In short, i-bonds will become less useful over time unless the purchase limits are increased to keep up with inflation.
The current limit on i-bond purchases is $10,000 per person per year, ignoring tax refunds, trusts, etc. And over time, as inflation eats at the value of money, the value of that $10,000 becomes less and less. That is to say i-bonds will eventually become useless. The purchase limit will prevent people from protecting a meaningful amount of their savings from inflation.
An example proves the rule:
- $10,000 buys $10,000 in i-bonds today. Thus, allowing an individual to save $10,000 per year in a low-risk, inflation adjusted government savings bond.
- Thirty years from now, $10,000 will still buy $10,000 in i-bonds. But those i-bonds will be worth about half as much as a i-bonds purchased today. Assuming two percent inflation, $10,000 in 2051 will be worth about $5,500 today. The math can be made worse. Assuming three percent inflation, $10,000 in 2051 will be worth about $4,000 today. At four percent inflation, $10,000 in 2051 will be worth about $3,000 today. Etc.
One answer would be for the treasury to increase purchase limits to keep up with inflation. I'm not sure if that can be discussed here. So, I'll drop it. Another, and the one I've come to, is that one might consider accumulating i-bonds earlier in their life than they might otherwise.
But is it worth it? Is it worth giving up two or three decades of stock market returns to accumulate a meaningful supply of i-bonds for retirement? I don't know. The answer is a personal one.
For me, I think, the answer is no. The opportunity cost isn't worth it.
- $20k/couple/year invested in i-bonds for thirty years would be worth ~$800k. That assumes about 2% annual inflation.
- That same $20k/couple/year put in the stock market for thirty years might well be worth ~$1.3m. That assumes 5% real (inflation adjusted) returns.
How do you think about this?