In this engaging episode of Friends Talk Financial Planning, hosts John and Bridget delve into the intricacies of selling I bonds, providing listeners with valuable insights and practical tips to navigate this financial terrain. With a dynamic and conversational approach, they make the complex world of I bonds accessible to both seasoned investors and those new to financial planning.
The hosts kick off the episode by breaking down the current rates of I bonds, offering a comprehensive overview of the market dynamics. Listeners are kept abreast of the latest financial trends, ensuring they are well-informed to make strategic decisions regarding their investments.
Throughout the discussion, John and Bridget highlight the various benefits associated with selling and buying I bonds. They elucidate on the potential advantages these bonds bring to an investment portfolio, such as their role in providing a stable and inflation-protected source of income. Additionally, the hosts explore the tax implications and considerations that come with selling I bonds, equipping their audience with the knowledge needed to optimize their financial strategies.
Listeners are treated to the hosts' personal experiences and strategies when it comes to dealing with I bonds. John shares his insights on timing and market conditions, while Bridget provides a perspective on risk management and diversification. The candid nature of their discussion creates a relatable atmosphere, making complex financial concepts more approachable for the audience.
Throughout the episode, practical tips and actionable advice are woven into the conversation, empowering listeners to make informed decisions about their own financial portfolios. Whether it's understanding the optimal selling point for I bonds or navigating potential challenges, John and Bridget provide a roadmap for success in the realm of financial planning.
As the episode unfolds, the hosts also address common misconceptions and answer listener questions, fostering a sense of community engagement. By the end of the episode, listeners are not only well-versed in the intricacies of selling I bonds but also equipped with the confidence to apply this knowledge to their unique financial situations.
Friends Talk Financial Planning continues to be a go-to resource for anyone seeking practical, relevant, and relatable advice on navigating the complexities of the financial world. John and Bridget's expertise, combined with their personable approach, make this episode a must-listen for anyone looking to enhance their financial literacy and make informed decisions about their investments.
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TRANSCRIPT:
John: Should I sell my I bonds? On today's episode of Friends Talk Financial Planning, we're going to talk about this, perhaps heresy about selling I bonds instead of buying them, why you might consider buying them or selling them for yourself today, and what I'm planning to do with my I bonds. 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 get into buying and selling and strategies for I bonds, please subscribe. It helps us with YouTube. So, John, what's the latest?
John: Selling I bonds. Are we even allowed to say this? We love I bonds. They've been a really great thing. But what’s on my mind—and I'm interested to hear your thoughts on it, Bridget—is that as of November 1, 2023, the new I bond rates came out. They're just about the same as the old I bond rates, but the new I bonds, if we buy them now, have a guaranteed component. I bonds always have a guaranteed rate, and then the inflation rate.
For a long time, the guaranteed rate was zero. And then you got whatever inflation was. And that was the case back when we were getting 9% and 7%. It was all the inflation component. Well, the last couple of times, they've had a little bit of the guaranteed rate and then a little bit more. And now buying I bonds, there's a guaranteed rate of 1.3% plus the inflation rate, which is basically one 3.4%. And if I were to take and sell my current I bonds, they always catch up.
So my current I bonds are getting that 3.4% inflation rate. If I sell those and buy a new one, I'm getting the 3.4% inflation rate plus the 1.3% base rate, and that base rate stays for all 30 years for as long as I own that I bond, so that's what I'm thinking about right now: cash out the one that doesn't have the base and pick up the new one. And so, that's what I want to talk about today. That's what I'm planning to do here coming up in December.
Bridget: So let's drill down on the strategy a little bit. First of all, when you sell an I bond, you're going to pay tax, so you have to be okay with saying, “I'm going to pay the tax on the returns for however long I've had the I bond.” And that would be in 2023, right?
John: Yes, that's right. And I bought these I bonds on December 1, 2021, so it'll be two years coming up here.
Bridget: Okay, so if you thought, “Oh, this would be a bad year to pay the tax,” or “I just want to pay the tax later,” you could wait until January 3, and you wouldn't have to pay tax on it until April 2025. That seems far way, but if you really wanted to defer the tax, you could wait until then to do this.
John: Right. And the other thing is, if I hadn't bought them at least a year ago, I couldn't even make this change in the first place. You have to wait for a full year to do that. So in my circumstance, I haven't bought I bonds yet this year in 23. That's one thing. If I had already bought them, I'd have to wait. And I don't want to put or don't need to put any more money into the bond side of my portfolio. I don't need more I bonds necessarily. I just want a better rate if I can, so that's where the motivation comes from me.
Bridget: Right. This is all about playing the rates.
John: Exactly.
Bridget: So you want to get the better rate. And so, you're saying, “Okay, let me get this fixed rate,” and that lasts for 30 years. The other thing is this fixed rate is at a 20-year high. It’s not an all-time high, I don't think, but it’s something like a 20-year high, so that means it might not get better. And actually, it probably won’t get better than this fixed rate, at least for a while, because right now it seems like inflation and interest rates might be leveling off, or maybe heading down.
John: And think about this, Bridget. Two years ago, the ten-year treasury rate was about 1.25%, 1.5%, something like that. Today, that's the base rate plus the inflation rate for I bonds. Again, as you said, maybe things are flattening out with interest rates and inflation. It certainly seems like that might be the case. Who knows? It might come back around.
But the idea of a couple of years ago getting 1.3%, that was what the long-term treasury bond was paying. And now we're getting that plus the inflation component. It seems like it could be a decent deal. If that base rate does go up more, in a couple of years we can go and do the same thing and make this exchange and get the newer, higher rate. So you're not locked in, other than that first year you can't sell, but after that, we still have flexibility, right?
