i-bonds as an inflation protected EF?

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MattB
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i-bonds as an inflation protected EF?

Post by MattB »

Hi Bogleheads,

I'm relatively new to the concept of i-bonds and have three questions.

First, would i-bonds make an ideal holding for an emergency fund? My current EF is in a cash equivalent but is not inflation protected. Is there any reason I shouldn't purchase i-bonds in addition to my current EF with the goal of replacing my cash equivalent holdings after 12 months, once the i-bonds have become redeemable?

Second, should I consider waiting possibly a few years to purchase i-bonds for an EF because the current fixed rate of return for i-bonds is literally zero? Or should I just grin and bear the fact that rates are at historic lows? It's disappointing to think that a security I may hold for 30 years might return nothing after inflation, depending on my future tax bracket. But at the same time return shouldn't matter. I would be buying these to maintain the purchasing power of an EF over time.

Finally, is there a way to purchase i-bonds through one of my brokerages, schwab preferably, or vanguard? Or are i-bonds purchased and held in an account through treasury direct?

Thank you.

Best,

Matt
SuperTrooper87
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Re: i-bonds as an inflation protected EF?

Post by SuperTrooper87 »

Yea. Just make sure you have the means to offset an emergency as the bonds will be tied up one year.

If after a year or more the fixed rate goes up, just sell what you bought and repurchase.

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MattB
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Re: i-bonds as an inflation protected EF?

Post by MattB »

Thanks for confirming. This is helpful.
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ApeAttack
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Re: i-bonds as an inflation protected EF?

Post by ApeAttack »

MattB wrote: Wed Jun 23, 2021 1:27 am Hi Bogleheads,

I'm relatively new to the concept of i-bonds and have three questions.

First, would i-bonds make an ideal holding for an emergency fund? My current EF is in a cash equivalent but is not inflation protected. Is there any reason I shouldn't purchase i-bonds in addition to my current EF with the goal of replacing my cash equivalent holdings after 12 months, once the i-bonds have become redeemable?

Second, should I consider waiting possibly a few years to purchase i-bonds for an EF because the current fixed rate of return for i-bonds is literally zero? Or should I just grin and bear the fact that rates are at historic lows? It's disappointing to think that a security I may hold for 30 years might return nothing after inflation, depending on my future tax bracket. But at the same time return shouldn't matter. I would be buying these to maintain the purchasing power of an EF over time.

Finally, is there a way to purchase i-bonds through one of my brokerages, schwab preferably, or vanguard? Or are i-bonds purchased and held in an account through treasury direct?

Thank you.

Best,

Matt
A couple months ago I started slowly moving part of my EF to I-Bonds because savings accounts can only earn 0.5% nowadays and there is a nice inflation hedge with I-Bonds. I plan on moving half my EF over the next few years.

I suggest moving part of your EF to I-Bonds slowly at first. It has been a weird feeling not having access to those funds over the past couple months. It was still the right decision, but it might make some people uncomfortable.
Just another lazy index investor who recently found out about I-Bonds (https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm).
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MattB
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Re: i-bonds as an inflation protected EF?

Post by MattB »

ApeAttack wrote: Wed Jun 23, 2021 2:34 am I suggest moving part of your EF to I-Bonds slowly at first. It has been a weird feeling not having access to those funds over the past couple months. It was still the right decision, but it might make some people uncomfortable.
Thanks.

Side note: I hate the feeling of seeing cash sitting in an extra savings account. I'll be glad when it's out of sight and inflation protected.
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Re: i-bonds as an inflation protected EF?

Post by ApeAttack »

MattB wrote: Wed Jun 23, 2021 2:45 am
ApeAttack wrote: Wed Jun 23, 2021 2:34 am I suggest moving part of your EF to I-Bonds slowly at first. It has been a weird feeling not having access to those funds over the past couple months. It was still the right decision, but it might make some people uncomfortable.
Thanks.

Side note: I hate the feeling of seeing cash sitting in an extra savings account. I'll be glad when it's out of sight and inflation protected.
It won't matter much in the long run if you start with 5k this month, then the final 5k in August after you have a taste of I-Bonds. But you know yourself better than anyone else... go for the full 10k now if you feel ready. :)
Just another lazy index investor who recently found out about I-Bonds (https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm).
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Re: i-bonds as an inflation protected EF?

