Put 10k into IBonds or equities (late 20's)

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hlinee
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Joined: Wed Jan 30, 2019 5:54 pm

Put 10k into IBonds or equities (late 20's)

Post by hlinee »

I put 10k into IBonds last year because I got hyped up about the interest rate being so high, but this year I am not sure whether I should put another 10k into IBonds or just invest into VTSAX/VTIAX (taxable). In 30 years, I will be in my highest tax bracket when I have to cash them in and maybe I should put 10k into stocks where I can continue to defer taxes and possibly pay a lower capital gains tax when I retire.
Makefile
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Re: Put 10k into IBonds or equities (late 20's)

Post by Makefile »

Depends on size of your portfolio, and your asset allocation I would say.
On a $50,000 portfolio, buying a max series I bond is like going 20% (or 16 2/3%) bonds, distorting it significantly.
On a $1,000,000 portfolio, $10,000 is "only" 1%.
sailaway
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Re: Put 10k into IBonds or equities (late 20's)

Post by sailaway »

There is simply not enough information here. Is this above and beyond your tax sheltered space? Do you have an asset allocation or just setting money aside?

Do you fully understand that this great rate is only for six months and if inflation goes flat again, the permanent rate on these is actually zero?
dwinant
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Re: Put 10k into IBonds or equities (late 20's)

Post by dwinant »

sailaway wrote: Mon Jan 17, 2022 6:42 pm Do you fully understand that this great rate is only for six months and if inflation goes flat again, the permanent rate on these is actually zero?
Permanent sounds so permanent, inflation goes flat you are free to redeem them after a year and forfeit the last 3 months of back to flat again interest. Given the implied inflation rate for the next 6 month period that will be out in May 2022 I'd say highly likely the rate will remain "great" for the next 12 months.
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FoundingFather
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Re: Put 10k into IBonds or equities (late 20's)

Post by FoundingFather »

Though I don't have full information on your situation, so I might be leading you somewhat astray, I will often some general thoughts.

What is your intended future use for this money you are setting aside, and how soon do you intend to use it? If you plan for this to be used in the next five years or so (i.e. house down payment, emergency fund, etc) then I bonds are a great place to put your money. If, instead, this is money for retirement or a similar future use that is 20+ years away, then I would put it in a total stock market index fund, or something similarly diversified, with low fees. This is my recommendation because, over the long term, stocks will likely outearn bonds.

If our responses are not quite getting at your real question, feel free to respond with more info and we can try again. :D

Founding Father
"I do not think myself equal to the Command I am honored with." -George Washington (excerpt from Journals of the Continental Congress, 16 June 1775)
Affable at 50
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Re: Put 10k into IBonds or equities (late 20's)

Post by Affable at 50 »

hlinee wrote: Mon Jan 17, 2022 6:36 pm I put 10k into IBonds last year because I got hyped up about the interest rate being so high, but this year I am not sure whether I should put another 10k into IBonds or just invest into VTSAX/VTIAX (taxable). In 30 years, I will be in my highest tax bracket when I have to cash them in and maybe I should put 10k into stocks where I can continue to defer taxes and possibly pay a lower capital gains tax when I retire.
There is not enough information provided for the forum to give an up/down indication.

Where do you stand in establishing your emergency fund?
Will the ibonds serve a component of your emergency fund at the end of the twelve month lockdown period and/or serve as a complement to your bond holdings in your asset allocation?
Are you maxing out your retirement accounts for 2022?
With a fixed rate of 0%, I’d hesitate to count this a 30-year investment.
BashBound
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Re: Put 10k into IBonds or equities (late 20's)

Post by BashBound »

Speaking as someone also in his 20s, why don't you put it in now and decide in a year whether to redeem and put it into equities? It looks like you will enjoy 12 months of high interest rate, and, not trying to time the market here, it seems to me more likely than not that the rate of return from equities could be lower than the I Bonds rate, and certainly with more risk, in the next year. You can reassess in a year's time, and possibly 15 months (if you do not want to forfeit the last three months of high interests).
dan7800
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Re: Put 10k into IBonds or equities (late 20's)

Post by dan7800 »

If nothing else, iBonds makes a great emergency fund (12+ months). It's also a great way to put money aside for larger purchases down the road IMHO
Blue456
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Re: Put 10k into IBonds or equities (late 20's)

Post by Blue456 »

hlinee wrote: Mon Jan 17, 2022 6:36 pm I put 10k into IBonds last year because I got hyped up about the interest rate being so high, but this year I am not sure whether I should put another 10k into IBonds or just invest into VTSAX/VTIAX (taxable). In 30 years, I will be in my highest tax bracket when I have to cash them in and maybe I should put 10k into stocks where I can continue to defer taxes and possibly pay a lower capital gains tax when I retire.
We use I-bonds as emergency fund and keep around 1-2 years of expenses in there. Another use for I-bonds is using them as bond portion of your investment assuming you don't want to be 100% equities.
TSR
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Re: Put 10k into IBonds or equities (late 20's)

Post by TSR »

Agree that we don't have enough information, but the biggest question for me is: Are you maxing out your tax-deferred space already (401k to $20,500; Roth to $6,000; HSA if you have one; etc.)? If not then for me the answer is automatically "do that first before even considering iBonds." If you are then the answer will depend on other factors that we still don't have enough information to answer.
dbr
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Re: Put 10k into IBonds or equities (late 20's)

Post by dbr »

I bond are a perfectly legitimate asset for anyone to own. Deciding out of the blue to buy them or to buy more of them because the interest rate has dislocated to an extreme is just not how to invest, at least not in the long run.

A better plan is to arrive at an appropriate asset allocation, probably high in stocks, and, as noted, in stocks in taxable accounts, and so on is a better plan. That doesn't mean adding to a holding of I bonds is not a fit if it is a fit. Note the fixed rate of zero is a guarantee to not have a positive real return.

Someone pointed out the other day that a reason people don't usually have built up large allocations to I bonds is that younger investors tend to hold larger proportions in stocks and tend to max out tax deferred accounts where it is not possible to buy I bonds. Defering taxes on the principal is a bigger deal than deferring taxes on earnings until pretax deferral is maximized. Later on it becomes problematic to shift large amounts to I bonds due to purchase limits, and much of the time there is not that big an advantage to that asset.
SnowBog
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Re: Put 10k into IBonds or equities (late 20's)

Post by SnowBog »

Again, not enough info has been provided...

But as a general recommendation, think of it as laid out in Prioritizing Investments Wiki:https://www.bogleheads.org/wiki/Priorit ... nvestments

If I Bonds are helping you create/fill your "emergency fund" and/or are for expenses you expect to have in the next 5 or so years - they are an excellent option.

If you've already filled up your emergency fund, and are maxing out all of your tax-advantaged accounts, still have money to invest in a "taxable" account, and your Asset Allocation calls for more bonds, then again I Bonds can be an excellent option.

But if you are between these two points, having established an adequate emergency fund but not yet having maxed out in your other tax-advantaged accounts (and the funds are being invested for retirement not short term needs), then you are likely better off investing in something like a "total stock market" fund (or the three-fund portfolio as you grow your investment enough).
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