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  • Bridget Sullivan Mermel CFP(R) CPA

Don't Buy I bonds | Thought You'd Never Hear Us Say It!

Updated: 4 days ago




Don’t Buy I Bonds. Here's 4 reasons why Series I Bonds might NOT be right for you, or right for you now. There are drawbacks to I Bonds that you want to be aware of before you buy them.


By the end of this episode, you’ll know the four reasons you might not want to buy I Bonds.


Check out these videos on Series I Bonds:

What to expect: https://youtu.be/AYr_7L6OaCs

I Bonds to Kids: https://youtu.be/KCOmYjZhUGM

How the latest rate works: https://youtu.be/3_9uVBdrb0A



#acpmemberwisdom #financialplanning #ibonds


00:00 Welcome!

01:10 Reason 1

02:07 Reason 2

04:20 Reason 3

07:03 Reason 4


John's firm website: https://www.trinfin.com


For advisors around the US: https://www.acplanners.org/home


Thanks for watching and please subscribe!


TRANSCRIPT:


Bridget: Don't buy I bonds. I bet that's something that our viewers or some of our viewers can't ever imagine either of us ever saying, but there are instances where buying I bonds does not make sense, and we would not recommend it. We're going to be talking about four of those situations today. Hi, I'm Bridget Sullivan Mermel and I've got a fee-only financial planning practice in Chicago, Illinois.


John: And I'm John Scherer. I have a fee-only financial planning practice in Middleton, Wisconsin. And before we start talking about this topic today, I want to remind everybody to hit that subscribe button. When you subscribe to our channel, it helps other people find our content on YouTube and helps us with the algorithm, so please hit that subscribe button. And then I want to find out why on earth you're talking about not buying I bonds.


Bridget: Well, I bonds are getting a lot of attention and deservedly so, but they can seem like a bright shiny object. And I think all of us are always intrigued by the latest and greatest. And I bonds fit into that category.


John: One of the reasons for that is they're paying a really high interest rate these days, which we've been talking for a while. If you haven't seen some of the past episodes, take a look back. There're several episodes about why we love I bonds. There's a lot of great things, especially getting that high interest. But there are some caveats. What's the first one that you want to talk about, Bridget?


Bridget: The first thing is if you might need the money within a year, because I bonds are tied up, so you don't want to go into them thinking, “I'm going to get this money out within a year.” That's the first reason for not getting I bonds: if you might need to get the money out. CDs are, I would say, generally a better deal because you can break a CD. It's not free, but it's not prohibitively expensive to say, “Hey, I want my money from the CD.”


John: That's a great point. Many people think that if you buy a one-year CD, you can't touch that money for one year. That's not the case. You can. For most CDs, you can take it out at any time and what you lose is the interest for the last three months, so you don't lose any. And they call it a penalty, which I guess it is, but it's not like saying, “Oh, I lose some of my money. There's a surrender charge.”


Yeah, there is, but all you lose is some interest. And I want to be really clear when we talk about these I bonds where you can't take it out within the first year. What we mean by that is literally there is no mechanism. You cannot get it out. It's not like saying, “Oh, you have to pay a penalty, or they don't like it.”


No, your money is locked up for a year, so anything you think you might need within a year as part of your emergency fund and things, you go, “We can't have that,” whereas a CD makes a lot of sense in this situation. Maybe that's a good segue into the second point. Why wouldn't you want to buy an I bond and have this inflation protection on it? If you don't have other emergency funds. This can't be part of your emergency fund, in part for that reason that we just talked about not being able to get into it.


Bridget: Yeah. And a major component of people being happy with their money is having an emergency fund, largely because it serves as a cushion and helps you be able to do other things, like have a higher deductible on your insurance. And just living paycheck to paycheck, which is not having an emergency fund, is correlated with a lot of negatives statistically, but I've also just seen it with my clients. Who yells at me ever in my life? It's the people without emergency funds, because an emergency comes up, they owe some taxes, or they owe more taxes than they think. It's not just our ideas. Research shows that emergency funds help you out a lot.


John: One of the things we talk about with emergency funds (and I think it's similar for you, Bridget) is having 10% of your money in the bank someplace, so you can write a check in case the radiator goes on the car or whatever it is, and then having 20% in the emergency or triple whammy fund, where you go, “It's not just the car. It's the car, and then this happens, and then that happens.” So something like 30% of your income in these cash reserve type things is how we think about it. Is that similar to you?


Bridget: I say at least 10% of your annual income. When you first spoke, you said of your money, so I want to be clear on that.


John: Yeah, thanks for being clear on that.