Post by anon_investor »

I Bonds are great! We started moving our EF to I Bonds in 2020.
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Re: i-bonds as an inflation protected EF?

Post by BV3273 »

I’ve been moving over about a thousand dollars per month. That way I still have some funds available if something pops up and it staggers the 1 year holding period. I’d rather do this than take the plunge all at once but hey that’s just me. A lot of people on here can’t stand the TD website, so that kind of weighed on me as well. So far so good.
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Re: i-bonds as an inflation protected EF?

Post by nisiprius »

MattB wrote: Wed Jun 23, 2021 1:27 am...Finally, is there a way to purchase i-bonds through one of my brokerages, schwab preferably, or vanguard?...
No. Savings bonds are "non-marketable securities," a concept which is somewhat unusual in the investment world. As far as I know, there are only two ways to hold them: in an account at Treasury Direct, and as physical paper bonds like the ones we keep in our safe deposit box. I'm going to ignore paper bonds in this posting because there isn't a straightforward way to buy them--the only way to get them is to request them as part of a tax refund. And they are hard to redeem, some banks will still do it but not many.
First, would i-bonds make an ideal holding for an emergency fund? My current EF is in a cash equivalent but is not inflation protected. Is there any reason I shouldn't purchase i-bonds in addition to my current EF with the goal of replacing my cash equivalent holdings after 12 months, once the i-bonds have become redeemable?
Absolutely. With two provisos, both obvious. The first is the one-year wait, which as far as I know is absolute. Once you've bought your I bonds you can't see your money again for a year. (And, no, you can't use them as loan collateral, that's prohibited). The second is that this is one more electronic account to keep track of, and before you can access your money you must first transfer it to a bank account which you set up when you open the account, and it requires sending a form to Treasury Direct if you ever want to change the bank. I've never done that so I don't know how long that takes. When I've made withdrawals the money was available in my checking account within 24 hours but I can't tell you if that's always true.
Second, should I consider waiting possibly a few years to purchase i-bonds for an EF because the current fixed rate of return for i-bonds is literally zero?
There's probably no reason to wait. Because they are non-marketable securities, I bonds have a really unique characteristics that no marketable security has: they are free from interest rate risk. If you own I bonds and the fixed rate goes up, the value of your existing bonds doesn't go down. This means that in theory you can simply redeem your old I bonds and then use the money to purchase the new, better bonds.

Of course there are two catches. The first is that if you do that, your funds are again inaccessible for a year. The second is the effect of the annual purchase limit.

The fact that I bonds are free from interest rate risk is poorly understood, and it's huge. People often bracket I bonds and TIPS together, because both are inflation-linked, but TIPS are regular marketable securities, and their market value fluctuates. Unless you buy individual TIPS at issue and hold to maturity, you are taking a definite risk, the same size as with other bonds of the same term. If you want your money before they mature, you might fail to keep up with inflation and you might even lose money if interest rates rise sharply. This is not true of I bonds. As a practical matter, once the year is up, you are not locked in the sense that you might lose money if you don't wait until maturity. You can redeem them whenever you need the money, and you can redeem them whenever you see some different investment you would rather be in.
It's disappointing to think that a security I may hold for 30 years might return nothing after inflation, depending on my future tax bracket. But at the same time return shouldn't matter. I would be buying these to maintain the purchasing power of an EF over time.
Because the number of dollars you get when you redeem an I bond never goes down, they have no fluctuation, no volatility, and are completely "cash-like." Therefore I think they should be evaluated against other cashlike, non-fluctuating vehicles: bank accounts, money market mutual funds, and Treasury bills. Although they are not exciting, whenever I've made the comparison I bonds come up as just plain better.

You may be suspicious of I bonds because you hardly ever hear about them. My opinion is that this is the result of obvious self-serving bias on the part of the investment industry: there's no way for anyone to make money by selling you I bonds. If you pay attention to investing self-help books, etc. you'll see a clear pattern: writers with connections to the investment industry just never mention savings bonds. But writers who are genuinely independent almost always mention them favorable.

