🔰Opinion: Hidden in plain sight is a U.S. Treasury yielding more than 7%
(Information courtesy of Mark Hulbert is a regular contributor to #MarketWatch)
✊🏾This share is my own share; but the thought leadership isn’t nor the ✍️. In addition, the discussion, opinions around this; do not reflect expert advice for investing.
🤑How would you react if your financial adviser tried to sell you a U.S. Treasury yielding 7.12%
🎭You’d undoubtedly be skeptical, since if something seems too good to be true it probably is; in this case, however, your skepticism wouldn’t be justified
🌟 I’m referring to a unique kind of savings #bond issued by the U.S. #Treasury that is indexed to #inflation .
• Known as an #I-Bond , its #interestrate changes every six months (on May 1 and Nov. 1) according to the Consumer Price Index’s trailing 6-month change.
• When the #Treasury at the beginning of this month set the rate that will be in place until May 2022, it was 7.12%
🤔Is there a catch? Perhaps, though you may consider them to be fairly small. Here are the details:👇
1. The current rate of 7.12% isn’t locked in forever, since the I-Bond rate is reset every six months. If inflation through next May is a lot lower, for example, then the interest rate the I-Bond will earn from May through November of next year will be lower as well. However, with the latest CPI number released this week showing that inflation has risen to a 31-year high, the risk of the May 2022 rate being a lot lower seems remote at this point
2. Actually, the I-Bond interest rate is the sum of two different #rates : The first, a #fixedrate , is set when you purchase it. The second is the #inflationadjustment , and this is the rate that changes every six months.
Currently the #fixedrate is set equal to 0%. If the Treasury at some point in the future were to increase this fixed rate on newly issued I-Bonds, you could cash in the I-Bonds you already own and purchase a new one. (Though you might have to pay a small penalty, as described below.
3. The way to think about the I-Bond is that it provides a guaranteed real (or inflation-adjusted) #yield. Since the fixed rate portion of its rate is guaranteed not to be negative, you at a minimum will always earn as much as CPI inflation. This makes I-Bonds preferable to TIPS , which currently trade at negative real yields
4. You can’t buy unlimited quantities of I-Bonds. You’re limited to buying $10,000 per year per Social Security number; a married couple could therefore buy $20,000 per year.
😮You’re also allowed to purchase an additional $5,000 per year with your tax refund
5. You can’t purchase an I-Bond in your IRA. But that’s hardly a defect, since you only pay tax on the I-Bond interest when you redeem it.
So in that sense an I-Bond is like an IRA, since your interest accumulates tax-free. Furthermore, I-Bond interest is exempt from state and local income taxes
🛠HOW MIGHT YOU USE 🛠
#I-Bonds ? For insight, I reached out to Zvi Bodie, who has done as much as anyone, if not more, to champion I-Bonds. Bodie, now retired, was for four decades a #finance professor at Boston University. In an interview, he suggested two major ways in which I-Bonds can play a valuable role: 👇
🔹As a portion of your emergency funds. I-Bonds’ yields are far better than the near-zero rates earned by most #money-market funds, even after taking into account the three-months-of-interest penalty when redeeming in the first five years. And they’re 100% safe and, provided you hold for a year, are completely #liquid
🔹As part of the #fixedincome portion of your #retirementportfolio . Though you can’t buy a huge chunk of I-Bonds at any one time, you can gradually build up a large portfolio of them. Imagine that you and your spouse, both 20 years away from retirement, start a program of each year buying your maximum allotment of I-Bonds. Such an approach is consistent with the standard #financialplanningadvice to gradually reduce your #equity exposure as you get closer to retirement. In my hypothetical case, your total I-Bond holdings at retirement will equal $500,000 (plus accrued interest). Unless your retirement portfolio is in the many millions, your I-Bond holdings would represent much (if not all) of your desired fixed income allocation
⚜️THE BOTTOM LINE?
I-Bonds may not be as exciting as a get-rich scheme with #memestocks or #cryptocurrencies . But they arguably will do more for your #long-term #financialsecurity
#possibilities #growth #longterm #whynot #invest #buildingportfolio #learning #opportunities #Bonds #MarketWatch
@ctsshah @TIM2030
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