 and it's kind of complicated and it's not worth the effort. And I mean, shoot, a couple of years ago when people were getting 9.5% compared to 1.5% on CDs, it was definitely worth doing. And the other thing is, think about this. For folks that have been watching for a long time and maybe have bought some I bonds, maybe you got two or three or four years of that, and now you've got $40,000 per person, maybe you've got $80,000 for a couple. And it fits your situation. Now you're getting 4% guaranteed tax-deferred, right, getting a pretty good rate. 

    And as inflation goes, you have some things locked in. It's one of those things where after a year, you can get out, but then you can only put in so much. So you need to think, “Well, okay, where does this come for inflation times going forward? And you've got a nice little pot of money that's earning a really good rate on those things, so there are some opportunities, and most people in our world aren't talking about that. And then the other thing that you brought up. Bridget is exactly right. I chuckled at it because the Treasury Direct website and these I bonds, came about in the late ninety s and nobody was really interested in them when inflation was at next to nothing and there were no guaranteed rates in it.

    So for 20 years, it was ignored. And the technology is DOS sort of 2.0. I'm not a tech guy, but I like this old stuff that we used to have. And so, it's just not super user-friendly. So there's some work that goes into it. And unlike some of the others, there are other sections of the Treasury Direct website where you can buy T bills and things like that. And it's a little bit more user-friendly. But that's the stuff that your advisor, Bridget and I can buy for you at Schwab, at Fidelity, at places. But these I bonds, that's the one place where you have to do it as a consumer. So factor in the complexity.

    Bridget: Yes, exactly. So I think that's a great place to wrap it up. I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois. 

    John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Both Bridget and I are taking on new clients, so we'd love to talk to you, but if you are looking for an advisor in your area and like what we have to say, Bridget and I are both members of the Alliance of Comprehensive Planners, which is a nationwide group of fee-only financial planners that thinks in a similar way that we do. And you can look for an advisor in your area by checking out acplanners.org. 

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