Are I Bonds a Good Investment? (7 Reasons to Buy Now)

What Are I Bonds And Should You Invest In Them?

I bonds are a fixed income investment issued by the United States government.  But are I bonds a good investment?

Let’s discuss the topic.  Also, why I like putting money in I bonds.  And how I bonds can help build your wealth.

No delays. It’s time to dive into today’s topic…

Are I bonds a good investment?Pin

Are I Bonds A Good Investment?

Here are 7 reasons why U.S. I savings bonds are a good investment:

  1. Can’t afford to take a loss on investment
  2. Desire reduced exposure to stocks
  3. Want a larger fixed income portfolio component
  4. Desire tax-advantaged savings outside of retirement accounts
  5. Prefer investing in income-producing assets
  6. Favor conservative investments
  7. Concerned about rising US inflation

With those reasons in mind. Next, let’s define I bonds. And discuss how they work…

Editors note: This previously published article has been recently revised and updated. I wanted to bring it to readers’ attention because of the rising threat of inflation in the U.S. economy.

What Are I Bonds?

An I Bond is a savings certificate issued by the U.S. Government that pays the holder interest.

Characteristics of I Bonds

Here are some of the primary characteristics of I bonds.

Interest Rates For I Bonds

First of all, I Bonds are indexed to inflation so the money you invest today will maintain its purchasing power. Furthermore, I Bonds mature 30 years after the purchase date.  Thus, they will no longer pay interest after 30 years.

Interest on an I Bond is a combination of two rates. A fixed rate and a variable rate.

Fixed-rate.  This rate is calculated at the time of purchase.  It remains the same throughout the life of the I Bond.

At times, the fixed-rate rises along with inflation.  The fixed-rate was 0% for many months after the last two recessions.  This made I bonds less attractive during those times.

Variable-rate.  The variable rate is calculated and changes twice a year.  This rate is based on the consumer price index.  A well-known gauge for inflation in the US economy.

The good thing about I Bonds is the variable rate is never negative. Even during the deflationary period after the great recession, the variable rate did not drop below 0%.

In contrast, the other inflation-protected bonds from the US government. Known as Treasury Inflation-Protected Securities, (TIPS), can have a negative interest rate.

Tax Advantages Of I Bonds

Tax advantages from tax deferral. I Bond interest accrues in your account over the time you hold the bond. You may report the income every year and pay taxes on it. But, this is not a requirement.

Thus, taxes may be deferred until the time when you redeem your bond. Or, when it matures after 30 years.

Tax-deferred savings and investments are a huge part of building wealth.  Because your money can grow so much faster. Without the burden of paying taxes on your interest income every year.

Tax advantages from tax exemption. First of all, state and local income taxes are never due on the interest earned from I Bonds. Furthermore, if you live in a high tax state like Illinois, California, or New York, this is a great deal.

And one good way to take advantage of the tax deferral is to build a bond ladder. Just buy the same amount of I Bonds each year.

Then redeem one year’s worth of bonds each year after you retire.  You will likely be in a lower tax bracket at that time.  Which is good if you have opted to defer taxes on the bond interest.

Limitations Of I Bonds

There are a few rules and limitations about I Bonds. That you should understand before investing.

First of all, you must hold I Bonds for at least one year.

Furthermore, if you redeem your bond after 1 year but prior to 5 years. Then you give up the last 3 months of interest earned. After 5 years, you are free to redeem the bonds without a penalty.

Finally, purchases are limited to a maximum of $10,000 per person per year.

The purchase money can be transferred electronically free of charge from your bank account.  And you can check the value of your I bonds online whenever you choose.

When you are ready to cash out. Just log in to your account. Redeem the I Bond(s) of your choosing. And transfer the money electronically into your bank account.

Next, I have some other good resources for learning about I bonds…

Guide to TreasuryDirect I BondsPin

Other I Bond Resources

Since this is just a brief summary of I Bond characteristics.  You can read more about I Bonds and purchase them from Treasury Direct.

Another great informational resource for I bonds is the website Tipswatch.  As I said before, TIPS stands for Treasury Inflation-Protected Securities.

Tipswatch is a blog written by David Enna.  The blog is meant to explore ideas, benefits, and cautions about TIPS, which David believes are an under-appreciated and under-used investment.  I bonds are one form of TIPS.

