Bridget Sullivan Mermel CFP(R) CPA
I Bonds News | Fixed Rate Explained | Blooper included!
I Bonds News: I bonds are one of our favorite investments. But now, with the new rates as of November 1st being down over 3% compared to the past, is it too late to invest? Have you missed out?
By the end of the episode, you’ll know what’s changed with I- Bonds, what has actually improved, and why it can still be a smart place to invest some of your money.
Plus, at one point, Bridget has a brain-freeze and forgets the news! John gently tries to cover but ends up with a guffaw.
In the last six months, you’ve gotten over 9% in I Bonds. Recently, Inflation has gone down, however. Before the rate changed, we had a lot of discussions about buying Series I Bonds before the rate changed.
John heard that more I Bonds were bought on the last day than had bought them in the 2 years before (see below)
Unexpectedly, in November, the Treasury added a base rate, or fixed rate of .4% to I Bonds.
We talk about the fixed rate (or base rate) and the variable rates of I bonds. Check out the blooper at: 6:42.
You might think—did I miss the boat? Am I too late? John talks about the break-even point where waiting to have bought might turn out to be a better deal.
Here's an article about the record sales of I Bonds in October: https://www.barrons.com/articles/treasury-i-bond-sales-record-7-billion-october-51667233209
#IBonds #ACPMemberWisdom #Bonds
01:03 What’s changed and what the rates are
05:10 Did I make a mistake buying in Oct?
06:42 Blooper starts! Bridget goofs it up!
08:33 Summary—the correct information!
John's firm website: https://www.trinfin.com
For advisors around the US: https://www.acplanners.org/home
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John: As you know, I bonds are one of our favorite investments, but now with the new rates as of November 1st being down almost 3% compared to the past, is it too late to invest in them? Did you miss the boat? We’re going to talk about that in today’s episode of Friends Talk Financial Planning. And by the end of the episode, you’ll know what’s changed with I bonds, what’s actually improved even though the overall rate has gone down, and why it still could be a smart place for you to invest some of your money. Hi, I’m John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I’m Bridget Sullivan Mermel, and I’ve got a fee-only financial planning practice in Chicago, Illinois. And John, before we start, let’s ask everybody to subscribe. It helps other people find us on YouTube. So, John, I’m really excited about this topic that you brought up. I know our viewers are interested in our opinions about I bonds, and it’s fascinating to find out that something significant has changed. So let’s talk about what’s changed and what the rates are. I think that’s what viewers want to know.
John: Yeah, let’s start with that. In the last six months, we were getting over 9.5% on I bonds. That’s an awesome rate! And the inflation component has sort of ticked down, and we were expecting this. We thought it was going to be a little lower than it was, and it came out right about 6.5% here as of November 1st. A lot of the conversations we had in October before the rate changed were asking, “Does it make sense to get in at that 9.5% rate?” And I think I read that the last day you could really buy those bonds was October 28th. If I remember it right, there were more I bonds bought that day than in the last two years combined, or something crazy.
There was money piling into that deal. So some people got in there and then the rate changed November 1st, but what happened with it was the inflation component of about 6.5%, as expected. What was sort of unexpected, however, is that in I bonds we’ve got that inflation component, but there’s also a base or a fixed component. The last several years it’s been zero on that fixed component, but in November they came out and said, “In addition to the inflation rate of 6.5%, there’s a base rate of 0.4%, so if you were to buy your I bonds today, you’re getting 6.9%, basically—6.5% inflation plus 0.4% for the base rate.
And what’s important about that is that fixed rate stays in place, so for that bond you buy today, that base rate stays in place for as long as you own that bond. For the next 30 years, you get that base rate plus the inflation component, so that’s one of the things that though we can kind of anticipate what we think inflation is going to look like, we can’t anticipate that fixed rate. And so that’s one of the things that’s changed but also sort of improved about I bonds.
Bridget: Yeah, absolutely. It’s important for people to understand that for the fixed rate, you get it for the entire time you have the I bond. So that’s in addition to the rate. Now let’s talk about what’s happened in the past. In the last couple of years, like three years, the fixed rate has been zero, but before that it was not zero.
John: We had a couple of years in there where it was like 0.5% and a little bit lower than that, but just for a short period of time. But then you go back to basically 2008, 2009—to the credit crisis—where after that it was zero for a long time, and then we had a couple of years with a little bit of base rate, and then another few years with zero, and now we’re starting to see some base rate in there, so it’s a fluctuating thing.
But it was interesting, we were talking before we hit record here that people who bought at that time, maybe three or four years ago, with a base rate of 0.5% were getting the 9.5% inflation component plus that base rate. They were getting double digits on this fixed, backed by the government, guaranteed return. So it can turn into a pretty good deal long term as well as the short term.
Bridget: Exactly. So that’s why, even if you missed out or you couldn’t invest your whole $10,000 for the year before October 28th—and we had a whole video on this fact and that you needed to get it in before the last possible date because that was the date that the US. Treasury said that they would honor, that that would be marked at the old rate—but even if you weren’t able to get that for many good reasons, the new rate isn’t quite as flashy, but there’s another part of it that’s got a little bit more appeal.
John: So from an overall standpoint, one of the questions that somebody might have is: Did I miss the boat because I didn't get in on that 9.6% return? And the answer to the short answer is no. And the reason is just what you said, Bridget. If you buy your bond today, you get that base rate that stays around forever. It can be a good deal. I’ve heard some people on the other side say, “Did I make a mistake buying in October versus waiting? I could have gotten that nice base rate.”
