I Bond rate 5/2021

[LarryMelman]

Why should one get excited about inflation reaching 3.54%, and that I bond merely matches it?

Why is it different than when inflation was 2%, and I bond also matched it?

Either way, there is no real return. In fact, you will have to pay taxes on that interest, and the tax on the 3.54% is going to be more than on the 2%.

Where else can I get 3.54% on cash right now? I'll hang up and wait for the reply.

 

[DaveLeeNC]

Where else can I get 3.54% on cash right now? I'll hang up and wait for the reply.

I-Bonds are NOT cash. Not even close (until you get 5 years out, anyway).

The point is that what an I-Bond is IN ALL CASES is a fixed rate (that is I-Bond dependent) and an inflation rate (external to I-Bonds). The recent announcement is that the I-Bond part (fixed rate) is 0% which is (historically) as bad as it has ever been.

I also did not see anything in the recent I-Bond announcement (fixed rate as bad as it has ever been and inflation is what it is) to get excited about. There certainly was nothing to change my perspective on whether or not I-Bonds (bought right now) are a good deal.

dave

 

[Montecfo]

Where else can I get 3.54% on cash right now? I'll hang up and wait for the reply.

I get your point, but it only takes me so far.

Let's see, assume I buy the max, $10,000 worth at 3.54% for 6 months is less than $175 interest. I will ignore the early withdrawal penalty for now.

I could open an account at Huntington Bank for example, deposit $1000, and get $150 bonus in 2 weeks and pull money out in 90 days. No early withdrawal penalty.

60% annualized return. And Citi and a few others have new account offers for greater dollars but a few more hoops.

 

[qwerty3656]

If fixed rate is 0 and inflation rate is 1.77, how is the composite rate 3.54? shouldn't the composite rate equal the fixed rate plus the inflation rate?

 

[Koolau]

If fixed rate is 0 and inflation rate is 1.77, how is the composite rate 3.54? shouldn't the composite rate equal the fixed rate plus the inflation rate?

They state it in for the 6 months IIRC, so 1.77 becomes 3.54 annualized - but not promised since next 6 months rate will likely change. Correct me someone if I'm wrong since YMMV.

 

[Koolau]

Why should one get excited about inflation reaching 3.54%, and that I bond merely matches it?

Why is it different than when inflation was 2%, and I bond also matched it?

Either way, there is no real return. In fact, you will have to pay taxes on that interest, and the tax on the 3.54% is going to be more than on the 2%.

I agree that there's not much excitement about just meeting inflation (and that assumes you believe that the folks who bring you the bonds are telling the whole truth about the inflation, heh, heh.) BUT at least (ignoring your taxes-to-be-paid, heh, heh) you're not sitting on 0% interest in a checking account or 1/2% in more typical current savings. I guess the excitement is NOT losing 3% and still paying taxes on 1/2% - so there's that. We sometimes take our excitement where we can find it.

We can choose to be happy or sad and we can choose to be excited or blasé I suppose so YMMV.

 

[audreyh1]

If fixed rate is 0 and inflation rate is 1.77, how is the composite rate 3.54? shouldn't the composite rate equal the fixed rate plus the inflation rate?

No, because that composite rate is annualized and compounded at 6 months.

 

[Golden sunsets]

The formula is:

FR + (2 x IR) + (Fr x IR)

In this iteration the FR is 0, so the formula simply becomes 2 x 1.77=3.54

 

[LarryMelman]

The formula is:
FR + (2 x IR) + (Fr x IR)

I couldn't tell if people knew that or not. It seems not.
IR is the % change in the CPI-U from the value announced last October to the value announced in April, 260.280 to 264.877, which is 1.77%. (The CPI is announced every month on bls.gov/cpi)
IR will change again on November 1, using the change in CPI-U from April to October. This will be known about Oct. 15.
And keep in mind that the interest rate of *your* individual bond changes on the 6-month anniversary of purchase. That is, the rates of bonds purchased in January change on Jan 1 and July 1. Using the rates in force at those times.

I wish I had been in the meeting where they decided to add the (Fr x IR) part. Hey, it added a big .05% to my 3% Fixed I-bonds from 2001. From 6.54% to 6.59%. Yippee.

 

[LarryMelman]

I-Bonds are NOT cash. Not even close (until you get 5 years out, anyway).

