Thanks!
The I Bond Thread
- Thread starter steelyman
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Montecfo
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
PB4USKI,
I'm impressed by the financial quick-footedness.
And just trying to understand: Let's say the FED starts aggressively unwinding the balance sheet next month and crushes inflation with higher rates all along the yield curve. And then let's say you want to unwind some of this due to better opportunities elsewhere. The weakness of the gift boxes is they must be delivered before they can be redeemed, is that correct?
I'm impressed by the financial quick-footedness.
And just trying to understand: Let's say the FED starts aggressively unwinding the balance sheet next month and crushes inflation with higher rates all along the yield curve. And then let's say you want to unwind some of this due to better opportunities elsewhere. The weakness of the gift boxes is they must be delivered before they can be redeemed, is that correct?
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That is my understanding of the situation. Similar to pb4uski, we bought $20k of I-bonds in Dec. 2021, another $20k in Jan, 2022. Then we bought $20k as gifts for each other in Feb. 2022 and another $20k as gifts in Mar. 2022. For a total of $80k currently earning 7.12% The gift amounts are locked up in the gift box until 1/1/23 and 1/1/24, respectively (since you can only purchase or receive $10k each per year).
Currently, I am weighing the gift purchase of another $20k this month, which will be locked in the gift box until 1/1/25. Assuming the worst case, that will earn interest at 7.12% for six months and, say, 8% for the next six months (we'll know for sure next week), or the equivalent of 7.7% over a full year. Assume that the Fed crushes inflation and all subsequent I-Bond rates are 0%. If we gift that last bit to each other on 1/1/25 and immediately redeem, our holding period will have been ~2.75 years. We will lose the last three months of (0%) interest or $0. So our effective yield over that 2.75 years would be 2.735% (2.75th root of 1.077 = 1.02735). I cannot find a CD yielding as much for a similar term. Current 3 year rates are ~1.7%.
And, keep in mind that this is the worst case scenario. I-bond rates probably will not go to 0% in November.
But, yes, if I purchase $20k next week, it will stay locked away in the gift box until 1/1/25 and cannot chase better opportunities in the interim. Hence, I have not yet bought, but I probably will.
Currently, I am weighing the gift purchase of another $20k this month, which will be locked in the gift box until 1/1/25. Assuming the worst case, that will earn interest at 7.12% for six months and, say, 8% for the next six months (we'll know for sure next week), or the equivalent of 7.7% over a full year. Assume that the Fed crushes inflation and all subsequent I-Bond rates are 0%. If we gift that last bit to each other on 1/1/25 and immediately redeem, our holding period will have been ~2.75 years. We will lose the last three months of (0%) interest or $0. So our effective yield over that 2.75 years would be 2.735% (2.75th root of 1.077 = 1.02735). I cannot find a CD yielding as much for a similar term. Current 3 year rates are ~1.7%.
And, keep in mind that this is the worst case scenario. I-bond rates probably will not go to 0% in November.
But, yes, if I purchase $20k next week, it will stay locked away in the gift box until 1/1/25 and cannot chase better opportunities in the interim. Hence, I have not yet bought, but I probably will.
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Excellent synopsis and I would bet the aggregate will be better than 2.735% maybe even 4% or more which as you say you can't get (yet ) with CD's
Montecfo
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Agreed!
pb4uski
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Yes, I'm taking a calculated risk, but 7.12% for the first 6 months and a likely 8% for the second six months can cover a lot. For discussion purposes, let's say the remaining months after the expected 8% are 0%... so I get $10,770.24 for $10,000 invested [($10,000*(1+7.12%/2))*(1+8%/2)]
The 2023 gift that I bought on 3/1/22 can be delivered on 1/1/23 and redeemed as early as 6/1/23 (3 month penalty = 0%) and would yield 6.11%. The 2024 gift that I bought on 3/1/22 and be delivered on 1/1/24 and redeemed at that time and would still yield 4.12%.
So a minimum of 6.11% for 15 months or 4.12% for 22 months. I don't see much downside.
Even if I stretched things and bought another $10k for delivery and redemption on 1/1/25 then the worst that I could do for 34 months is 2.65%... about the same as 3 year CDs and UST. So I'll wait on any 2025 gifts for a while.
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Spanky
Thinks s/he gets paid by the post
Is it true that you could only buy $10K (or $20K as couple) as gifts per calendar year?
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No, not to my knowledge. I understand the limitation to be on the receiver. That is, you can either receive as a gift or purchase for yourself no more than $10k per year. But you can purchase as a gift as much as you like.
Gifts are received and count against the receiver's limit when they are "delivered". Bonds are delivered as and when the giver chooses. So the $20k in gift bonds I purchased for my wife this year will be delivered in two chunks - $10k(plus accrued interest) on 1/1/23 and another $10k (plus accrued interest) on 1/1/24. And the $20k she bought as gifts for me will be delivered in two chunks on each of those dates as well. Assuming those gifts are delivered on those dates, then we each will not be able to purchase our own I bonds in 2023 or 2024, because the gift will have already maxed us out.
