Using I Bonds to Boost Rate of Return and Protect Against Inflation
The S&P 500 Index is up 25% as of today. Despite such as a strong growth, I’ve been hearing a lot of concerns about the short-term future of the stock market and whether there is any room left for an additional growth in 2022. I am not a crystal glazer and won’t be sharing any market views in this post. Instead, I will share with you a strategy that can be beneficial if you are sitting in cash and think that the stock market correction is coming soon. The strategy is very easy to implement and comes with an annualized 7.12% rate of return. The best thing is that it has virtually zero risk because it is backed by the US Government. Sounds too good to be true? Let me explain.
I Savings Bonds
The Fed has been clear that inflation is a concern and that interest rates will be rising. When inflation is rising, you normally should keep away from bonds. Unless the bonds are linked to inflation!!! I saving bonds are exactly such bonds that you can invest your money in and get a much higher rate of return than 0.01% in your Chase or 0.50% Ally accounts.
The I bonds are issued by the Treasury Department and backed by the US government. You can buy I bonds through the TreasuryDirect website. I bonds have a unique structure and earn interest based on both a fixed rate (currently 0%) and a rate that is set twice a year based on the inflation. This composite rate is the actual rate of return that I bond will earn over the next 6 months. Maturity of I bonds is 30 years but you can cash them at any time after a 12 months period. Because of this restriction this is not a liquid asset. Moreover, if you redeem your I bonds after 12 months of holding it but before it is 5 years old, you will lose the last three months of interest.
The current composite interest rate of I Bonds purchased before May 1, 2022 is 7.12% for the first six months. This is a very good, almost risk-free interest rate. The catch with I bonds is that you are only allowed to purchase $10,000 in electronic bonds per year. In other words, this is not a good instrument for large portfolios. But here is one strategy that you can use NOW to invest more and take advantage of this favorable interest rate. And by "now" I mean before 01/01/2022
Since the annual $10,000 limit applies only to a calendar year, you can buy $10,000 worth of I bonds before January 1, 2022 and then an additional $10,000 before May 1, 2022. After that, a new rate will be set. That means, you can invest $20,000 and lock in an annualized 7.12% for first 6 months the bond is held. If you are married, your spouse can do the same increasing your total investment to $40,000. Moreover, I bonds can be purchased for your children or by your trust. Finally, you are also allowed to invest up to additional $5,000 per individual in paper I bonds using your federal income tax refund.
In the current inflationary environment, I believe that I bonds offer a good and safe opportunity to park your cash and increase a rate of return of your fixed income portfolio.
If you want to learn more about I bonds, please don’t hesitate to contact me.