New I-Bond Inflation rate?

[Bikerdude]

The September CPI-U came in at .2 so if I understand the I-Bond inflation calculation correctly then that will be added to the April thru August rates for a total of 1.4. This is then multiplied x 2 and added to your fixed rate to determine your return for the next 6 months (announced on November 1st). Is this how others understand it?

 

[ratinor]

I believe the calculation is based on percentage change over the 6 month period.
The index went from 212.709 to 215.969 so a 1.532% change.
That times 2 = 3.064% will be the inflation component to which you add the fixed rate component.

 

[mn54]

The fixed rate component is determined by when the I-bond was originally purchased. Is that correct?

 

[ziggy29]

The fixed rate component is determined by when the I-bond was originally purchased. Is that correct?

Yes. You'll have to pry the ones I have with a 3.4% fixed rate from my cold dead fingers (or in January 2030 when they mature, whichever comes first...).

 

[Bikerdude]

I believe the calculation is based on percentage change over the 6 month period.
The index went from 212.709 to 215.969 so a 1.532% change.
That times 2 = 3.064% will be the inflation component to which you add the fixed rate component.

That's what I thought. My numbers are different, probably because I took the monthly decimal change but April had no change so March would have been the number to use. I'll be happy with anything at this point. Thanks.

 

[Florida]

Series I to Earn 3.36%, Series EE to Earn 1.20% Fixed Rate, When Bought from November 2009 Through April 2010

 

[ziggy29]

I'm shocked they increased the fixed rate to 0.3% given the alternative nominal yields of money market funds and short term CDs.

 

[jdw_fire]

I'm shocked they increased the fixed rate to 0.3% given the alternative nominal yields of money market funds and short term CDs.

do you mean the real interest rate? where do you find this for new i-bonds?

 

[FIREd]

I'm shocked they increased the fixed rate to 0.3% given the alternative nominal yields of money market funds and short term CDs.

I am surprised as well. I was expecting 0% fixed again.

 

[ziggy29]

do you mean the real interest rate? where do you find this for new i-bonds?

Series I to Earn 3.36%, Series EE to Earn 1.20% Fixed Rate, When Bought from November 2009 Through April 2010

The earnings rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the life of the bond, and the semiannual inflation rate. The 3.36% earnings rate for I bonds bought from November 2009 through April 2010 will apply for their first six months after issue. The earnings rate combines a 0.30% fixed rate of return with the 3.06% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U).

 

[jdw_fire]

Series I to Earn 3.36%, Series EE to Earn 1.20% Fixed Rate, When Bought from November 2009 Through April 2010

thank you

 

[Bikerdude]

Series I to Earn 3.36%, Series EE to Earn 1.20% Fixed Rate, When Bought from November 2009 Through April 2010

Yeah, I'm liking it.

 

[JOHNNIE36]

Read this thread with interest (pardon the pun) and just don't understand those bonds. I'm sitting on $175K I don't know what to do with. Not interested in stocks anymore as I've been there-done that. At 73 you can't take chances. I'm looking for best return-best safety. I can get 3.5% on a 5-yr CD but thats a long time. How is the I-bond better that this CD?

 

[Alan]

Read this thread with interest (pardon the pun) and just don't understand those bonds. I'm sitting on $175K I don't know what to do with. Not interested in stocks anymore as I've been there-done that. At 73 you can't take chances. I'm looking for best return-best safety. I can get 3.5% on a 5-yr CD but thats a long time. How is the I-bond better that this CD?

The CD is fixed for 5 years at 3.5% and is safe. The i-bond interest rate changes every 6 months depending on inflation but can never go to below zero - also safe but variable. It will be 5 years before you know if the 5-year CD or the i-bond returns a better return over 5 years. You must own an i-bond for 12 months and if you cash it in before 5 years are up you give up 3 months interest. The returns are not taxed until you cash it in.

You can only buy $5k per person per year in i-bonds.

 

[FIREd]

Read this thread with interest (pardon the pun) and just don't understand those bonds. I'm sitting on $175K I don't know what to do with. Not interested in stocks anymore as I've been there-done that. At 73 you can't take chances. I'm looking for best return-best safety. I can get 3.5% on a 5-yr CD but thats a long time. How is the I-bond better that this CD?

I-bonds pay an interest equal to a fixed rate (0.3% for bonds bought in the next 6 months) + a variable rate which is the annualized semiannual rate of inflation (currently 3.06%). So if inflation goes to 10%, the bonds will pay 0.3%+10%=10.3% interest rate. The interest you earn on i-bonds changes every 6 months to reflect the changing inflation rate.

My back of the envelop calculation: let's say you buy an i-bond right now with a 0.3% fixed rate. If you expect inflation to top 3.2% annually on average over the next 5 years, i-bonds will provide a higher return. If inflation remains below 3.2% or if we experience deflation, then the CD will return more. I am sure someone out there could refine that calculation further by taking things like taxes into account.

