Reasons to Sell I Bonds: The new rate announced with Series I Bonds is 4.30%, which includes a .9% fixed rate. With the new interest rate announced that is lower than the interest rate has been recently on I Bonds, you may be asking yourself--when is it time to sell your I bond?
Bridget Sullivan Mermel and John Scherer talk through how to approach the decision. There are more factors to consider than you may think! Savings Bond Series I Bonds have been great investments for the past several years. They have earned a high interest rate and are backed by the US government so are considered among the safest investments available.
However, because inflation is going down, the party may be over for Series IBonds. Or maybe I bonds party on in your portfolio!
Here’s a video about how interest works on I bonds: https://youtu.be/A0FHc-9syaU
Here’s a video on bond and CD ladders: https://youtu.be/9TjD_b7OVvk
Here’s a video about investing for higher interest rate: https://youtu.be/qAu0mv9blEo
John's firm website: https://www.trinfin.com
For advisors around the US: https://www.acplanners.org/home
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TRANSCRIPT:
John: Now that interest rates on I bonds have dropped, does that mean that you should cash in some of the ones you've already bought? That's what we're going to talk about on today's episode of Friends Talk Financial Planning. 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 go any further, let's ask people to subscribe. Please hit that subscribe button. And please hit a like, too. That helps us reach other people, and other people find our content. Okay, John, I'm really excited about this topic, because I think a lot of people are worrying about it. The interest rates on I bonds have gone down, so people think, should I sell?
John: Right. And it's interesting that going back a couple of years now, when we first started talking about I bonds, the rates were sky high. It made a ton of sense to buy I bonds, and now we're in a position where things like CDs, treasury bills, and other short-term instruments that have some of those guarantees, like I bonds do, are getting the same or even better rates. So what do you do with the ones you bought? How do you make that decision now?
And for me anyway, I think it really comes back to how we make a lot of our financial decisions: not trying to figure out what action to take, but trying to figure out what our goals are. First ask, “What are we trying to accomplish with this?” And then let the actions follow from there. And what I mean by that is there're two reasons, I think, why people purchased I bonds. One is if for somebody who is just looking for interest rate arbitrage.
Bridget: Arbitrage…
John: Yeah, fancy word. You can sound cool when you talk to your friends and say, “I did interest rate arbitrage.” Interest rates were higher on I bonds. Here's a place to put some money where you're going to earn a little bit more than what you can get in the bank or CDs. And if that was your only goal, now you take a look at it and you go, “Okay, I bonds are less appealing these days than they were even a year ago.” On the other side of it, we've got a lot of folks who view I bonds as inflation bonds, a way to protect against inflation.
And if protecting yourself against inflation was the real driving force for you, and if you were in a position where you think, “Golly, it really freaks me out as we see prices that have gone up so much over the last couple of years. I want to have some of that cash reserve money tied with inflation.” That's a different point. Maybe the exact interest rate you're getting right now is not the driving factor, because having a pot of money that's going to keep you ahead of inflation is more important than what interest rate you're getting today.
Bridget: Yeah. And I think that it’s important to think through the total implications of selling I bonds. First of all, let's talk about some pragmatic issues. You have to have held an I bond for a year before you sell it or cash it in.
John: Right. Great point. If you haven't even held it for a year, you have no choice.
Bridget: Exactly. So you have to have held it for a year, and if you haven't held it for five years, then you lose the last quarter—a quarter being three months of interest—when you sell. The other thing is that you don't want to get ahead of yourself. The interest rate, even if you're just buying it for interest rate—if arbitrage was your point—you want to hold on to that thing as long as you're getting a higher interest rate.
John: Right.
Bridget: And so, your decision should depend in part on when you bought the I bonds. For example, if you bought the I bonds on the last possible day of the high interest rate, then you get that for the next six months. And so, you might think, “Oh, I just heard the interest rates have gone down.” But when you actually purchased the I bond it was with the higher rate, so you might as well wait those three to five months. All this is to say that it’s important to ask, “What interest rate am I actually getting?”
John: Right. “What interest rate AM I getting?” not just what I heard in the news.
Bridget: Exactly. You might want to just wait a bit. Even if you are going to end up selling them, you might want to hold out until I get to the end of this interest rate.
John: That's a really super point. It's not just what the current prevailing rate is, it’s what your rate is. The other thing in thinking about the whole picture is if you've owned your I bond for some period of time, one of the great things about I bonds is that the interest grows tax deferred. So you don't have to pay any taxes on that. When you do sell an I bond or cash it in, however, you have to pay taxes on that built up gain. If you've owned it for just over a year or two years, there’s probably not a ton of interest built up.