To summarize, I and my young wife currently have in our gift boxes, awaiting delivery to the other, $20k in I-bonds purchased over the past two months (so a total of $40k in purchased gits between the two of us). We will most likely each purchase another $10k gift next week, which will have to stay in the gift box until 1/1/25. (which means we each will have purchased $10k for ourselves this year and $30k as gifts this year).
The upside is that we capture the interest rates now, and the clock starts on the one year redemption period and 5 year interest penalty period. The downside is that we can't redeem those gift bonds until they are delivered to us, so we are locking up $20k until 2023, another $20k until 2024, and likely another $20k until 2025. And I-bond interest rates could plummet in the intervening period.
In essence, we are prefunding three years of purchases.
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If UBS is correct with their inflation predictions here: https://fortune.com/2022/04/07/ubs-peak-inflation-march-consumer-price-index-2022/
then the November 1, 2022 rate reset will be ~ 6.5% annual yield. In that case, and assuming rates go to 0% thereafter, the effective annual yield for a bond purchased this month and redeemed on 1/1/25 would be ~3.94%
pb4uski
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And that 3.94% beats the pants off any 33 month CD or UST available!
jazz4cash
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Im impressed by how many members here have young wives. I don’t ever recall anyone having an old wife or a young husband for that matter.
Spanky
Thinks s/he gets paid by the post
Thank you for the detailed explanation.
And their assumption is gas prices drop and OER drops...I think both of those are unlikely, especially the second one, which is only about 1/4th actual rent increases in the real world currently and has a LOT to catch up on. Gas prices I suppose are possible if the conflict in Ukraine ends sooner rather than later but who knows there as well. And if gas doesn't drop soon, everything that fuel effects - which is nearly everything non-service related - will be forced to raise prices as well to cover the increased input and delivery costs.
Chuckanut
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Are people setting up trusts just to buy more I-bonds?
My parents had a trust a few decades ago. IIRC, it was expensive to setup and a pain every time something changes. Lots of legal fees, also.
My parents had a trust a few decades ago. IIRC, it was expensive to setup and a pain every time something changes. Lots of legal fees, also.
Spanky
Thinks s/he gets paid by the post
I am planning to establish one joint and two individuals and to use Quicken WillMaker & Trust software to produce the documents.
This site may be useful: https://thefinancebuff.com/simple-living-trust-software-i-bonds.html
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She has always been two years younger than me. And that has been the norm in our culture for a long time - husbands are generally older than their wives.
Well I always new I was not the norm.
DW is 3 and 1/2 years older than me. Always fell for the older women. Hah even had a big crush on my 3rd grade teacher.
Spanky
Thinks s/he gets paid by the post
DW is 5 years younger. That makes it a little harder to retire at the same time.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
That is exactly what I did. I was buffing up our estate planning anyway and would have set up a joint trust for our two homes and eventually the cars, boats, etc. but it will also be used to buy i-bonds.
But I did set up his and her trusts that I suspect will only be used for i-bonds.
Software was $90 (that I was going to spend anyway for estate planning) and it cost $10 to have each trust notarized. So now we will be able to buy $50k annually.
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Nicely done.
Sunset
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Not in IL , as it's expensive to do it here.
Some States it costs next to zero dollars.
However, if you have a business, even a sole proprietorship (start a lawn mowing service) then it can buy the yearly $10K limit. However, the entity account cannot have a beneficiary, nor (I think) buy gifts (but I didn't check).
Sunset
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Some of us are privileged with young wives, mine is about a week younger than me.
Whenever I have a birthday, she gets to call me an old geezer for a week
Mulligan
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PB, That base case seems most reasonable. And as you are doing, the comparative marker should be the 3 yr Tbill, for state income tax free purposes (if applicable, as it is for me). If you wait past April to fund 2025, the variable becomes more undefined and likely a worse bet. As the likely hood of banging out future 7% 6 month cycles decreases as the odds of 3 yr TBill yield increases.
Accidental Retiree, did you set up a new account # and separate login on TD from your individual accounts? I have a revocable trust and want to setup and purchase I bonds in that. Thanks.
Chuckanut
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Some of us are privileged with young wives, mine is about a week younger than me.
Whenever I have a birthday, she gets to call me an old geezer for a week
I have a friend who is 70. He has a 40 year old wife. And a child who will be in kindergarten in a year or two.
As far as 7%+ I-bond rates, I would prefer going back to 1 or 2% rates based upon much lower inflation. I chuckle when I see all of the concern of the price of gasoline, while inflation steals so much more from us than even the most rapacious energy Mega Corp.
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