Finally, weird stuff happens. When I bought I bonds around 1999, 2000, 2001, I thought they were ridiculously conservative investments. At that time the fixed rate was about 3% and everyone thought that was ludicrously low. At that time, 3% was essentially "zero" because we were in a bull market and virtually all stocks had been gaining 20% and more per year. The last thing I ever expected was that the series I savings bonds I bought in 2001 would outperform stocks for fourteen years!

I'm not suggesting that's likely to happen again, but I am suggesting that "returning nothing after inflation" could turn out to be not bad at all.

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Last edited by nisiprius on Wed Jun 23, 2021 7:36 am, edited 1 time in total.
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Re: i-bonds as an inflation protected EF?

Post by cliff »

Rather than start new thread thought I'd ask my I bond question here. The limit, unless one uses tax refund, is 10k per year..So a marrried couple can buy up to 20k. If bonds are registered 'with', for example grown child and the child is listed first, can another 10k be purchased?
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Re: i-bonds as an inflation protected EF?

Post by Grt2bOutdoors »

cliff wrote: Wed Jun 23, 2021 6:35 am Rather than start new thread thought I'd ask my I bond question here. The limit, unless one uses tax refund, is 10k per year..So a marrried couple can buy up to 20k. If bonds are registered 'with', for example grown child and the child is listed first, can another 10k be purchased?
Yes, however only in a minor linked account. The minor owns the bond, not you. The minor linked account is the Treasury Direct form of an UTMA and the bonds with account ownership will transfer into a separate minor only account at age 18! Further if you do decide to do this and redeem a bond out of there - a big messsge will appear on the screen informing you that the redeemed proceeds are to be used for the benefit of the child and you are attesting to such.
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Re: i-bonds as an inflation protected EF?

Post by BrokerageZelda »

cliff wrote: Wed Jun 23, 2021 6:35 am Rather than start new thread thought I'd ask my I bond question here. The limit, unless one uses tax refund, is 10k per year..So a marrried couple can buy up to 20k. If bonds are registered 'with', for example grown child and the child is listed first, can another 10k be purchased?
For a grown child, no. The first name on a bond is always the owner of the TreasuryDirect account.

You can buy 'gift bonds' with your child's name first, but you cannot have your own name as POD or WITH on a gift bond that you give (yes, I've had the same idea). However, you might be able to buy a gift bond registered to Child WITH Spouse.

Your child will need to open up a separate personal TD account to receive the gift bond. And receiving gift bonds counts as purchasing bonds in terms of the purchase limit, so once you receive $10k in gift I Bonds in a single year, you're not allowed to buy or receive any more I Bonds for the rest of the year without getting nailed for over-purchasing by TD (yes, I've had the same idea).

You can be WITH or POD on as many bonds as you like, however if a WITH bond's second owner redeems a bond, the primary owner of the bond gets hit with the tax bill/1099, so you can't just use a bunch of family and friends as 'mules' with no consequence (yes, I've had the same idea).
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Re: i-bonds as an inflation protected EF?

Post by amamon »

Could someone please help clarify for a newbie -- isn't the purpose of an EF to be completely liquid? What we're really talking about here is the validity of investing in iBonds as an alternative/supplemental investment to any non-tax advantaged/non-IRA accounts, after the core EF has been established, correct? Why is this being framed in the context of an EF?
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Re: i-bonds as an inflation protected EF?

Post by BrokerageZelda »

amamon wrote: Wed Jun 23, 2021 4:05 pm Could someone please help clarify for a newbie -- isn't the purpose of an EF to be completely liquid? What we're really talking about here is the validity of investing in iBonds as an alternative/supplemental investment to any non-tax advantaged/non-IRA accounts, after the core EF has been established, correct? Why is this being framed in the context of an EF?
I Bonds are special in that they can act both as a liquid high yield emergency fund (after the first year) and as inflation protected Treasury bonds in a special tax deferred account outside of normal retirement account limits. If you only need I Bonds to be one of these two things, you can buy them just for that purpose. But if you need both, you can can sort of flex your perspective and allow your I Bond stash to be available for whichever purpose you need them for at any given time.

You do have to keep a 'bonus' duplicate portion of your EF in liquid savings to account for the temporarily locked-up funds while you're in the process of moving your EF into I Bonds. But once you're done with the lockup periods, getting money out of TreasuryDirect is as fast and easy as an ACH out of Ally Bank, for example.
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Re: i-bonds as an inflation protected EF?