Bridget: Yeah. And so, let's drill down on the timing of it a little bit. We already talked about how you might want to wait until 2024 for a tax reason or because you can't get more I bonds yet. Those are two good reasons to wait till 2024. But there're other reasons that you might want to do it right away, but there’s still a question of just exactly how to time it because you could try to make a little bit more money based on how you time this. And this is if you haven't bought I bonds yet this year, and if you want and can do it this year.
John: Well, one of the key things that we haven't brought up yet on this episode is that when you do sell I bonds, in the first five years, you give up one quarter's worth of interest,
Bridget: One quarter being three months.
John: Yeah, exactly. Three months of interest. So think about what's gone on recently. 18 months ago, two years ago, I bonds had been paying 9%, and then at 7%. And then about a year ago at this time was in the 6% range. And then starting May 1, it changed down to somewhere in the 3% range. I think I'm getting 3.38% or something like that on my I bond right now. And so, for example, let’s say I bought my I bonds on December 1, so the rate goes from December 1 until June 1 with a 6.5% rate, then on June 1, it changes. Well, if I sell my I bond in July, it looks back and I give back three months of interest.
I'm giving back two months of that annualized six plus percent interest rate. I want to keep that stuff even though the rate went down, so I've got to wait for June, July, August, and September would have been the first time I would want to sell this, because then what I'd be giving up is that 4% rate. It makes it easy to do math if you give up one quarter of 4%, that's 1% that it would cost in interest. So you need to be really careful on when you sell. You don't want to give up interest. If you bought I bonds late in the cycle, you might not want to sell your I bond in December, because you might still be getting that 6% rate or the lookback of three months might be eating up some of that high interest rate.
What I want to give up is some of the around 4% interest rate. I'm in a position where, starting in September, whatever I would have given up is at that lower rate, a little less than 4%, so as I look at this decision now, I want to do it in December so that what I'm going to give up for three months’ worth of interest will effectively be 1% worth of interest. Why would I do this? If I can turn around and buy a new I bond and I have the same current inflation rate plus that 1.3% base, I'm paying 1% to get out, but I'm getting 1.3% to get in.
So for the first year, I'm ahead by 0.3%. And after that, I'm ahead by 1.3%. I get that whole extra amount for the rest of the time I choose to own that I bond. That was some of the math that I did. And when you’re trying to decide if it makes sense, it’s important to know that you will lose some interest, and then make sure you’re losing the smallest amount of interest and not losing any of that great 6% rate that we were getting last year.
Bridget: And I can speak from experience, because I sold some I bonds this year. Who remembers what month they bought the I bonds in or what interest rate they were actually getting? If you log into the site, you can see what interest your I bonds are paying and when you bought it, and if you're thinking about making this move, you're going to need to engage with the site anyway. And you can look at the list that we'll link to in this episode about the ideal time if you're thinking about selling to get a better long-term rate. And so, it shows if you bought your I bond here, think about selling it here. This is just for the strategy.
John: Yeah. That's great. And the other thing that I think about in addition to talking about the buying and selling side of things is that with I bonds you get credited interest on the first of the month after holding it for the whole month. When I bought mine and went onto the website, I kind of forgot. When I bought them, it was a couple of years back on December 1. That wasn't an awesome decision back in 2021, because if I had bought it towards the end of the month, I'd still get the full month's worth of interest.
Similar thing on selling. I don't want to sell November 30 because then I don't get the full month's worth of interest. I want to sell December 2 or 3, because then I get that full month of November’s worth of interest. Not that we're going to break the bank with that, but why give up free money, right? If you see a quarter on the sidewalk, you should bend over and pick it up. I’m not going to run a mile to pick up a quarter, but if it's right there, golly, why not pick it up? When I bought these I bonds, I just didn't think about the timing, so I just want to remind viewers to think about that timing even within the month.
Bridget: And it gets into the level of complexity with which you like to handle your finances. If you just like to keep this as easy as possible, then I would say don't really worry about these little timing things. But if you're saying, “I like to squeeze every dime I can out of these babies,” then we're saying buy at the end of the month and sell at the beginning of the month. And I would say give yourself a little cushion.
For example, I wouldn't buy exactly on the exact last day of the month. I would buy on the 25th of the month and I would sell on the 3rd of the month because I've just seen enough things in the financial industry that don't run perfectly like clockwork. When I'm trying to run like clockwork, they're not, so I recommend that you give a little bit of cushion on both sides. The other thing I just want to mention is that I recently did sell some I bonds.
First of all, it was easy to do. I did log in about a week ahead of time to just make sure that I was squared away with which account it was going to go into. I recently had some fraud on my account, so I knew I needed to change my checking account number and I wanted to make sure I had enough time. I wasn't trying to do that on the same day just for security reasons, and I didn't know how hard it would be. But actually, it was easy to change. And then when I did sell them, it was fast. I got the money fast. It was like a day or two.
John: Cool.
Bridget: I just want to mention that. So that helps with all these timing issues that we're talking about too. Make sure you set it up, but then it should be fast.
John: Yeah, that's great. Well, hey, I think that's a great place to wrap things up here. If you have some I bonds that have that 0% base rate, you might consider if it makes sense for you to make an exchange like we're talking about here today. And again, I'm John Scherer, 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. John and I are both proud members of ACP, or the Alliance of Comprehensive Planners, which is a non-profit association of planners who think like we do about tax focused holistic financial planning. We're both taking clients, but if you're looking for an advisor in your area, you can check out acplanners.org.
John: And don't forget to hit that 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.