Updated 11/7/2022. *This is not an official recommendation for you as your situation is unknown to me. This is a summary based on the nuanced discussion of this episode. Consult your financial advisor for advice on your specific situation. Answers include Probably Yes, Possibly Yes, Maybe, Possibly No, Probably No, and Almost Certainly No.
The rates of this article were updated on 11/7/2022 to reflect the new rates. However, the commentary has not been updated and may be outdated.
Series I Bonds are back in the news. With inflation raging, the rates are back up. You can currently get 6.89% on an I Bond. Eighteen months ago, the rate was 1.68%. In this episode, we will cover:
What are Series I Bonds?
Series I Bonds or “I Bonds” are 30-year bonds issued by the US Federal Government through their Treasury Direct program. They are available for electronic or paper purchase at TreasuryDirect.gov. You cannot get them in your existing brokerage or bank accounts.
I Bonds earn interest as a combination of a fixed rate and an inflation rate. That is where the “I” comes from.
The fixed rate is set for the life of the 30-year bond when you purchase it, and the inflation rate adjusts twice a year based on current inflation. Both adjust on May 1st (running May-October), and November 1st (running November-April). When the inflation rate adjusts, you get the new inflation rate on top of your fixed rate when you bought the bond.
I Bonds earn interest monthly and accrues it inside the bond until you cash it out or it matures. Interest compounds semiannually. Every six months from your issue date, the bond adds the accrued interest to the principal, and new interest accrues on that amount.
The bond will automatically mature in thirty years, and you’ll get the value paid out to you. You can cash it out anytime after 12 months. If you cash it out before it is five years old, you will forfeit the last three months of interest accrued.
If you buy them electronically (the only way you should), you can buy any amount between $25 and $10,000 worth in each calendar year. You cannot buy more than that in a year. That is per Social Security Number.
Series I Bond interest is federally taxable but is exempt from state and local income taxes.
Series I Bond Rates
The fixed rate has been less than 2% since November of 2002.
The inflation rate has been less than 2% for many of the six-month periods between 1998 and 2021. For those 46 periods from 1998 through 2020, the average combined rate at issue was 3.06%. You can see all the historical rates at the bottom of the blog.
Then 2021 happened and rates started going up with inflation.
The rates from May through October 2022 were:
Any bonds purchased between May and October 2022 will earn that annual rate on a monthly basis. The new interest rates declared on November 1st, 2022 adjusted that rate.
The rates from November 2022 through April 2023 are:
When You Shouldn’t Buy Series I Bonds
You should not buy Series I Bonds for these purposes:
Long-Term Investing/Saving for Retirement
I Bonds are not a good savings vehicle if you are still a ways off from retirement (or other long-term goals). You should have an excellent long-term equity investment plan that you are funding. The S&P 500 has averaged 10% or more over thirty-year periods. Better equity plans have averaged even higher. I Bonds are looking at a temporary bump that hopefully won’t last. We don’t want inflation to continue. And when the inflation rate drops, so do the Series I Bonds. (Again, they’ve averaged 3.3% since 1998.)
Further, you can only purchase I Bonds directly. You cannot buy them in your Roth IRAs or 401(k)s. While the state income tax exemption is nice, your federal tax rates are higher. You are better off saving into a Roth IRA where all the growth will be state and federal income tax free!
Short Term Savings (Emergency Fund)
You must hold an I Bond for at least 12 months. Therefore it is not a good place to stick your three or six-month emergency fund. It’s not going to available when you need it.
Short Term Opportunity
If you have $10,000 lying around in cash that you won’t need in the next 12 months, perhaps you should have stuck it in the S&P 500 when it dipped back in May. You would be up 5+% in a month, not 9% in a year. Even if you did it today, June 9th, by the time it recovers to its previous peak, you’ll be up about 17%. How long will it take for that to happen? A year? Two years? It may be a better return. You are only guaranteed the 9.62% annual rate for the first six months. If it drops off in November, your annual return could be lower.
When You Should Buy Series I Bonds
Here are some scenarios where you might consider buying some:
Savings In Retirement
If you are already retired, you should have had 2-5 years of expense in fixed-income investments. Some of that may be cash that is not in retirement accounts. While you cannot invest the income you need over the next 12 months into I Bonds, you may want to and be able to invest income beyond 12 months into I Bonds.
