Bridget Sullivan Mermel CFP(R) CPA
Should I buy I Bonds? How do I buy I Bonds?
Updated: Dec 18, 2021
Buying I bonds can be a smart way to keep up with inflation and earn more interest. But who should buy I Bonds? How do you actually go about getting them? These are questions we'll talk about with our special guest, Linda Stratton, CFP(R).
Linda first bought I Bonds in 2005 and she's recommended them to clients, too. She joins Bridget Sullivan CFP(R) CPA and John Scherer CFP(R) in talking about who I bonds work for and how to actually go about buying them.
First, Linda explains who I Bonds are well suited for--those with a cash stash. In other words, they're pretty liquid and have adequate emergency funds. I Bonds are great for a permanent cash savings account, according to Linda.
The main restriction on I Bonds is that you can't liquidate them in the first year. If you redeem them after year one, but before year 5, you lose one quarter's worth of interest, which isn't a big factor.
Because they're gauged for inflation, they typically, but not always, pay higher interest rates than money market accounts. That's one of their main advantages. Because of this feature, they're considered a hedge against inflation.
They're also safe because they're US Government bonds. And the tax on the interest is deferred until you cash them in. They're 30 year bonds, so they stop earning interest after 30 years. For these reasons, they're a great part of a long term savings plan.
To buy them, you must register and buy them through treasurydirect.gov
Other considerations if you're thinking about investing in them--You should be okay on a computer. You won't be bombarded with statements and marketing, so you should be able to remember you have them and communicate their existence to other people, for instance, your spouse, and heirs.
You can assign beneficiaries on the accounts.
The website has security measures, so, once again, a modicum of computer literacy is required to buy them.
Linda also likes this investment because they're less tempting to spend than other forms of saving. She finds it fun to look at them a few times a year and feels delight at how she can set them and forget them (but not totally!)
Bridget and John met Linda through ACP, or the Alliance of Comprehensive Planners. If you like how we talk about a subject other advisors don't talk about and want to find out more, check out acplanners.org
Linda Stratton AIO Financial: https://aiofinancial.com/
US Treasury Direct: https://www.treasurydirect.gov/
John: I Bonds can help offset inflation and rising prices. But who are they really right for, and how do you actually go about buying them? That's going to be our topic on today's episode of Friends Talk Financial Planning, as we talk with Linda Stratton, a financial advisor at AIO Financial in Tucson, Arizona. Hi, I'm John Scherer, and I run Trinity Financial Planning in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel, and I've got a family financial practice in Chicago, Illinois. Oh, hey, John, before we get going with Linda, I want to just mention that we want to ask people to subscribe to Friends Talk Financial Planning. It helps us reach more people and gets us a little more respect with Google. So, Linda, you are my inspiration with I Bonds, or one of my inspirations. When I was interested in them, I started asking you and you've been using them for quite a while. And my question for you is, who are they good for? When do you recommend these? What are the qualities of the people that are going to be successful with these?
Linda: Well, I think the ideal person who would love I Bonds is somebody who has...is sitting on a cash stash, and it's pretty liquid, and is looking for a way to make their cash savings, cash reserves, a little bit more productive. And I say a cash because there are some restrictions on I Bonds. For instance, when you first buy I Bonds, you can't liquidate them for a year.
So, you just have to be cognizant of that. That's the main restriction. If you liquidate them earlier than five years, you sacrifice three months of interest, but that's really a nominal amount. That's not that big a deal. I Bonds are still very liquid, and I consider I Bonds to be part of your cash savings, but they're kind of permanent cash savings. They're emergency funds. Ideally, you won't have an emergency, so you won't be touching the I Bonds.
I find that the advantages of I Bonds are they typically, not always, but typically will pay a higher interest rate than money market funds. I personally have had I Bond since ’05, and over 16 years I've found that to be very true. It's not 100% true, but it's like 95% true. So I Bonds are inflation adjusted US savings bonds. So you have a hedge in your cash stash against inflation by definition.
Also, they are US government bonds, so they're super safe. You don't have to worry about any default risk. People really like that in their cash, and then they are tax deferred. So you don't pay tax on the interest until you redeem the bonds so you can kind of control. If you're in a high tax rate, peak earning years, you just sit on the bonds for years. They have a 30-year duration. They pay the interest for 30 years and then they mature. So they're just a great alternative to a long term cash savings plan, which they're also liquid should you need the cash.
John: Linda, when you said that, it's a 30-year bond, so it stays in place, right? I buy this kind of like a CD or something that would stay in place. And then is there anything to do or it just sort of earns whatever the current interest rate is it from that standpoint anyway? Set it and forget it?
Linda: Exactly. So another limitation is that each Social Security number, each person, can buy a maximum of $10,000 a year. The lowest denomination is $25, so you can buy any amount, you know, any reserve cash, stash it in the I Bonds. Maybe do it year after year. So then they just click away. And the interest, since it's inflation adjusted, the interest rate on the bonds are adjusted May 1 and November 1. I spend, like, the month before, waiting for May 1 or November 1 just because I'm really dying to know what the new interest is going to be, and it's pegged to the CPI index.