A small but noticeable part of my cash reserve is in I-bonds. Mostly with 3% fixed rate from 2001, but I'll throw $10K in near the end of May to get 3.54% for 6 months. Yes, I have to hold for a year. Yes, the rate may go down after 6 months.

3.54% is better than anything else I can do with loose cash right now. That cannot be disputed.

I also chase bank account bonuses. And I clip coupons. Every little bit helps.

 

[audreyh1]

I count IBonds as part of my cash allocation in my retirement portfolio AA. Don’t have to worry about inflation risk, and is like a 1 yr non-breakable CD or a 5 year CD with a 3 month penalty.

 

[NW-Bound]

I do consider I Bond as part of my cash, and that is because it is not really a bond that loses value when interest rate goes up. And no, I do not get excited about this.

The larger part of my cash, I hold in a short-term T-Fund by Black Rock which pays peanuts. But I use it as collateral to write put options on selected stocks, and that pays a lot more than 3.54%. There's of course risk, but it's a risk that I can handle.

 

[tdv2]

I started acquiring IBonds recently....sure it's small potatoes for some of us....$20k per year per couple. I also treat these funds as cash since once the holding period expires you can liquidate as needed without risk of loss of purchasing power. I wonder why when some dismiss these as useless. My question is why not? It's super easy to open an account and fund it.....these bonds do what they are supposed to do as evidence of the 3.54% current yield....makes it even more valuable for those of us living in a state that has income tax.

 

[audreyh1]

I count IBonds as part of my cash allocation in my retirement portfolio AA. Don’t have to worry about inflation risk, and is like a 1 yr non-breakable CD or a 5 year CD with a 3 month penalty.

I meant to type interest rate risk.

 

[njhowie]

Why should one get excited about inflation reaching 3.54%, and that I bond merely matches it?

Why is it different than when inflation was 2%, and I bond also matched it?

Either way, there is no real return. In fact, you will have to pay taxes on that interest, and the tax on the 3.54% is going to be more than on the 2%.

Because today, even with Treasury and CD rates tiptoeing higher, how many years do you need to go out to get even 2%? You can't - because there aren't any paying 2%.

Now, let's make things a bit more interesting...there are posts popping up on Bogleheads that when the next rate reset comes, it may put the inflation component in the 6% to 6.5% range.

Getting a little more excited? I don't care that inflation will be 6%+ and the I Bond simply matches it - there is no risk equivalent place to put the money and get a similar return...or zero real return, if you prefer.

Oh, and the interest is free from state taxes - interest from CDs are not.

 

[njhowie]

I started acquiring IBonds recently....sure it's small potatoes for some of us....$20k per year per couple.

Ignore those who poo-poo an investment because the caps are too low for their massive portfolios. That is no reason "for you" or most others to ignore good returns relative to what else is out there for the equivalent risk.

Should the November reset put the I Bond at 6%, that will be 6x the going 1% 5-year CD rate. Your $20,000 in I Bonds will command as much heft as $120,000 someone chooses to put in to the CD. That's no longer small potatoes.

 

[Koolau]

I'm curious (just curious) where folks get (end up with) all this cash that they consider putting in I-bonds - yeah, I know, it's only $20K. I've whined before that I had too much qualified money in my port. Now, to get the cash to live on, I must take RMDs (and maybe a little more) to cover my yearly expenses. At the start of the year I have a nice chunk of cash, but it's mostly gone by year end.

It's true that if I just wanted some cash (to have and to hold OR to put into I-bonds) I could invade my Roth IRAs - but why would I? They are my "gold standard" and BETTER than cash.

I could take from my taxable in my portfolio (but I'd likely owe at least some taxes on it.) I have a good chunk in the S&P500 in taxable, but I've been "proud" of myself for allowing my total equities to climb to (wait for it) almost 35% of my portfolio.

I "live" on my SS and modest pension (so there's really nothing left to invest in I-bonds.) And, as pointed out, I NEED my RMDs to live on as well. I was taking RMDs (well, qualified money that I had to pay taxes on) BEFORE I was forced by law to take the money.

So, again, if anyone wants to share, I'd be "curious" how folks end up with "loose" cash that's actually investable (NOT needed for every-day stuff like mine is.) Oh, and I'm not poor. I have "enough" barring any true "black swans." My "mix" is not ideal, perhaps, but that isn't easily remedied at this late date. YMMV

 

[RetireAge50]

Hmmm. Starting to think more seriously about taking out a fixed rate loan at what are they now 2% and putting them into these I bonds. Risk free spread. Something seems out of whack.