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nisiprius wrote: Wed Jun 23, 2021 6:05 am The fact that I bonds are free from interest rate risk is poorly understood, and it's huge. People often bracket I bonds and TIPS together, because both are inflation-linked, but TIPS are regular marketable securities, and their market value fluctuates.
This is why I view my I Bonds as part of my cash allocation, not bond allocation. I view cash as anything that is not marked to market.
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Re: i-bonds as an inflation protected EF?

Post by exodusNH »

amamon wrote: Wed Jun 23, 2021 4:05 pm Could someone please help clarify for a newbie -- isn't the purpose of an EF to be completely liquid? What we're really talking about here is the validity of investing in iBonds as an alternative/supplemental investment to any non-tax advantaged/non-IRA accounts, after the core EF has been established, correct? Why is this being framed in the context of an EF?
After 12 months, it is liquid. Putting it in I bonds (which have relatively small purchase limits) means that your money will never lose real purchasing power. TIPS can have negative adjustments in a deflationary environment. There's effectively no credit risk. Your taxes are deferred (if you want) until you cash them in, unlike TIPS/treasuries. Unlike bond funds, the value never changes and won't have liquidity risk.

You wouldn't want to lock up 100% of your EF for that initial 12 months. But if you've got a stable income, moving it over to I bonds means you don't have to chase yield in savings accounts.

Your EF is separate from your monthly needs and anticipated expenses. You keep that in an account, probably in a bank with branches near you, replenishing it with your regular income.

Some people forego the EF once their taxable accounts are big enough, under the expectation that the additional return you may earn is worth the low risk that you'll have to pull money out at a bad time.
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Re: i-bonds as an inflation protected EF?

Post by MattB »

amamon wrote: Wed Jun 23, 2021 4:05 pm Could someone please help clarify for a newbie -- isn't the purpose of an EF to be completely liquid? What we're really talking about here is the validity of investing in iBonds as an alternative/supplemental investment to any non-tax advantaged/non-IRA accounts, after the core EF has been established, correct? Why is this being framed in the context of an EF?
My questions were framed in the context of an emergency fund because I want to use i-bonds as my emergency fund.

For me, the purpose of an EF is to be able to cover emergencies. I'm currently holding cash in a savings account for this purpose because it is principle protected. But I was looking for principle protected alternatives because I was losing out to inflation. And it seems i-bonds fit the bill.

As others have noted, there is a bit of dancing that has to happen to use i-bonds for an emergency fund: I'll need to purchase i-bonds with non-EF cash and then wait for 12 months before I can repurpose some of the cash that is currently held in my emergency fund. But after that, over the long-term, and with little maintenance, my emergency fund should keep up with inflation even if bank-rates remain pitifully low.

Moreover, the money that I may save holding i-bonds for my emergency fund may be significant. For example: I-bonds are currently returning 3.5% annually. My savings account is returning something like 0.1%. That difference, 3.4% annually, over 20 years, is almost exactly 100%.

That is to say I might double the money in my emergency fund over 20 years for holding i-bonds, where I would earn about 2% total, over twenty years, for keeping my emergency fund tucked away in a savings account.

Those numbers are different after taxes, obviously, but the difference remains significant to me.
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Re: i-bonds as an inflation protected EF?

Post by tomsense76 »

nisiprius wrote: Wed Jun 23, 2021 6:05 am The first is the one-year wait, which as far as I know is absolute. Once you've bought your I bonds you can't see your money again for a year. (And, no, you can't use them as loan collateral, that's prohibited).
On TreasuryDirect's website they note there may be special provisions if one is affected by a natural disaster. They explain this on a subsequent page in more detail. IIUC these are the same natural disasters declared on FEMA's site.

Related the US (as a whole) was declared nationally to have entered a natural disaster on 13 March 2020 due to COVID 19. There are of course other natural disasters that have come up since like devastating winter weather, wildfires, etc..

Now what I don't know (and maybe others can clarify) is, does one need to redeem the bonds while the disaster declaration is active or can one redeem them after? Also does this still apply for bonds bought during the disaster (as opposed to just those bought before)? I don't know the answers to these questions (maybe someone else will). Additionally as electronic bonds mention sending an email explaining why one is redeeming early, would imagine these are evaluated on a case-by-case basis and if one's reasoning is "fishy" the request would likely be rejected (this is speculation on my part but doesn't seem far-fetched).
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Re: i-bonds as an inflation protected EF?

