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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Using I Bonds New Fixed Rate to Optimize Earnings



I Bonds New Fixed Rate is about double what it was before--up to .9% of your investment. In this video we talk through the strategies that are in play now because of this new, higher fixed rate.


Just a couple of years ago, the 10 year Treasury was only paying about 1% interest. Today, if you buy a new I bond between May 1 & Oct 31, 2023 you’ll get a guaranteed minimum rate of 0.9% for the life of the bond (up to 30 years) PLUS you’ll get an inflation component as well. Too good to be true?


- New rate was announced on May 1

- The current 0.9% fixed rate is the highest in the 31 I bond rate changes since Nov 2007

- My I bond purchased in January 2022 is getting 3.4%, the new one I’m going to buy this summer will be getting 4.3% (3.4% inflation plus 0.9% fixed)


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


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


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TRANSCRIPT:


John: I bond rates reset on May 1st this year as they do every year, but this year there were some significant changes. What do you need to know about these changes and what actions should you think about taking? 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. John, I'm totally psyched to talk about this, but before we do, let's talk about subscribing. If you hit subscribe, it helps us get more viewers, spread the message, and increase our credibility with YouTube. Okay, so John, let's talk I bonds. What are your thoughts? Why don't you give us the full report?


John: Yeah. I want to start with a little bit of background, Bridget. Every May 1st and November 1st I bond rates get reset. And we've been talking about those a lot on the show. We love I bonds, at least recently, because I bonds adjust for inflation. There're two components to I bonds. There's a fixed and an inflation component. And that inflation component has been paying some significant interest the last few years. A couple of years ago it was as high as 9%. Recently it was at about 6.5% annualized.


With inflation trending down, however, when the new rates came out May 1st, the variable or the inflation-based rate is now 3.4%. But the one thing that got added in, and we talked about it on an episode here a few weeks ago, is a fixed component that had been at 0.4% but now has more than doubled. If you buy a new I bond, the fixed component is 0.9% and then that inflation component is 3.4%, so it’s actually paying 4.3%, which is really competitive with some other things like CDs.


What I think is really interesting about this and potentially useful is that the 0.9% fixed rate is set for the life of the bond, for as long as you keep it up to 30 years. And if you think about this, Bridget, it was just a couple of years ago when the ten-year treasury bill was paying something around 1%, where you lock your money away for a secure return of 1%. Today we're in a position with these I bonds where we're getting almost 1% on a fixed rate. Plus, if we have inflation going up and down again, we get an inflation component. So I think it's really compelling to at least consider.


Bridget: I really love the explanation of it, because I bonds get a lot of attention when inflation is high, for instance, a couple of years ago when they were paying 9%. Okay, so then it's pretty obvious what the advantage is. But this 0.9%, for as long as you keep it up to 30 years, can also have a significant impact, because we think that interest rates will probably go down. It could return to what we've seen recently with 0% inflation or maybe even a little deflation. That's a compelling reason for these instruments.


The other thing that I like about them is that I feel like they're great for people near retirement. So it's not just about the interest rate, but it's also about a specific issue. If inflation rises before you have retired, that can make people feel really uneasy and less sure of retiring, because they're thinking, “Okay, once I take my earnings off the table, then that means I've got to live with this stuff.” And if your expenses are going up just because of inflation, it feels good to have one investment at least that's just tied to the inflation rate, and then you might get something extra too.


John: Yeah, absolutely. I love how you described it. A couple of years ago, as we started talking about this, it was sort of a no brainer decision. It was basically free money. We've talked in the past about the restrictions, like you can't get to it for a year, et cetera. But at that point we said, “Everything else is paying 2%, 3%, or 4%. We're getting 9%. There's little or no reason not to do it if you fit the profile.” Today, it's a little bit different. For example, I can buy a CD that's paying 4%, or I can buy these I bonds. It's not quite as self-evident. It's not this quick easy money sort of a thing, but it is this strategic thing that you were talking about. Where do I want to be positioned long term?