If you've owned an I bond for ten years, maybe there's a pretty big tax bill that's coming. And just because the interest rate now may be lower than what you can get other places when you factor in the taxes in your personal situation—I'm still working, and in five years I'm not going to be working, and maybe I'll be in a lower tax bracket—it might not be the best decision to sell your I bonds. Applying that personal side of things and being mindful of the taxes is a big part of that decision, too.
Bridget: Yeah, I think that's a really good point. Another thing is that right now you've got this whole I bonds set up with the inflation protection. And so, say you had $40,000 that you took out but then the whole environment turns out to be similar to what it has been.
John: It circles back.
Bridget: Yeah, exactly. You can't put that money back in. You have got to start again from your initial investments. So it's not like once you take the money out and you pay the tax, et cetera, then you can get it back in. You have to start again.
John: And that’s because there's a limit on I bonds. You can only buy $10,000 per person per year. If you had $50,000 in a CD, and now your spouse says, “I'm going to move money out of this CD and put it into this other investment because it's better interest.” If the winds change, you can just take the money out of the other investment and put it back into a CD. You can't do that with I bonds.
Bridget: Right.
John: If I take out $50,000, and now I want to go back, I can only do it in chunks of $10,000. So you've got some limitations there, and I think for that reason I tend to be slow to sell I bonds. It’s not that I don't think people should, but I tend to look for a reason and ask, “Do we need to sell? Is it reasonable to leave them in there longer?” That’s sort of the default that I've taken with it.
Bridget: And I’ve actually grown fond of I bonds now, because I think they're a really nice tool to hedge against inflation, but also, they generally get close to the prevailing rate anyway. Usually, it's like an investment that's got an extra bonus on it with the inflation hedge. And so especially in situations where people are nearing retirement—when we generally set up CD ladders or bond ladders—it's kind of a nice alternative to a CD ladder, or in addition to a CD ladder. It basically gives you a couple of rungs.
John: The other thing that we talk about a lot with our clients is looking at the actual dollars that we're talking about. If you have $50,000-$100,000, maybe you've added money over a period of years, 1% is a pretty significant amount. If there's a 1% difference in interest rates, and I've got a $10,000 I bond that 1% equals $100 a year of gain or loss sort of a thing. And again, if you want to give me $100, I'll take it, but how much are we actually getting?
If you can get an extra 1% in a CD, or another investment, what are you really getting? And then what are you giving up on the other side because you can't just turn around and buy them back again if the winds shift with inflation. And so, looking at the dollars is really important. If you've got bigger dollars in there, it's a bigger decision. If you have fewer dollars in there, maybe it's a smaller decision than what it might feel like. We all want to get the best returns and the best gains on things, but looking at what it means in dollar terms can be a helpful tool.
Bridget: Yeah, and it's hard to predict the future. The reason that I bonds went out of favor, or just under the radar for so long, is because we had very low inflation or we even had some deflationary periods, which is not normal. Usually there's some inflation, and I think that even the Fed is really aiming for 2% inflation. A little bit of inflation shows that things are chugging along and growing. So having that as one of the tools makes a lot of sense to me.
But maybe if you're the person that bought it saying, “Oh, no, I love high interest rates. I get lot of satisfaction out of high interest rates. The higher the better. And I'm going to use this money either to fund my wedding, to buy my house or something else, or I'm going to then put it in Treasuries and then after Treasuries aren't the highest thing anymore, then I'll put it in the next investment that's paying a little bit more. And I have a history of putting money different banks, all because they have higher interest.” Maybe you love the interest rate game. Great. Have at it. Sell if that is what you prefer.
John: So long as you look at all the details. And I think the big thing to circle back on is asking, “What are your goals?” There're different things that appeal to different people. And oftentimes the question is, “What should I do?” But before you know what you should do, you should figure out what you're trying to get to and then back into the idea of what is there to do from that standpoint.
Bridget: With that is 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've got a fee-only financial planning practice in Middleton, Wisconsin. And both Bridget and I are taking on new clients at our firms. But if you're looking for an advisor in your area, we're also members of the Alliance of Comprehensive Planners. If you want to find somebody who thinks like us, but maybe is more local to you, you can check out acplanners.org.
Bridget: And please hit the subscribe button.
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.