Post by tomsense76 »

There are several threads on building bond ladders as well as pages on the wiki. If you are really squeezing to get all cash in I Bonds, these may be worth reading up on. Ofc some features that brokerages have like auto-roll are not available from TD AFAIK (happy to learn I'm wrong about this though :happy)

As interest is earned at the beginning of each month, one reasonable way to go about laddering would be to purchase some I Bonds each month. Since $10,000 doesn't nicely divide by 12, one purchase may be a bit bigger than the others. One might choose to make that larger purchase last as older I Bonds would then be available for use in short order (so one would maintain good liquidity).
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Re: i-bonds as an inflation protected EF?

Post by exodusNH »

MattB wrote: Wed Jun 23, 2021 4:59 pm That is to say I might double the money in my emergency fund over 20 years for holding i-bonds, where I would earn about 2% total, over twenty years, for keeping my emergency fund tucked away in a savings account.
It is more accurate to say that 20 years from now, your initial outlay will have the same purchasing power as the day you bought it. The absolute number might be double, but it won't buy you more.

I only bought my first I bond this year, which I'm intending to use in retirement as to cover (or at least partially cover) unavoidable expenses such as property taxes. I count them as part of my bond allocation in my AA. (It's a small enough amount that I'm not worried about rebalancing issues.)
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Re: i-bonds as an inflation protected EF?

Post by MattB »

tomsense76 wrote: Wed Jun 23, 2021 5:49 pm There are several threads on building bond ladders as well as pages on the wiki. If you are really squeezing to get all cash in I Bonds, these may be worth reading up on. Ofc some features that brokerages have like auto-roll are not available from TD AFAIK (happy to learn I'm wrong about this though :happy)

As interest is earned at the beginning of each month, one reasonable way to go about laddering would be to purchase some I Bonds each month. Since $10,000 doesn't nicely divide by 12, one purchase may be a bit bigger than the others. One might choose to make that larger purchase last as older I Bonds would then be available for use in short order (so one would maintain good liquidity).
Thanks for the suggested reading. We won't be squeezing all of our cash into i-bonds. We presently keep about $20k in our checking account, which fluctuates between 15 and 25 over the course of most months. That money will remains as true cash. We also keep $20k in a separate savings account that my wife has tagged our emergency fund. That money will be converted to i-bonds over time. And I'll likely add to it until we have $40k in i-bonds.

I think my strategy will be to buy $10k i-bonds every 6 months for two years. After that, I'll check the fixed rate every six months and sell/repurchase half of our total holdings if the new fixed rate is sufficiently compelling.

I don't currently see any point in continuing to purchase $10k/year, every year, for the foreseeable future, because this is an emergency fund. 10 or 12 months of expenses is enough. And at some point that money is better invested in VTSAX or some other broad market fund.
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Re: i-bonds as an inflation protected EF?

Post by MattB »

exodusNH wrote: Wed Jun 23, 2021 5:52 pm It is more accurate to say that 20 years from now, your initial outlay will have the same purchasing power as the day you bought it. The absolute number might be double, but it won't buy you more.
Tomato-tomahto. The point is the same. Using i-bonds as an emergency fund vehicle will save us money over time. The alternative would be to periodically add cash to a savings account balance that would be losing purchasing power to inflation over time.
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Re: i-bonds as an inflation protected EF?

Post by anon_investor »

MattB wrote: Wed Jun 23, 2021 6:09 pm
exodusNH wrote: Wed Jun 23, 2021 5:52 pm It is more accurate to say that 20 years from now, your initial outlay will have the same purchasing power as the day you bought it. The absolute number might be double, but it won't buy you more.
Tomato-tomahto. The point is the same. Using i-bonds as an emergency fund vehicle will save us money over time. The alternative would be to periodically add cash to a savings account balance that would be losing purchasing power to inflation over time.
Bottom line, I Bonds for an emergency fund are good of you can get over the 1 year limitation.
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Re: i-bonds as an inflation protected EF?

Post by hershey102d »

SuperTrooper87 wrote: Wed Jun 23, 2021 1:32 am
Treasurarydirect.com only
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