Grt2bOutdoors wrote: ↑Sun Oct 18, 2020 12:27 pm
protagonist wrote: ↑Sun Oct 18, 2020 12:06 pm
SnowBog wrote: ↑Sun Oct 18, 2020 10:47 am
In my particular case, I'm hoping to be able to retire early, but want to delay social security and pensions until later. That leaves me reliant upon my portfolio and exposed to sequence of returns risk. By buying $10k each (self + spouse) of EE bonds each year, we create an income floor of $40k/year 20 years from date of purchase.
This reduces the need for drawing down the portfolio, and IMHO also lessens the SoR risks.
Obviously there is a risk of high inflation, but we also but $10k each of I Bonds, and the EE Bonds are only a small part of our portfolio, which we expect the rest of the portfolio (at least the equity side) will help hedge against inflation.
To me the biggest downside is the 20 year "commitment" for EE Bonds to pay off. In my case, I found it about them too late, so I'll only be able to use EE Bonds to cover about half the time I would have otherwise liked to have covered. But I acknowledge, they probably fit a narrow band of appeal (which includes me.)
If instead of buying 10K each of I-bonds and EE-bonds/year, you both bought just 20K of I-bonds, you would have a minimum of $800K inflation-adjusted dollars after 20 years (and that is assuming a 0% rate on all the I-bonds- certainly you would wind up with more than that). That should be more than enough (plus hopefully social security) to assure a comfortable retirement, and I would assume that any excess would probably be invested in stocks, cds, bonds, whatever, depending on your risk tolerance. The difference is that your $800K plus, inflation-adjusted, would be essentially risk-free, and if you needed money before 2040 due to unforeseen circumstances you could withdraw from it and you would not take any significant hit. A lot can happen in 20 years. What will your $40K in EE bonds be worth then?
The maximum annual purchase per person is $10K for I Bonds. So the minimum they will have is $200 to $400k on inflation adjusted proceeds. That said, why don’t you calculate what 15 year I bonds are worth today? I can pretty much estimate that they will not be worth a double in the next 5 years while the EE bonds will be. Unless you believe we will have rampant inflation in the next 5 years.
I was referring only to their 2020 contribution which would mature in 2040 and be worth $40K in 2040 dollars. They would have invested $400K in EE bonds by 2040, but they would not receive the full $800K nominal until 2060, at a rate of $40K/year.
The point is not whether, ultimately, I-bonds or EE bonds would yield more over 20 years. And how much they would be worth compared with inflation over the past 15 years as you suggest is irrelevant. The period 2005-2020 (an era of low inflation and a bond bull market due to steeply declining interest rates, plus the unpredictable 2008 crash) has little if any predictive value regarding the period 2020-2040. Neither does the 15 year period 1968-1983. There is no way to predict whether I-bonds will be worth more or less than EE bonds 20 years from now. The point is that the purpose of fixed income investment is safety, and EE bonds do not offer that, nor do they offer liquidity without a very stiff penalty. If one is looking for maximum growth, one should invest in stocks and accept the risk.
As for your question whether we will have rampant inflation between now and 2040, I have no clue. But I do have some personal experience with rampant inflation and lack of predictability. I bought property in the early 1990s in Venezuela, at which time Venezuela was the wealthiest and most stable democracy in South America (with possible exception of Argentina). You ask, will we have runaway inflation between now and 2040? The following is the only way I can respond to that:
Most of our lifetimes have distorted our perspective due to recency bias during the most remarkable, prosperous, stable 75 year period (since the end of WW2) in the West than the world has possibly ever known. We see things through rose colored glasses. No major wars , and none on American or Western European soil at all. No major epidemics. No major financial crises. No droughts or famines. Stable democracy. Explosive and likely unprecedented economic growth. My grandfather came to this country when his family escaped the pogroms in Russia at the end of the 19th century. In his 75 years of life he went through pogroms, typhoid epidemic, WWI (in which he served), flu epidemic of 1918-19, the Great Depression, WW2 (when he lost half his family in the Holocaust), etc etc etc. His life was pretty typical in ups and downs. And he was lucky not to be born a bit earlier, so he escaped the Civil War and the subsequent economic crisis. When I look at his life, and those of almost every other generation prior to mine throughout history, I think of what he would be saying about 2020: "COVID? Schmovid!! You complain about wearing masks? waah waah waah! You kids have no idea how good you have had it!!"
I hope our luck holds out to 2040 and 2060 and beyond. I wouldn't take bets either way. To quote Firesign Theater: "I'm just a bozo on this bus".