Mr. Enna regularly reports on the rates that I bonds are paying.  He offers his opinions on what will happen in the future to I bond rates. And when he thinks it is a good time to buy them. All views are based on his perspective and personal experience with I Bonds.

Next, let’s discuss how I bonds can work for you and your investments…

I Bonds For Fixed Income

I Bonds are one type of fixed income investment. And here is where fixed income investments come into play…

First of all, they do not have the potential for explosive gains.  On the other hand, they can limit one’s potential losses.  It is the classic risk-reward trade-off.  Less risk, less potential financial reward.

So, how much in fixed-income investments should you have in your portfolio?  Well, one quick and dirty rule of thumb is to take your age and subtract it from 100.  Put that percentage in stocks. And put the rest in fixed-income investments.

So if you are 35, you should put (100-35) or 65% of your investment portfolio in stocks.  The remaining 35% should go into fixed-income investments and cash.

You can modify the result of this calculation to suit your personal risk tolerance.  For example, are you 35, but risk-averse?  Then put 60% in stocks and 40% in fixed-income investments.

As a side note, academic research suggests that a 60% stock and 40% fixed income investment asset allocation provides the most risk-adjusted potential return on investment.

U.S. Series I Savings Bonds (I Bonds)

So where do I bonds fit within your fixed-income portfolio allocation?  To answer that question, here are some examples of investments that pay a fixed income.

Cash.  Examples include savings accounts and certificates of deposit.

Bonds. Savings bonds (including I bonds). Other types of US and international government bonds. And bonds issued by corporations and other entities like universities, municipalities, and not-for-profit entities.

Although I bonds are considered a type of bond, they behave more like a cash equivalent in my opinion.

This is because the principle amount you invest in I bonds never changes.  And there is very little risk that the US government will not pay back your original investment.

Finally, I bonds are an investment that does not trade on an open market. Where prices fluctuate and are different than the value of your original purchase.

So, these characteristics seem more like cash to me.  Not liquid cash, but a long term cash-like holding.

My I Bonds

I hold I bonds in my investment portfolio.  My first purchases date back to the early 2000s.

At that time, the fixed interest rate component was 2%.  That fixed rate coupled with today’s variable rate provides a solid, risk-free, and tax-deferred return on investment.

In my opinion, that’s pretty good for an investment that is guaranteed to keep pace with inflation. And has little to no risk of loss.

I bought additional I bonds in more recent years.  The fixed rate at the time was .5%.

I bonds are not going to make you or me rich.  But, at my current stage in life, I prefer to give up some potential investment gains. To protect against potential investment losses. That I may never be able to recover from. Maybe you feel the same?

Should You Buy I Bonds?

Are I bonds right for you?  I can’t answer that. Because everyone’s financial situation is different.   But consider these questions…

  • Do you have some extra money to sock away for at least 1 year that you can’t afford to take a loss on?
  • Are you starting out & saving for a down payment on a home?
  • Do you need to reduce your exposure to stocks?
  • Do you need to add to the fixed income component of your investments?
  • Are you looking to invest in income-producing assets?
  • Would you like investments outside of your retirement accounts that are also tax-advantaged?
  • Are you risk-averse and like conservative investment assets?
  • Do you think US inflation is going to run higher in the future?

If you answered yes to one or more of these questions. Maybe you should invest in I Bonds.

As I said. I don’t know. That’s your decision.

But, if you still need some help deciding. Here is what I think about when making investment decisions. Maybe my thought process will help you.

Whether you are considering I Bonds. Or another investment type.

should I invest in I Bonds?Pin

Investing Objectives

I relate all of my investing decisions back to my investment objectives.  In fact, I have documented my investment objectives.  Doing so is a key investing principle.  And solid investing habits are critical to building your wealth.

How do you know what to invest your money in if you are not clear on your objectives?  And do not know what you are trying to accomplish with your money.

The fact is, you can’t objectively evaluate investment options. When investing without clear objectives.

It’s like anything worth accomplishing in life.  Set some solid objectives. And a plan to achieve them.  Then set off on executing the plan.

But remember…

Investing Objectives Can Change

My investing objectives have changed over time. Maybe you can relate to my story.

In my 20’s I wasn’t really clear on my investing objectives.  That led me to chase the hot performing investment of the moment.  And that is not a productive behavior for building long-term wealth.

