Should you invest in I bonds to protect against inflation? | personal financing
(Robin Hartell, CFP®)
In normal times, it would be impossible to achieve a guaranteed 9.62% return on your money with virtually no risk. But with inflation soaring to its highest levels in 40 years, that’s exactly what Series I bonds have to offer. The US Treasury recently announced that the bonds will pay an annual interest rate of 9.62% on bonds issued from May through October 2022.
If you’re concerned about inflation and the recent fluctuations in the stock market, you may be wondering if you should invest in I bonds now. While bonds can be a great option for those looking for safe investments, there are a few things you need to know before you buy.
What are bonds?
Bonds are a type of savings bond that has emerged recently due to high inflation. The bond pays a fixed rate – currently 0% – that remains the same for the bond’s 30-year life. But the bonds also pay a variable inflation rate that adjusts every six months. The 9.62% annual interest rate that the bonds pay out comes entirely from the adjusted variable inflation rate.
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Savings bonds are backed by the full faith and credit of the federal government. The risk of not getting the money you invest in I bonds, plus the interest, is as close to zero as you can get.
Interest accrues semi-annually and is added to the principal value of the bond. So if you buy $1,000 worth of I bonds now, you’ll earn 4.81% (half of 9.62%) in the next six months. In October, the value of your bond will be I$1048.10.
But there are a few caveats: When you invest in I bonds, you can’t cash out for one year. If you redeem your bonds in the first five years, you will also lose three months of interest. For example, if you withdraw the money after 24 months, you will only receive interest payments of 21 months.
You also cannot purchase more than $10,000 worth of I bonds electronically through TreasuryDirect.gov in a given calendar year. However, you can purchase an additional $5,000 paper bond using the tax refund.
Should I invest in bonds?
Investing in I bonds makes sense for medium-term goals — think one to five years — if you’re looking to park your money in a way that keeps pace with inflation.
For example, suppose you want to buy a house in the next two or three years. You will not want to invest your down payment in stocks because the market can fluctuate greatly in the short term and you will need your money back in a couple of years.
But even the best high-yield savings accounts currently offer interest rates well below 1%. When you keep your money in a savings account, inflation erodes its value year after year.
Investing in I bond makes sense in this scenario. You don’t need your money right away. Other investments offer the potential for higher returns, but they also carry greater risks. Since you want to be sure that the money you saved will be there when you need it, investing it in I bonds is a good move.
Of course, the interest rate of 9.62% is likely to be short-term. The Federal Reserve continues to raise interest rates with the aim of calming inflation. With inflation low, I will bond interest rates. So if you choose to invest in I bonds, you shouldn’t expect to earn 9.62% year after year.
Who Shouldn’t Invest in Ana Bonds?
It is necessary to build a six-month emergency fund to protect against unexpected loss of income or major expenses. But emergency savings should be liquid, which means you can access your money quickly without penalty. Since you can’t cash out my one-year bonds, it’s not a good option for your emergency fund.
Having long-term investments is just as important. This 9.62% interest rate may be particularly attractive in place of the stock market’s poor performance so far in 2022. So far, the S&P 500 is down about 13%.
Investing in the stock market has a proven track record of beating inflation over long periods of time. The 9.62% interest rate that bonds pay is an anomaly — the highest paid since the federal government introduced inflation-adjusted savings bonds in 1998. Meanwhile, a 10 percent yield is what you’d expect from the stock market on average. general.
Taking advantage of the unprecedented yield on I bonds could be a smart move with inflation rising. But bonds are not a substitute for having short-term savings or long-term investments.
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