So the inflation adjustment happens every six months, but you don't do anything. You just let your bonds just cook for all these years. And then, like my I Bonds that I bought in '05 will expire in 14 years, not expire, but they'll stop earning interest in 14 years. So at that point, I have to redeem them just because there's no point to keeping them anymore, or I could roll them over. But, yeah, they're just very long term, but let them cook, kind of forget about them, but not completely forget about them.
Bridget: Right! They're different from an IRA or a 401K.
Linda: Because you can only buy them through the treasury, and the website is treasurydirect.gov. You would need to establish an account, link the account to your bank or credit union, and that's how you fund the I Bonds, buy the I Bonds. In the future, when you redeem them, they'd go back into that bank or credit union account.
Bridget: So it seems like you've got to be decent on a computer for this to really work for you. Linda: Yes. In the old days, a lot of people remember getting I Bonds as gifts from their, or EE Bonds. We only talk about I Bonds because of the inflation adjusted feature. I so much prefer that to any other type of savings bond, but they're no longer paper bonds. They're all electronic. And this has been true for over ten years. So, yes, you need to open an account and then they have some security protocols, including two factor authentication. In my case, my code goes to my email, and I've got to plug it into the I Bond login, but yes.
Bridget: Yeah. So they're security conscious at US Treasury Direct, because I'm sure a lot of hackers would like to get everybody's information, so that means it's not…it’s just one of those websites that’s kind of a pain. It's not meant to be “save your password, make this easy” type of financial institution. But that's what helps make them safe.
Linda: It makes it safe. I mean, I do feel pretty secure every time I go through the steps to log into the account. And I think there's a kind of a plus side on the hassle. It's not a hassle, but it's harder than logging into my checking account. But the plus side is that you're not inclined to mess with your savings bonds, whereas when you have a chunk of cash in checking, it's like, “What can I do with that?” In other words, where can I spend it? Whereas it's a special event to log into your Treasury Direct account, and then you go, “Oh, Wow! Look what I'm earning! And how much money do I have in there? And great!” It's conducive to the long term keep-the-cash-in-the-I-Bonds plan.
Bridget: So do you think Hallmark is going to start making banners: “Celebrate I Bond Interest!"?
John: Semi-Annual I Bond Interest Day, right?
Linda: Right, right.
John: I thought it was a really important point that you made earlier, Linda, and it kind of ties in with the opposite side of, hey, you sort of put it in there and just let it ride, right? It's not easy to get into, so you're not tempted to go, “Oh, what kind of shiny thing can I buy?” But at the same time, you said earlier that you can access those. They are liquid.
So it sounds like it's sort of one of those things that, in reality it's liquid, but sort of in people's minds you have that envelope type theory. Like, “Oh, it's sitting over here and it’s earning good interest.” Now it's a sort of middle ground, perhaps, between locking things up for real and also just having a completely liquid cash sitting around that you feel you might spend. Is that an accurate description?
Linda: That's true. That's a very good description. Yeah. Because the process of holding the I Bonds, it's just a slightly different process. And it's almost like putting it in a separate box. However, if you feel like, let's say you've got $10,000 of I Bonds in your account. And let's say you say, "Well, I'm having a car repair emergency, I would like to use some of the bonds."
So provided your past the one-year period on your older bonds, you don't have to redeem all $10,000. You can just say, “Oh, I'm going to redeem $1000,” and you will have that money, I believe, the next day when you transfer it to your checking account. And that process is super easy within the Treasury Direct Account.
Bridget: So I've got one more question. And that is about, like, the separate box. It seems like it's something that you still need to be able to remember and communicate to other people so that they know you have them. Like, if you die, you want somebody else to know you got this thing. That's something that's going to be showing up in your email every month.
Bridget: Or that they're going to be sending you a lot of obnoxious marketing emails. You don't want it to become the money in the wall that somebody can find, like, “What's this money doing in the wall or money buried in the garden.” You know?
Linda: It's like money in the computer. Money in the computer. It is. I mean, it’s because it's electronic. And as you said, Bridget, they don't send you statements. You're not getting a report. You have to go in there yourself and see what's going on. So, yes, somewhere in your estate planning file, you need to let your successor know how to get in here. It's also important to title the account.
When you buy the bonds, you can choose how to title them. And if you're married, I recommend really having a joint bond or having your spouse be the beneficiary of the account or somebody being the beneficiary of the account because that can be hard to extract in the case of the owner's death. So that makes it much easier, like as most account titling decisions go. I Bonds are no different.
And they do give you options, multiple options on how to title bonds. And I believe if you have a trust, I think you can title them in the name of the trust, but I'm not positive about that.
Bridget: Awesome! So I think with that, we can wrap this up. I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois. And I want to mention that the way we know Linda is through ACP or the Alliance of Comprehensive Planners. It's a group of tax focused, comprehensive financial planners that serve people all over the country. You can check out acp.org.
John: That's right. So if you enjoy the things we talk about here, do check out acp.org and also as a final reminder, subscribe to Friends Talk Financial Planning and help other people find this good information. Linda, thanks so much for being on. This is really great! Learned a lot today. I appreciate your time.
Linda: It's my pleasure. It was fun. Thank you.
John: Yup. Thanks, you guys.
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.