You usually get into a hot investment late. And at a high price. Then suffer losses. And, losing money does not make investing fun.

In my early 30’s, my objectives became more clear.  That being the growth of my principle.

So I invested in growth stocks through mutual funds.  I balanced this growth objective with a small allocation to fixed-income investments to reduce volatility.

But in my late 30’s, as I turned up my focus on early retirement. I set my investing objectives mainly around the pursuit of income.

Why income?  Because I wanted to get paid cash from investments in retirement.

Furthermore, I wanted passive income from our investments to cover all our expenses.  And I wanted passive income to grow over time to keep up with inflation.  In this way, our future buying power would not be reduced.

Of course, there are other retirement readiness rules of thumb.  Like the rule where you need 80% of your working income to retire.

Or the 4% rule. Where you are allowed to withdraw 4% annually from your investments to meet your retirement income needs.

My Current Investing Objectives

For your consideration, here are the investing objectives I have used to invest our money over the past 15 plus years.

Objective 1 – Income.  Every investment or savings vehicle I purchase must pay a passive income.  If it doesn’t pay regular and recurring income I won’t buy it.

I like to say, it’s hard to go broke if you are getting paid.  Of course, building wealth is not that easy. But, you get the idea. And note that the income from I Bonds fulfills my investment objective 1.

Objective 2 – Growth of Income.  I prefer that the income from each investment I make will grow over time.  This is not an absolute requirement.  It is a preference.

Because a passive stream of income that grows over time keeps up with inflation.  Another reason why I Bonds fit into my investment strategy.

Also, it is why I really like dividend growth stocks.  They pay current income and that income rises every year.  I sit back and collect my increasing dividends. And do virtually nothing other than putting my money into a dividend growth stock.

Objective 3 – Growth of Original Investment.  Finally, I want my original capital investment to grow over time.  This is sometimes called capital appreciation.  Growth stocks and other growth investments fit this objective. On the other hand, I Bonds do not meet this investment objective.

But again, I prefer dividend growth stocks.  Dividend growth stocks achieve all three of my objectives.  Over the long term, the price per share of a dividend growth stock will usually rise along with the company’s dividend increases.

Finally, over our entire portfolio of investments, I put equal weight on these objectives.  Each individual investment may meet one objective better than another. But over our entire portfolio, it balances out.

Then Why Buy I Bonds And Not 100% Dividend Stocks?

So if dividend growth stocks meet all three of my investing objectives, why not put all of my money in them?  The reason is investment risk.  Dividend growth stocks and the stock market, in general, can be very volatile.

For example, during the 2007 to 2009 bear market, my dividend stock portfolio value dropped by more than 50%.  And I just don’t need that kind of excitement in my life.

Who wants to see their entire wealth cut in half or even more?  It can happen.  Don’t be fooled into thinking it is different now.  It can and probably will happen again.

So underlying my investment objectives is the following philosophy.  I would rather give up some potential upside investment gains in order to protect from significant losses.

Once again, protecting principle is where I Bonds fit with my investment objectives. Maybe I Bonds can fulfill your investment objectives too?

I don’t know. Like I have said. That decision is yours.

Okay. That’s all for today. Thanks for reading! And a brief recap before you go…

7 Reasons Why I Bonds Are A Good Investment

  1. Can’t afford to take a loss on investment
  2. Desire reduced exposure to stocks
  3. Want a larger fixed income portfolio component
  4. Desire tax-advantaged savings outside of retirement accounts
  5. Prefer investing in income-producing assets
  6. Favor conservative investments
  7. Concerned about rising US inflation

More Reading About Investing And Investments

Don’t forget to check out all of our investing and saving articles from Dividends Diversify.

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Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.

Now You Can Decide If I Bonds A Good Investment

2 thoughts on “Are I Bonds a Good Investment? (7 Reasons to Buy Now)”

  1. This is the first time I had anyone express the same feelings I have about Treasury Direct.The website is impossible to use, and it is the primary reason I don’t want to invest with them. Most time, I cannot even find my account or have to call someone up to guide me through it. Pushing a button twice forces you to start all over again!
    Is there another way to buy just paper Ibonds? Such as in a bank?

  2. Stick with your paper bonds. The website is impossible to use and heaven forbid, if you want to hold your assets in a Trust. They make you jump through hoops to get your money out.

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