Creating an I-Bonds ladder

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fetch5482
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Creating an I-Bonds ladder

Post by fetch5482 »

I recently learnt about I-Bonds and the current 7.12% interest it pays. I am thinking of maxing out i-Bonds each year going forward. For our family, that means we can contribute a total of $40,000 each year (not counting the 5K paper bonds from tax returns to keep it simple).

I want to create a ladder every 3 months - is this practical to do with i-bonds given they are basically liquid (with 3 months of penalty) after one year? i.e., does it make more sense to put in all the 40K at once now or should I stagger 10K each quarter (say January, April, July, October). Then next calendar year, I do the same.

Wanted to seek some opinion on the practicality, since i-bonds are different from CD in that they don't carry 6-9 months of penalty in interest as CDs usually do; but the rates are variable and revised twice each year.
(AGE minus 23%) Bonds | 5% REITs | Balance 80% US (75/25 TSM/SCV) + 20% International (80/20 Developed/Emerging)
sailaway
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Re: Creating an I-Bonds ladder

Post by sailaway »

Do you have the money now? If so, is it sitting in something that will pay more than 7% over the next six months?

This isn't like a CD where you have to decide what is happening with it on a certain date. If you can, buy the bonds now and cash them in when you need them.
Last edited by sailaway on Tue Jan 18, 2022 11:07 pm, edited 1 time in total.
ivgrivchuck
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Re: Creating an I-Bonds ladder

Post by ivgrivchuck »

gas_balloon wrote: Tue Jan 18, 2022 11:03 pm I recently learnt about I-Bonds and the current 7.12% interest it pays. I am thinking of maxing out i-Bonds each year going forward. For our family, that means we can contribute a total of $40,000 each year (not counting the 5K paper bonds from tax returns to keep it simple).

I want to create a ladder every 3 months - is this practical to do with i-bonds given they are basically liquid (with 3 months of penalty) after one year? i.e., does it make more sense to put in all the 40K at once now or should I stagger 10K each quarter (say January, April, July, October). Then next calendar year, I do the same.

Wanted to seek some opinion on the practicality, since i-bonds are different from CD in that they don't carry 6-9 months of penalty in interest as CDs usually do; but the rates are variable and revised twice each year.
If you can put 40K at once without running into liquidity issues, you should probably do it... The rate is extremely good right now, but is expected to come down significantly going forward.
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fetch5482
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Re: Creating an I-Bonds ladder

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Yeah I had saved up for down payment on a home purchase which we've deferred due to the high home prices that have made it unaffordable/impractical for us to pursue. The cash was planned to DCA in the market over the coming months, however I decided instead to use I-Bonds as a substitute to my bond portion of the portfolio and bought more equities in my 401k instead. So the cash is basically sitting in a no-penalty CD earning 0.55% at Ally right now. Adding the $40K cash to I-Bonds will basically get my bond allocation to where my glide path tells me it should be at my current age.
(AGE minus 23%) Bonds | 5% REITs | Balance 80% US (75/25 TSM/SCV) + 20% International (80/20 Developed/Emerging)
BrokerageZelda
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Re: Creating an I-Bonds ladder

Post by BrokerageZelda »

Are any of your family members minor children? There are separate rules for minor custodial accounts, and you can't swap assets at will between parent and child the way you can between two spouses. So you can't use kids as 'I Bond mules' for expanding your own limit.

https://thefinancebuff.com/buy-i-bonds-kids-name.html
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fetch5482
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Re: Creating an I-Bonds ladder

Post by fetch5482 »

BrokerageZelda wrote: Tue Jan 18, 2022 11:25 pm Are any of your family members minor children? There are separate rules for minor custodial accounts, and you can't swap assets at will between parent and child the way you can between two spouses. So you can't use kids as 'I Bond mules' for expanding your own limit.

https://thefinancebuff.com/buy-i-bonds-kids-name.html
Yeah, 2 adults, 1 trust and 1 minor. The minor's account will eventually become theirs (and avoid it being part of inheritance/estate), I don't expect to withdraw for either parents' need from that account. We had read the same article from the finance buff before DW & I decided to have an account in the kids name.

We are funding a separate 529 with the kid as beneficiary which will pay about 50% of college fees (since we only have one kid and 529 carry withdrawal penalty for non-qualified use, we are going conservative on how much we contribute to 529). For the remainder, we will decide at the time whether to use their I-Bonds or fund it ourselves from our other investments. It's a far-off bridge which we don't need to cross right now.