Another consideration: If you need the income to pay the bills, then CDs might be a better option because you have to redeem i-bonds in order to be able to extract the interests. So i-bonds are great for capital preservation but CDs are better for someone who needs the income on a regular basis.

 

[Bikerdude]

Another consideration: If you need the income to pay the bills, then CDs might be a better option because you have to redeem i-bonds in order to be able to extract the interests. So i-bonds are great for capital preservation but CDs are better for someone who needs the income on a regular basis.

Plus it will take a long time to invest 175K at 5K per year.

 

[FIREd]

Plus it will take a long time to invest 175K at 5K per year.

True! If Johnnie is married, however, he could buy up to $20K worth of i-bonds per year: $5K for himself in electronic bonds, $5K for himself in paper bonds, $5K for his wife in electronic bonds, $5K for his wife in paper bonds. It would still take a few years though...

 

[Bikerchick]

I've been buying i-bonds since they were available and have been pleasantly surprised at the nice returns on those earlier purchases. OTOH, the current rate on a 5-yr CD at my credit union is 3.3% APY, minimum a thousand dollars.
Current Rates

 

[FIREngineer]

Another thing to consider: I bonds are exempt from state and local income taxes.

 

[mn54]

True! If Johnnie is married, however, he could buy up to $20K worth of i-bonds per year: $5K for himself in electronic bonds, $5K for himself in paper bonds, $5K for his wife in electronic bonds, $5K for his wife in paper bonds. It would still take a few years though...

What's the difference between an electronic I bond and a paper one? Is one purchased online and the other from a financial institution? I thought the 5K max. was for all I bond purchases.

 

[FIREd]

What's the difference between an electronic I bond and a paper one? Is one purchased online and the other from a financial institution? I thought the 5K max. was for all I bond purchases.

Electronic i-bonds can be purchased from Treasury direct while paper i-bonds can be purchased from a bank (or other financial institution) or via payroll deduction.

Individual - Buy I Savings Bonds

The following link also explicitly says that you can buy $5,000 worth of electronic i-bonds and $5,000 worth of paper i-bonds per calendar year:

Individual - Purchase Limits

Through your TreasuryDirect account - which is established using your name and social security number, bank information, driver’s license and e–mail address – you can invest in electronic savings bonds (also referred to as book–entry savings bonds) each calendar year by purchasing as much as:

• $5,000 in Series EE Bonds, and
• $5,000 in I Series Bonds.

You may also invest the same amount in paper savings bonds -- using your name and social security number -- by purchasing as much as:

• $5,000 in Series EE Bonds (which is equivalent to $10,000 face amount), and
• $5,000 in I Series Bonds.

 

[JustNtime]

Well you could get your limit now and again in January - which would double those amounts for you and spouse. Possibly use kids or parent SSN for additional purchases. (Carefully considering the educational benefit possibility)...

RATINOR: I believe the calculation is based on percentage change over the 6 month period.
The index went from 212.709 to 215.969 so a 1.532% change.
That times 2 = 3.064% will be the inflation component to which you add the fixed rate component.

Am I correct in assuming the 'inflation' was based on the previously deflated index number? In other words we didn't have to make-up the previous 'deflation' before getting a new inflation adjustment!! Looking at these over the long term this appears to be another bonus...

 

[JOHNNIE36]

Thanks for all the feedback on the I-bonds. It's another thing I learned today. I guess I would prefer to know what I'm getting when I purchase it and that's where CD's can't be beat for the safety. I enjoy the income off the CD's but I'm not desperate for it. Over the years I did well in the stock market (doubled my money) in the nineties. Then took a hit in the 2000's and got out for good. Time to stop guessing at my age so I'm into CD's. Right now everything is in at 4.5% for another 4 years and that looks pretty good. The $175K will probably go in at 3.5% for 4 years and by that time I think rates will be up.

 

[JustNtime]

Frankly, I'm surprised to see I-bonds competitive with CDs again. The Last I-bond I bought was in 2003 and I will 'treasure' those I have from 2001/2... If I had a choice of buying 4yr CD at 3.5% or the 3.36% I-bond -- I'd choose the I-bond for the state/local tax advantages and the real possibility that all this gov't spending will eventually lead to some real inflation down the road. The small limits make this a rather small gamble either way. Seems very unlikely that inflation + 0.3% will be less than 3.5% over next 4-5yrs.

Actually our state tax is 5.75% so 3.5% after state tax is only ~3.29%! So inflation would have to be less than 3% annually for me to be better off with the CD. ymmv


My Mom's IRA is in a 7yr CD at 6.25% until 2014, sooo hopefully we'll see some higher rates when it matures...