If I want to have a fixed income as I get closer to retirement, what does that mean for me? And golly, I might want to have this fixed rate that stays in effect over time. I looked it up as I was thinking about our discussion today and the last time the fixed rate in I bonds was this high was 2007, when it was over 1%. That was 16 years ago in the middle of the credit crisis, so we haven't seen this fixed rate for a long time. And who knows, maybe in November, there will be a higher fixed rate. We don't know what the future is going to hold, but it certainly is appealing to think about that strategically for our viewers when they ask, “As I get closer to retirement, what makes sense?”


I'm a little bit farther away from retirement than you are, but one of the things I'm thinking about this year is: I've kind of got enough of the fixed income investments. I don't really need to buy more I bonds to fit my situation, but I've got some that we bought last year and the year before and the year before that, and I'm taking a look at those right now and saying, “Listen, I bought those two years ago or a year ago, and my fixed rate is zero, so when this new rate gets set here, I'm getting 3.4%. Does it make sense for me to take that out, sell it, pay the taxes on the gains in there, and then reinvest and buy a new one?


I can only do it for $10,000, but do I buy a new one? I would get this higher rate, and strategically I'm planning to keep that for the next 3, 5, 7, 10 years, and I would get that guaranteed rate plus whatever inflation comes in as opposed to now just getting the inflation factor in it.” And so, we talk on the show about if you have new money, what sorts of decisions make sense, but in a situation like mine, where I don't really need any more in this spot, but maybe I need to rejigger what I've done in the past and bring some of it forward to get that new rate. I think it's something that people should really think about.


Bridget: One of the things I really like about I bonds is how you can decide when you want to pay the tax on it. You pay the tax on it when you take the money out. And so, if I can handle paying the tax on it now, then I could reset it so that it's going to be 0.9%, especially if I'm thinking about holding onto it for the long-term. This strategy says, “Okay, if I'm going to hold on to this until I retire, maybe I should think about doing that.” I really like that strategy.


John: And it reminds me, as you're describing that strategy, how so much of this is individualized to our own situation, to your own situation as a viewer. And again, a couple of years ago, when you had money in the bank and you were not going to need it for a year, you were getting a slam dunk with I bonds. It was less strategic, and more like saying, “If you have extra cash, why not get this money now?” Right now, however, we're considering what makes sense for specific situations. As a viewer, if you ask, “Should I do this?”


Well, it sort of depends. Where are you? Do you need to put more money into fixed income, or do you have things that are already in fixed income that you might like to add to I bonds. Awesome. You can buy a new one today and get that 0.9% fixed rate plus inflation. Do you have some I bonds and go, “Listen, I don't really need any more, but I've got these old ones, maybe I should sell and re-purchase.” Maybe that makes sense for you. There're so many ways, and it just depends on your taxes, as you were talking, so it's just different for each of us.


Bridget: And when you go into the US treasury direct site, you can pick the I bonds that you want to sell. And we had another point. We don't usually care too much about timing, but in this case, it makes sense to see when the last rate ends for you. When you buy an I bond, the interest rate starts ticking, and you get that for the next six months. So if you buy the I bond on the last day of when it was paying 9%, then you get that for the next six months. It doesn't automatically switch like most accounts do. So then you'd want to look at exactly when your higher interest rate stops and when your lower interest rate starts and wait to buy it until the new interest rate starts.


John: Yeah, that's a super point. And again, we've discussed this on previous episodes, but in my personal situation, I bought an I bond a year ago in February. And we just talked about how rates are now at 3.4%. Well, my rate changes to 3.4% later, because I bought it in February. I'm still getting the 6.5%, which was for the last rate change, until August. In August, my rate will change to the current rate, which will be 3.4%. That’s a super point. I'm not going to look to make a change now necessarily.


I'm going to wait until after that rate goes down to 3.4% to make my decision. So it's a timing thing, and I really appreciate that you brought that up. The rate changes May 1st, but then it's based on your anniversary, your six-month anniversary from when you purchased it. So don't just rush out there and say, “Hey, rates went down!” and make a change. Your rate is likely or at least possibly still at 6.5% right now. And I think maybe that's a good place to wrap things up. 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 members of ACP, or the Alliance of Comprehensive Planners, which is a group of like-minded planners all over the country. If you're looking for a planner, you can reach out to John or me, or if you want to find a local advisor, 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.

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