 

[Sunset]

I'm curious (just curious) where folks get (end up with) all this cash that they consider putting in I-bonds - yeah, I know, it's only $20K. I've whined before that I had too much qualified money in my port. Now, to get the cash to live on, I must take RMDs (and maybe a little more) to cover my yearly expenses. At the start of the year I have a nice chunk of cash, but it's mostly gone by year end.

...

You could take an extra $20K out of your 401K/IRA in addition to your normal RMD amount.
Things to be mindful are: would it cause IRMAA / NITT / push you into a higher marginal tax bracket ?
Some else can chime in if I forgot some extra taxation effect.

If none of those apply it won't cost you extra per dollar to do so.

There may even be a benefit for doing it for a number of years, it may depending upon your 401K/IRA, push down the RMD number to a lower overall marginal tax rate. (Unlikely but possible in theory).

 

[LarryMelman]

You don't need to cite Bogelheads. You can do the calculation for yourself. The CPI reported in April was 264.877. The CPI reported this week was 273.567. That is an increase of 3.28%. And there is one more month in the 6-month cycle. If next month's number is flat to this month, then the inflation based rate on new bonds starting in November would be 6.56% (assuming the fixed rate stays at 0). That's the highest inflation-based rate in the history of I-bonds back to 1998.

It is important to understand how this works. If you bought in September or October, you'd get 3.54% for the first 6 months. Then it will adjust up to 6+% for the next 6 months. But if you wait till November, you will start at 6+%.

 

[Koolau]

You could take an extra $20K out of your 401K/IRA in addition to your normal RMD amount.
Things to be mindful are: would it cause IRMAA / NITT / push you into a higher marginal tax bracket ?
Some else can chime in if I forgot some extra taxation effect.

If none of those apply it won't cost you extra per dollar to do so.

There may even be a benefit for doing it for a number of years, it may depending upon your 401K/IRA, push down the RMD number to a lower overall marginal tax rate. (Unlikely but possible in theory).

Interesting you mention this. I've actually been ruminating on taking extra from 401(k). No worry on IRMAA etc. and I won't get into the next tax bracket. So, why NOT take it out now, pay the taxes and have a bit of extra cash? So far, RMDs are not a big deal, but as I age, they might just push me into the danger zone on either taxes or IRMAA or both. Taking money now COULD just "save" me later. YMMV

 

[USGrant1962]

Having hit 59.5 this week, I'm starting to think about leveling 401(k)/tIRA withdrawals to mitigate the RMD tax bomb. I'm over weighted in tax deferred. In addition to considering Roth conversions, using some of that to fund my annual iBond purchase seems attractive.

 

[sengsational]

Once you drop in your $20K for the year in I-Bonds, I thought going for the "too big to fail" corporate bonds. I'm sure I'm not to first to think of this, but if the government would probably bail-out these big corporations, couldn't you just buy the TBTF corporate bonds and get around the puny treasury rates? I have no idea what these bonds are paying, but the thought just occurred to me. Those here that spend more time thinking about such things can remind me how daft I am, hehehe!

 

[njhowie]

Once you drop in your $20K for the year in I-Bonds, I thought going for the "too big to fail" corporate bonds. I'm sure I'm not to first to think of this, but if the government would probably bail-out these big corporations, couldn't you just buy the TBTF corporate bonds and get around the puny treasury rates? I have no idea what these bonds are paying, but the thought just occurred to me. Those here that spend more time thinking about such things can remind me how daft I am, hehehe!

See attached for what corporates are paying relative to everything else. The interest rate risk is not worth it in my view. The yields are too low.

Note that the yields shown are for the highest yielding bond currently offered in each category. So, your TBTF corporates are likely yielding below the yield indicated.

 

[sengsational]

Yeah, I agree. Why take any risk at all for such measly pickings.

My mom just sold her house and is sitting on cash in her Fidelity account and asked me what to do with it. She had mostly of her savings in a few utility stocks, where my dad had it before he passed. Those show a yield of 4% right now. She also had a few years of cash after selling a stock position a few years back. Now she's got many years of cash that's getting eaten by inflation. I'm inclined to suggest keeping a few years in cash and putting the rest in the utilities. If worse came to worse, she has 7 kids, and most of them could chip in to prevent her from having to sell low, if that ever came up on the horizon. Inflation is a scourge on people in her position.