Contributed by: Kelsey Arvai, MBA
Inflation has been steadily increasing, making Series I savings bonds (I bond), which are investments linked to inflation rates, a very attractive investment. I want to share some key points that will help you determine if it makes sense to consider adding them to your portfolio.
I bonds are backed by the US Government and offered via Treasury Direct. I bonds earn interest based on both a fixed rate (0.0%) and a rate set twice a year based on inflation. The bonds earn interest until it reaches maturity at 30 years, or you cash it in, whichever comes first.
Through October 2022, I bonds are earning an interest rate of 9.62%. Meaning that during the first six months that you own the bond, let's say from May 2022 through October 2022, your bond would earn interest at an annual rate of 9.62%. A new rate will be announced every six months based on your bond's fixed interest rate (0.00%) and inflation. The inflation rate is based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.
I bonds are attractive but have many limitations and require a fair amount of legwork to acquire. The most significant restriction is that you can only buy $10,000 per year per person. You could also purchase $5,000 in a paper bond with your tax return if you're entitled to a return from the Federal government (although it's too late now unless you've filed an extension).
To get started on purchasing an electronic I bond, you'd have to open an account with Treasury Direct online. Here is the website for more information.
There are some restrictions on who can own an I bond. You must have a Social Security Number and be a US citizen (whether you live in the US or abroad). You could also be a US resident or a civilian employee of the US, no matter where you live. Children under 18 are eligible for paper bonds as long as an adult buys the bonds in the child's name. Electronic bonds are available as long as a parent or other adult custodian opens a Treasury Direct Account that's linked to the adult's Treasury Direct account. If you'd like to see more about how to purchase a bond as a gift, you can watch a video here.
A few final notes to add, interest is compounded semi-annually. The bond's interest earned in the six previous months is added to the bond's principal value, creating a new principal value. Interest is then earned on the new principal. Rates can go up and down, but you must hold the bond for a minimum of one year, and if you cash out between the end of year one and year five, you could lose your prior three months of interest as a penalty. If inflation subsides, you could be staring at minimal interest rates. Zero is the lowest that the rate would go, so if we entered a period of deflation, there wouldn't be a negative interest rate. As always, consult your financial advisor before making any changes to your current portfolio.
Kelsey Arvai, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.
The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kelsey Arvai, MBA, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.