I'm grossly over simplifying the situation in my question to just focus on whether laddering makes sense. Basically the 3 accounts (2 adults, 1 trust) plus 5k from tax refund will allow to to put away 35K in I-Bonds instead of total u.s. bonds which gets us very close to where our AA needs us to be in bonds. The kids' accounts for td (10K this year) and 529 are not part of our AA, but tracked in our overall net worth (since we plan to fund most of their college education through either 529 or I-Bonds or our own investments portfolio).
(AGE minus 23%) Bonds | 5% REITs | Balance 80% US (75/25 TSM/SCV) + 20% International (80/20 Developed/Emerging)
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Re: Creating an I-Bonds ladder

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gas_balloon wrote: Tue Jan 18, 2022 11:11 pm Yeah I had saved up for down payment on a home purchase which we've deferred due to the high home prices that have made it unaffordable/impractical for us to pursue. The cash was planned to DCA in the market over the coming months, however I decided instead to use I-Bonds as a substitute to my bond portion of the portfolio and bought more equities in my 401k instead. So the cash is basically sitting in a no-penalty CD earning 0.55% at Ally right now. Adding the $40K cash to I-Bonds will basically get my bond allocation to where my glide path tells me it should be at my current age.
A year is a long amount of time. If the housing market crashes by 20% in 3 months, will you regret not having the 40k available to snap up a home?
May all your index funds gain +0.5% today.
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fetch5482
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Re: Creating an I-Bonds ladder

Post by fetch5482 »

ApeAttack wrote: Wed Jan 19, 2022 12:15 am
gas_balloon wrote: Tue Jan 18, 2022 11:11 pm Yeah I had saved up for down payment on a home purchase which we've deferred due to the high home prices that have made it unaffordable/impractical for us to pursue. The cash was planned to DCA in the market over the coming months, however I decided instead to use I-Bonds as a substitute to my bond portion of the portfolio and bought more equities in my 401k instead. So the cash is basically sitting in a no-penalty CD earning 0.55% at Ally right now. Adding the $40K cash to I-Bonds will basically get my bond allocation to where my glide path tells me it should be at my current age.
A year is a long amount of time. If the housing market crashes by 20% in 3 months, will you regret not having the 40k available to snap up a home?
No. I have company RSUs vesting in the next 6 months that will make up for that 40k. I don't hold company stocks. During normal times I just reinvestment them into my bogleheads portfolio, but next few months I'll keep them as cash until we are 100% sure we are out of housing market.

I'm in Bay area where 40k doesn't really buy much house. I'm sitting in ~300k cash right now from which 40k goes to I-Bonds. That'll get replenished shortly from RSU.

Fwiw, we do own a house right now, just looking to upgrade, so we have a bit more patience than a first time buyer. Also I do have ~ 50k of emergency cash. Worst case I can use them before the next vest towards down payment and refuel it once the vest shows up (unlikely, but it's a possibility in worst case). I'm in a stable role at a stable company and don't expect any changes to my employment status (unless I myself decide to quit) for the next 6 months.
(AGE minus 23%) Bonds | 5% REITs | Balance 80% US (75/25 TSM/SCV) + 20% International (80/20 Developed/Emerging)
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BL
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Re: Creating an I-Bonds ladder

Post by BL »

ApeAttack wrote: Wed Jan 19, 2022 12:15 am
gas_balloon wrote: Tue Jan 18, 2022 11:11 pm Yeah I had saved up for down payment on a home purchase which we've deferred due to the high home prices that have made it unaffordable/impractical for us to pursue. The cash was planned to DCA in the market over the coming months, however I decided instead to use I-Bonds as a substitute to my bond portion of the portfolio and bought more equities in my 401k instead. So the cash is basically sitting in a no-penalty CD earning 0.55% at Ally right now. Adding the $40K cash to I-Bonds will basically get my bond allocation to where my glide path tells me it should be at my current age.
A year is a long amount of time. If the housing market crashes by 20% in 3 months, will you regret not having the 40k available to snap up a home?
Agree that you need to consider what if housing becomes affordable before the 1-year lockdown is done.

If that is not a problem, then I suggest putting it in as soon as possible, because that means the 1 year will be up sooner, which give you the choice of when to withdraw it or withdraw a portion of it.
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fetch5482
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Re: Creating an I-Bonds ladder

Post by fetch5482 »

Thanks everyone for the guidance. I went ahead and deposited the full $10,000 in each of the 4 accounts.
I will backfill my cash over the next few months by selling the RSUs that will vest; so I will be prepared to re-enter the housing market if I choose to by summer.
(AGE minus 23%) Bonds | 5% REITs | Balance 80% US (75/25 TSM/SCV) + 20% International (80/20 Developed/Emerging)
delrinson
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Re: Creating an I-Bonds ladder

Post by delrinson »

I've got two years of laddering accomplished....$40,000 altogether. I think I'll keep doing $20,000 a year until it looks like cash and/or online savings is a better place to park cash.
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