Bridget: So we take your annual income. If you make $100,000 a year, I want to have $10,000 in just an emergency fund. And that's what I'm talking about for this question: how much should you have in your emergency fund? We also like to have secondary emergency funds in the first year. That's what the less accessible emergency funds are, and that's really what the I bonds are, particularly in the first year, because it's not accessible, so it doesn't really count as part of your emergency fund until year two, and then it's a great part of your emergency fund.


John: That's sort of the dichotomy of these I bonds. In the first year, if you don't have a sufficient emergency fund in those ranges, primary or secondary, you go, “Listen, you can't use this because you can't touch it.” After the first year, though, I know a lot of people started buying I bonds probably a year and a half ago when we first started talking about them. Now it is liquid after that first year, so you're going to get to a point where it can be part of your emergency fund, it's just not when you start off with it.


Bridget: Right, exactly. So that's another reason. The other thing is that we've noticed significant problems with using the US Treasury Direct website. It's antiquated, the I bond started in something like 2001 or 2005.


John: I think maybe even before that.


Bridget: That's when they set up the system. And so, you need to have like your notebook at hand, so you remember all the passwords and what do you even do with passwords? And you have to remember how to log in.


John: Well, when you put in your password you don't type in the password, instead they got this typewriter thing, at least last time I logged in, and you have to click on the typewriter deal to put in the password. The third thing of why you wouldn’t do it is that it takes some technicality to get it done. It's not necessarily simple like a lot of other things. And so, if futzing with the technology and the logins and the system from the 1890…😊 I mean the early 2000s is not your preference, this may not be best for you.


And nobody cared about it for a long time. Inflation hasn't been a big deal for the better part of 20 years, so nobody is really excited about I bonds now. Now inflation has ramped up the last little bit and suddenly, holy cow, this makes a difference. And there was no reason to put resources into this website to buy I bonds, and now there is, but you can't buy them.


Bridget: Right.


John: You can't go to your Schwab account, to your Fidelity account to buy I bonds, but you can buy other type of treasury bills and treasury bonds and other things. You can't buy these I bonds through your brokerage account, you've got to go to Treasury Direct, and that system can be just kind of clunky, so that could be another reason not to buy them. And they can tell you, “We can't handle your bank. You have to go get this certified thing.”


We've had viewers that have told us that, but then on the other hand, we've also had viewers say, “I got it done in ten minutes, what are you even talking about? Yeah, sure, it's like a small pain, but who cares?” And then I had one person say, “Yeah, they gave me the message that I had to go to my bank and have this thing signed, so I just tried a different account and that worked.” Again, it's not as easy as many other things, honestly, but it's not prohibitively difficult either.


John: It’s not like you need to know computer programming to do it, but it also could be a little more complicated.


Bridget: Absolutely. And there's another element of this Treasury Direct website is that it adds a layer of complexity to your life that you may or may not want. So there're some times in your life where you want to keep things as simple and streamlined as possible. You don't want to keep track of anything else, so opening another account, in general, is drag. And I know that's one of the things when people are coming to us as clients that we try to help them with, like consolidating their 401Ks and just consolidate things.

John: Simplify.


Bridget: So we're telling people that this is a little more complicated. If you hate complexity, you have no time to do anything, and there're times in a lot of people's lives that are like that, then again, not the best time for I bonds. So this is my third point, second part of it.


John: Okay, you're adding complexity, and then why would you want it? But with things the way they have been recently, you can earn returns of interest of 50% to 100% more than what you can get in other similar places. Right?


Bridget: Yeah. And more than the stock market.


John: Right. I want to make sure we hit on our fourth point before we wrap things up here. Where does it not make sense to do I bonds? If you haven't maxed out your retirement plan through work, you haven't maxed out your Roth IRA contributions—it's not a hard and fast rule, in my mind, anyway, but it's not a slam dunk—should you not do I bonds?


I don't know, doing the retirement plans through work, doing the Roth IRAs often makes more sense than having some extra interest on your $10,000 I bond purchase if that's what you do. So that's the other place. If you're not maxing those retirement plan things. really think hard about doing those things first. That might be and often is the best way to do it. Of course, your mileage may vary.


Bridget: Exactly. So it's a great time to wrap it up. I’m Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.


John: And I'm John Scherer. I have a fee-only financial planning practice in Middleton, Wisconsin. Both Bridget and I are taking new clients at our practices, so we'd love to have you reach out, but we're also members of the Alliance of Comprehensive Planners, and if you like the way that we think and are looking for someone in your area, check out acplanners.org to find someone who thinks in a similar way that we do.


Bridget: And don’t forget. Please subscribe.


At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.


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