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Ask a Financial Advisor: Is Now a Good Time to Buy I Bonds?

A lot of our clients and contacts have been asking us about I bonds lately. With bond interest rates at record highs and market uncertainty, people are wondering if now is a good time to buy savings bonds. If you’re asking yourself “should I buy bonds right now?” this is for you. 

What Are I Bonds?

I bonds are a type of U.S. savings bond designed to preserve the value of your cash against inflation. It works like many other types of bonds: bondholders act as lenders who receive interest on their loan to the bond issuer. In turn, the seller promises a guaranteed rate of yield after a period of time known as the maturity date. For I bonds it’s 30 years.

The interest rate is calculated using a ‘composite rate’, which is a mix of a fixed and a variable interest rate. The fixed rate is based on current interest rates, and the variable rate adjusts every six months for inflation. Yep, that means the rate can go up (or down) twice a year based on current interest rates and inflation readings.

The current variable rate is quite high at 9.62% and we have record-breaking inflation to thank for that. Between the attractive interest rate and the volatility of markets right now, the idea of using I bonds as a financial safety net is attractive to many people.

Here’s how it works if you want to buy an I bond: Each individual can buy up to $10,000 via the government’s TreasuryDirect website. If you have a tax return, you can use it for another $5000. I bonds are subject to federal, but not state and municipal taxes. When used to pay for qualified higher education expenses, I bonds are tax-exempt.

You cannot redeem the bond in the first year. After 1 year through five years you can redeem the bond, but you forfeit the last 3 months interest. After 5 years you forfeit no interest. 

What Are the Benefits of I Bonds?

As with all investments, there are pros and cons to buying bonds. Some of the main advantages to investing in I bonds include: 

  • Bonds are generally considered safer and less volatile than investing in stocks
  • U.S. treasury backing means there’s almost no risk of default
  • Protects the purchasing power of your cash during inflation
  • Potential to earn more money over time through twice yearly interest compounding

What are the Cons?

All of that sounds pretty good, doesn’t it? Well, here’s the flipside:

  • The interest rate could go down during the life of the bond
  • You lose liquidity due to the long maturity rate of I bonds
  • The I bond buying site is outdated and a pain to use
  • You can’t use retirement assets to purchase I bonds

You also have to track everything related to the bonds on your own. The Treasury won’t provide you with a record of what rates you bought/sold at etc. When it comes to estate planning, you’ll need to create a treasure map for your heirs to the bond. 

Always Keep the Long Term Financial Goal in Mind

Now that you understand the pros and cons of I bonds, what’s the right answer for you? Well, it depends on your financial needs and your goals. 

Start by asking yourself, what’s the purpose of this investment decision? In general, we’d say I bonds are a better fit for savers, but not necessarily for investors right now.

  • If you’re in saving mode - I bonds can be great as a tiered savings vehicle (for cash reserves you don’t plan to use anytime soon, if at all).
  • If you’re in investing mode - As an investor, stocks are better for staying ahead of inflation, allowing your money to stay liquid while still serving longer term goals.

In the end, stocks and bonds are both common ways to tackle inflation. The one that’s right for you just depends on your ‘why’ for the money. As well as taking into account your age, risk tolerance, and time horizon. 

No matter what you decide to do, the old adage holds true—don’t put all your eggs in one basket. Which is why qualified financial advisors often recommend a diversified portfolio—in other words a healthy mix of stocks, bonds and cash to help you cover all the bases.

At Wealth Legacy Institute, every financial plan is:

  • Built to counter inflation and save you money on taxes  
  • Designed to be simple vs adding complexity 
  • Built on principles of long-term investing 
  • Tailored to fit your lifestyle and retirement goals. 
  • Managed by a fiduciary financial advisor so you can trust that you’re getting objective advice

Does your portfolio need a checkup? Get tips on this and more in our FREE Essential Retirement Guide. 

Essential retirement guide 2022

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third-party data which may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Indices are unmanaged baskets of securities and are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Total return includes reinvestment of dividends and capital gains. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements, or representations whatsoever by us regarding third-party websites. Wealth Legacy Institute is not responsible for the content, availability, or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products, or services available on or through these third-party websites. The opinions expressed by featured authors are their own and may not accurately reflect those of Wealth Legacy Institute®.

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