Risk-Averse Short-Term Savings
If you don’t want the uncertainty of when the equity markets will recover and thus how long it would take an equity investment bought now to recover, you could take the guaranteed 4.81% (9.62% over six months). Or if you are listening to his later and you already missed the equity dip, but not the interest rate hike, then you could do it then.
This is not investment advice. I am writing and recording this on June 9th, 2022. The longer it has been between when I wrote this and when you read it, the more things could have changed, adjusting the outcomes and recommendations. Seek right-now advice from your financial advisor if you want to know if you should buy I Bonds.
But if there was ever a time to buy I Bonds, it is probably now. The current recommendation for people in the right situation is probably yes; you should buy I Bonds. Check the blog for updates if you listen to this long after its publication date.
If this has been helpful to you and you know other people who have brought up I Bonds, share this episode with them.
Series I Bond Historical Rates
|Period Starting||Fixed Rate @ Issue||Inflation Rate of Period||Composite Rate @ Issue*|
|November 1, 2022||0.40%||6.49%||6.89%|
|May 1, 2022||0.00%||9.62%||9.62%|
|November 1, 2021||0.00%||7.12%||7.12%|
|May 1, 2021||0.00%||3.54%||3.54%|
|November 1, 2020||0.00%||1.68%||1.68%|
|May 1, 2020||0.00%||1.06%||1.06%|
|November 1, 2019||0.20%||2.02%||2.22%|
|May 1, 2019||0.50%||1.40%||1.90%|
|November 1, 2018||0.50%||2.32%||2.82%|
|May 1, 2018||0.30%||2.22%||2.52%|
|November 1, 2017||0.10%||2.48%||2.58%|
|May 1, 2017||0.00%||1.96%||1.96%|
|November 1, 2016||0.00%||2.76%||2.76%|
|May 1, 2016||0.10%||0.16%||0.26%|
|November 1, 2015||0.10%||1.54%||1.64%|
|May 1, 2015||0.00%||-1.60%||-1.60%|
|November 1, 2014||0.00%||1.48%||1.48%|
|May 1, 2014||0.10%||1.84%||1.94%|
|November 1, 2013||0.20%||1.18%||1.38%|
|May 1, 2013||0.00%||1.18%||1.18%|
|November 1, 2012||0.00%||1.76%||1.76%|
|May 1, 2012||0.00%||2.20%||2.20%|
|November 1, 2011||0.00%||3.06%||3.06%|
|May 1, 2011||0.00%||4.60%||4.60%|
|November 1, 2010||0.00%||0.74%||0.74%|
|May 1, 2010||0.20%||1.54%||1.74%|
|November 1, 2009||0.30%||3.06%||3.36%|
|May 1, 2009||0.10%||-5.56%||-5.46%|
|November 1, 2008||0.70%||4.92%||5.62%|
|May 1, 2008||0.00%||4.84%||4.84%|
|November 1, 2007||1.20%||3.06%||4.26%|
|May 1, 2007||1.30%||2.42%||3.72%|
|November 1, 2006||1.40%||3.10%||4.50%|
|May 1, 2006||1.40%||1.00%||2.40%|
|November 1, 2005||1.00%||5.70%||6.70%|
|May 1, 2005||1.20%||3.58%||4.78%|
|November 1, 2004||1.00%||2.66%||3.66%|
|May 1, 2004||1.00%||2.38%||3.38%|
|November 1, 2003||1.10%||1.08%||2.18%|
|May 1, 2003||1.10%||3.54%||4.64%|
|November 1, 2002||1.60%||2.46%||4.06%|
|May 1, 2002||2.00%||0.56%||2.56%|
|November 1, 2001||2.00%||2.38%||4.38%|
|May 1, 2001||3.00%||2.88%||5.88%|
|November 1, 2000||3.40%||3.04%||6.44%|
|May 1, 2000||3.60%||3.82%||7.42%|
|November 1, 1999||3.40%||3.52%||6.92%|
|May 1, 1999||3.30%||1.72%||5.02%|
|November 1, 1998||3.30%||1.72%||5.02%|
|September 1, 1998||3.40%||1.24%||4.64%|
*All previous bonds are getting the current inflation rate. This was the rate at issue. For current rates on past bonds, go to https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/
This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. The opinions expressed in this article are the opinions of the people expressing them. The performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. RetireMentorship is not affiliated with any Registered Investment Advisor, Broker-Dealer, or other Financial Services Company.