US Savings Bonds – Actually a Good Investment Option

I will admit I have only recently looked at US Savings Bonds as an investment option. It seems to me series I savings bonds are the better option. Series I bonds are based on the inflation rate and given how strongly the Fed has been surpassing interest rates (which is likely to increase for the next few months) this offers an option to get a higher rate of interest.

Rates for EE bonds depend on the issue date and are either a fixed rate of return or a variable rate based on 90% of 6-month averages of 5-year Treasury Securities yields.
The annual interest rate for EE Bonds issued from November 1, 2019 through April 30, 2020, is 0.10%. At that rate these certainly don’t seem worth bothering with to me.

The earnings rate for series I combines two separate rates:

  • A fixed rate of return, which remains the same throughout the life of the I bond.
  • A variable semiannual inflation rate based on changes in the Consumer Price Index for all Urban Consumers (CPI-U). The Bureau of the Fiscal Service announces the rates each May and November. The semiannual inflation rate announced in May is the change between the CPI-U figures from the preceding September and March; the inflation rate announced in November is the change between the CPI-U figures from the preceding March and September.

image of series ii USA savings bond with Chief Joseph

The composite rate for I bonds issued from November 1, 2019 through April 30, 2020, is 2.22% (pretty good rate, you can see why I say they are a good option). This rate applies for the first six months you own the bond. The rate will then be recalculated using the CPI-U rate.

Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]

2.22% = [0.0020 + (2 x 0.0101) + (0.0020 x 0.0101)]

This is calculated based on a fixed rate of .2% (showing how depressed interest rates are) and 1.01% inflation rate for a 6 month period (which also is low but compared to interest rates pretty high).

You may buy series I US savings bonds online via TreasuryDirect. In a calendar year, you can acquire up to $10,000 in electronic I bonds. Somewhat bizarrely the USA government decides you can purchase an additional $5,000 in the paper I bonds each year (but you cannot purchase $15,000 of the electronic I bonds).

You can redeem series I bonds after 12 months. However, if you redeem the bond before it is five years old, you lose the last three months of interest.

US savings bond interest is also exempt from state and local income taxes. This likely isn’t a big deal for most people but for a few states with high tax rates on high income tax holders this may be a nice additional benefit.

Given the very limited options to earn interest income today series I bonds are a reasonable alternative for the income portion of a person’s portfolio.

You may also use the Treasury Direct website to buy US Treasury bills, US Treasury notes and US Treasury bonds.

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