And the math on it comes out to be something like after seven or eight years of getting that 0.4% every year before it would be a better deal. So it could turn out to be a better deal to buy them here in November, but I don’t think that that’s a thing where you look back and say, “Geez, I made a mistake.” There is a benefit to short-term guaranteed money for the next six months, like buying a CD if we think of it like that for five or six years and getting a better return on the thing.
When you have money and you’re in a position to invest, it’s sort of like investing in stocks, the best time to do it is typically right now. So I don’t think either side is the right way. It’s not like people made a mistake if they bought in October. I bought early. I don’t feel like that. If you didn’t get it, you didn’t miss the boat; you still have an opportunity. I think that that sort of discussion is really a nonstarter and not worth considering. I’m not sure if you feel the same way or what your thoughts are on that.
Bridget: Well, I agree with you, and I just want to make it clear that if you did buy in October, you’ll get the old rate for October plus the next five months, and then after that you’ll get this rate, so you’ll start getting a fixed rate you just won’t get it immediately, you won’t get it right now.
John: Well, you’ll get the new variable rate, not the fixed rate on that
Bridget: Well, you’ll get the fixed rate when it kicks in.
John: If you buy today, yeah.
Bridget: But even if you bought in October, you’ll get the new fixed rate when it clicks into the next rate.
John: No, it’s only for those on the new issues. That’s going to stay in effect for as long as you have the I bond. If you bought it in October, you’re going to get zero forever.
Bridget: Yeah, you’re right.
John: If you buy in November, you’re going to get that 0.4% forever. And if you buy next May, it might change. This is a great topic.
Bridget: It’s about when you bought it.
John: Yes, it’s about when you bought it, so there are some people who still have rates from the past. These things came out back in the late ‘90s, ‘98 or ‘99. Nobody really cared about it back then, but the base rate back then was something like 3%. There’s a place you can go on treasurydirect.com and see past rates. So those people today are getting that 6.5% plus the 3% today. And this is the thing where people say, “Well, jeez, did I make a mistake?” And the answer is no.
You can buy another one in January if it makes sense, and then you’re getting that base rate, and we just don’t know where those things are going to be so that idea of making a mistake on one side versus the other isn’t helpful. You go, “Listen, hindsight is always 20/20 on these things” If you have money, if it fits in your portfolio, if it fits your goals, buying when you have the ability to do it makes sense, and nothing has changed in that recently.
Bridget: Here good. So it’s kind of embarrassing not to realize that before, but it’s good that people can walk through this with me. So let me just make sure that I’ve got this right. So if I bought in October, I get the 9.6%, and I won’t get the fixed rate unless I buy new I bonds.
John: That’s right.
Bridget: If there’s a fixed rate when I buy more I bonds, then I will get the fixed rate, but I will only get the variable rate when my rate changes after five months.
John: Right. That variable rate is going to adjust every six months from when you bought it. Six months from when you buy an I bond that variable rate changes, but the fixed rate stays the same throughout the bond. That’s exactly right. And I love this discussion because it helps to clarify. Of course, you and I deal with this, and you go, “Oh, yeah, this is really easy.” But this stuff isn’t always simple. These are things that take time to think about it, and you’ve got to be intentional about what you’re doing with this and dig in.
So I really appreciate these discussions because it all sounds the same. In a lot of cases, you go, “Okay.” And we as professionals have to think about this, so hopefully for reviewers these explanations are useful as you go, “Oh, yeah, that’s right. This is how these things work.” And they might give some clarity on what decisions folks might have. In circling back in this, we talk about what’s different in the rates today. First of all, the variable rate has gone down and gone down a lot from over 9% to just over 6%, 6.5% or so.
But think about this, though people might feel bad of the decrease in rate, 6% guaranteed for the next six months is a pretty darn good rate still. What’s changed also, though, is if you buy them today now you get this base rate that plays into it: 0.4%. That stays as long as you own that bond. So you’re getting less interest than if you bought it a month ago, but long term it could end up being a decent deal. And then the question is, well, what do we do when it’s the same advice as we had over the years?
If it makes sense for you to have an I bond, if you’re thinking about buying CDs, if you have a CD coming due, money you’re not going to spend in the next year, buying an I bond, whether it’s today in November, December of 2022, or whether it’s in January because you’ve already bought yours still makes sense to do because based on your situation, and not to not really worry about what the interest rates are going to do next time. That’s not the right question. It’s what makes sense for you as an individual.
Bridget: And the one thing about I bonds I would say is different than CDs is that you do have to keep the money in for a year.
John: Right. You cannot take it out. And you mentioned we’ve had previous episodes on I bonds. Check out the channel. We’ve got a lot of details on how the whole thing works. But that is the caveat: you cannot get to it within the first year. That is absolutely critical to remember.
Bridget: Well, I think it seems like this is a great time to wrap up. John and I are both members of ACP, or the Alliance of Comprehensive Planners. And to introduce myself again, I'm Bridget Sullivan Mermel, and I’ve got a fee-only financial planning practice in Chicago.
John: And I’m John Scherer, I got a fee-only financial planning practice in Middleton, Wisconsin. And before we hang up, don’t forget to hit that subscribe button. Help people find this information on YouTube.
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.