Financial Independence Daily FI discussion thread - Tuesday, November 02, 2021 |
| Daily FI discussion thread - Tuesday, November 02, 2021 Posted: 02 Nov 2021 02:02 AM PDT Please use this thread to have discussions which you don't feel warrant a new post to the sub. While the Rules for posting questions on the basics of personal finance/investing topics are relaxed a little bit here, the rules against memes/spam/self-promotion/excessive rudeness/politics still apply! Have a look at the FAQ for this subreddit before posting to see if your question is frequently asked. Since this post does tend to get busy, consider sorting the comments by "new" (instead of "best" or "top") to see the newest posts. [link] [comments]  |
| Enjoying the 'free lunch' of Series I and EE savings bonds (with caveats) Posted: 01 Nov 2021 08:18 PM PDT I wrote a post about these bonds five years ago and they have never seemed more relevant. With low yields on bonds and savings accounts, these Treasury-issued options are especially relevant. You can buy 10K each per year of these bonds (so that's 20K I + EE per year). That limit is higher than some people need, lower than others want, but quite a lot of money per year you can put toward them if you want to in taxable (non-retirement) space. Also (we'll get into this more) I Bonds in particular are a great part of a FIRE portfolio because their cash-in dates are flexible -- you can, for instance, wait to cash them out in a low-tax year when you're working less or not at all. EE Bonds, meanwhile, make a great annuity that starts 20 years from whenever you start buying them. The fact that they're both tax-deferred also means if you're making a lot now and less later, well, you'll pay less in taxes. Series I Bonds also work as good shorter-term savings vehicles if you have over a year before you need the cash. 1) Series I Bonds: These will track inflation and can be held from 1 to 30 years. Sometimes they offer a bit extra (a fixed rate on top of inflation), but that's moot given that TIPS have negative yields. So they are a lot like TIPS, but more flexible, offer tax deferral, are immune to interest rate risk, and: they pay more. These are a great deal IMHO. 2) Series EE Bonds: Don't be fooled by the low 'rate' on them - the key is that they double in value after 20 years, which is the equivalent of a 3.5% annual return. If that sounds low to you, check out what 20-year Treasuries are yielding. Plus if yields do go up, you can cash them out early, and invest in higher-yielding bonds. The catches are few but to be complete: (A) you need to create a TreasuryDirect account, which means you have one more account to manage, and (B) you can only buy them in taxable, which may not make them ideal for people who are unable to invest beyond their tax-advantaged (retirement) accounts, then (C) they have some liquidity issues in terms of the one-year lock-up period, and not getting the EE doubling if you cash in early, but yields are so low right now that if they do go up and you do cash these out early you're not going to miss much. But, you ask, "Zero percent real return from I Bonds and 3.5% nominal return from EE Bonds? That's not a great return!" Well, I could debate this, but I'll just say that compared to other bonds, these government-backed securities seem like the best deal out there by far. For example, as of today, 20-year Treasuries are yielding 2%. Compound that for 20 years and you get less than $5,000 versus $10,000 when your EE Bonds double. But, you ask, "Won't stocks more than double over 20 years anyway?" Well, first, comparing stocks and bonds is a mistake, because their risk profiles and uses are so different. Second, bonds have indeed beaten stocks for 20-year periods before. Even taking the last 20 years as an example: it took US stocks 15 years to double and international stocks almost 20. So yes, over the last 20 years stocks came out ahead, but only in the final stretch ... the next 20 years, who knows? So think of it this way: are you going to hold bonds now and for the rest of your life of some type? Are you planning to live 20+ years? If you answered yes to both, you may benefit from EE bonds! Anyway, I'm (obviously) a big fan of both of these bond types and would recommend evaluating whether they would work for you. Posting this in part because I Bonds have come up a lot recently both here and over at /r/bogleheads, but also because EE bonds often get overlooked and are also worthy over consideration IMHO! [link] [comments]  |
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