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How to Take Advantage of Inflation when Banks Won;t Help

How to Take Advantage of Inflation when Banks Won;t Help

| April 20, 2022
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This isn't your typicaly pitch. I figured I would get this out there, because as far as opportunites go, this is the type of thing that doesn't come around often.  Its going to sound simple, and even a little silly.... Its I-Bonds. I know what you are thinking... Savings Bonds... for real?

YES!

I-Bonds are an instrument that was originally introduced during the Clinton Adminstration and was intended to be a fixed rate savings vehicle for retirement. Because interest rates and inflation were historically quite low, it never really took off.

So what does this all mean for you?...  Righ now as of April I-Bond backed by the US Government are currently paying 7.12% in interst.  In May based on current CPI data that could rise to about 9.6%.

Why hasn't their been more chatter about I-Bonds then? Probably because no one gets paid when you buy them except for you!  Advisors can't sell I-Bonds... It is a direct purchase between you and the federal government.   As a firm who cares about clients and seeks to put them first, we realize that this might be a great alternative to other products right now.  Money that you want to keep safe, and not lazy fits the bill.   You might ask, if I am worried about clients wanting to move all their money into I-Bonds?  Well the government took care of that, because you can only purchase $10,000 worth a year as an individual (married couple can buy 20K)

Here are the Pros to this idea:

  • Backed by the full faith and credit of the US Governent
  • According to the Treasury Direct Website, Interest rates can't go below zero and the redemption value can't decline.
  • State and Local Tax Free
  • Federal Income Tax Deferred
  • If the interest rates decline, then by shear math the penalty goes down for early withdrawal. 

Cons:

  • Can Only be purchased in the amount of 10K per individual (20K if married.... That is 10K each)
  • Must be held for at least 1 year... but 5 years to avoid penalty.  The thing is the penalty is 3 months interest just lke old time CDs used to be.  This means if you hold for 18 months lets say, you will still get 15 months worth of interest.  And that interest would be way higher than the bank!
  • Interest rate is not fixed... It resets based on a timeline based on the month of purchase.  The Treasury Direct Site provides the details on that here. Treasury Direct Site for Rate Calculations.

I-Bonds can last for 30 years, but based on the nuances of the structure, you don't have to hold it that long if you don't want to. Yes you will earn slightly less interest in the first 2-5 years if you get out early, but we have to consider the bank account alternative.  So the rates for 1 year bank CDs which effectively is about the same effective timeframe the rates are about 1.3. Even with the penalty redeeming at the conclusion of 12 months gives about $534 in interest on a 10K purchae... which on a fixed rate basis on that period of time is 5.345% rate.

The addded bonus is that in this instance rising baseline rates could mean increased interest generation if inflation still persists high, and most speculate that the problems with inflation won't fix themselves over night. As I alluded to earlier, if rates on I-Bond drop... Principle is still protected, and early penalties in the 1-5 year window effectively decline because the penalty is calculated on giving up the prior 3 months interest. 

If you want to chat more, please feel free to reach out. I am including the I-Bonds Savings link below.  I recommend you check out the website, and be sure you understand the parameters.  Also keep in mind that the site is a little tempermental.  Fair warning… but Do not hit the back button!  Do not make a typo!  It can be a major hassle if you have any errors upon buying.

I Bonds Information SIte

I Bonds Rate Calculation Details

I Bonds Historical Rates PDF

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