i-bonds will become useless [if their purchase limits are not indexed to inflation]

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SnowBog
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Re: i-bonds will become useless.

Post by SnowBog »

Noobvestor wrote: Tue Oct 26, 2021 8:58 pm
000 wrote: Tue Oct 26, 2021 8:01 pm But for me I'm not sure that a guaranteed after-tax real loss with no zag potential and some liquidity issues is an investment I want to make for 30 years anyway.
Liquid after one year (with three-month interest penalty) and if you want flight-to-safety/correlation effects, a Treasury index pairs well with I Bonds. I have enough in liquid bond funds that I can rebalance a long way down without having to think about tapping into I Bonds.

As always, it's a matter of alternatives. TIPS have a guaranteed after-tax real loss too right now. And if that changes: sell I Bonds, buy TIPS.
And some of us view the "no zag potential" of I/EE Bonds as a "feature" not a problem.

First, that makes them very simple to understand - and thus predict and plan for the future. No complicated "how much will the value rise/fall if interest rates fall/rise".

In fact that's part of what gives EE Bonds their "annuity like" ability, as you'll know exactly how much you'll have [nominally] in 20 years the day you purchase them.

Second, for those that view bonds as "safer" investments, it removes the interest rate risk and market risk (don't have to worry about people panicking and selling and driving I Bond prices lower). And they already have basically zero credit risk (unless you think the US Government plans to default) and no inflation risk (since they are inflation adjusted). Minimizes tax risks, since they are free from state/local taxes and federal taxes can be deferred up to 30 years giving you "tax arbitrage". Not sure how much "safer" one could get...

Lastly, it helps avoid behavioral risks like trying to "time" the right time to sell by guessing if the market rate is going up or not.
SnowBog
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Re: i-bonds will become useless.

Post by SnowBog »

I think "useless" is overstated...

But it would be nice if there was an inflation adjustment to the limit like there is for IRA & 401K accounts.

Although since they have changed the limits in the past, I suspect they'd do so again were they to get to your conceptual "useless" point.

Frankly, I'm more concerned they'll discontinue savings bonds completely...
tomsense76
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Re: i-bonds will become useless.

Post by tomsense76 »

MattB wrote: Tue Oct 26, 2021 4:24 pm 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.
I think I'd rather have an extra $1.3m in equities than $800k in i-bonds at retirement.

How do you think about this?
The thing is if one is maxing out all their retirement accounts (especially as a couple). They could be putting away mid-5 to low-6 figures per year. That's before getting to saving bonds. In all likelihood one is spilling over additional savings in taxable. Assuming they are starting out saving, one is putting away that amount per year (not to mention growth of a stock orientated portfolio) for say a 30yr time horizon. So they already will be getting into the millions by retirement. The absence of less than half a million by buying saving bonds instead of stocks won't even be noticeable.
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SnowBog
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Re: i-bonds will become useless.

Post by SnowBog »

MattB wrote: Tue Oct 26, 2021 4:24 pm 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.
I think I'd rather have an extra $1.3m in equities than $800k in i-bonds at retirement.

How do you think about this?
[OT comment removed by admin LadyGeek]

The people that are seriously looking at I Bonds as part of their portfolio have already decided to hold bonds. So if you want to offer a comparison - then explain why you think other bond options are better...

Otherwise you are arguing being 100/0 when someone has already decided on an AA of 80/20 (or in my case 60/40 @ 45 because we'll have "enough" and have long passed the point we have more to lose than we need to gain). It's a mostly pointless argument as ones AA is based on need/willingness/ability to take risk - not which ends up with the biggest terminal balance in a bull market...
000
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Re: i-bonds will become useless.

Post by 000 »

Yeah as I said the contribution limit shouldn't impact the marginal efficiency. But perhaps whether it's worth the effort.
tomsense76
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Re: i-bonds will become useless.

Post by tomsense76 »

SnowBog wrote: Tue Oct 26, 2021 9:21 pm I think "useless" is overstated...

But it would be nice if there was an inflation adjustment to the limit like there is for IRA & 401K accounts.

Although since they have changed the limits in the past, I suspect they'd do so again were they to get to your conceptual "useless" point.

Frankly, I'm more concerned they'll discontinue savings bonds completely...
Was thinking the same. Less-"useful" perhaps?

Though I think OP's concern is on point. Basically what is the future of savings bonds? If we project no changes going forward, agree it is bleak. Discontinuation would then be a mere formality.

That said, I don't exactly buy-in to "the no changes going forward" simply because of changes already happening in this space.
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JoMoney
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Re: i-bonds will become useless.

Post by JoMoney »

Things change. The U.S. government isn't having any problems finding buyers for their debt right now. In principal, the central bank is not supposed to be political, and at some point their mandate may require a monetary policy that's less accommodating to the spending of congress. If those days come, maybe more incentives for savers will come... but there will likely be other more competitive options also looking to borrow as well.
For now, savings bonds offer a premium that's not available anywhere else.
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lotusflower
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Re: i-bonds will become useless.

Post by lotusflower »

MattB wrote: Tue Oct 26, 2021 4:24 pm 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.
Given that the purchase limit has changed several times in recent history, OP why are you begging the question with the likely false premise that the limits will never change again?
stoptothink
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Re: i-bonds will become useless.

Post by stoptothink »

MattB wrote: Tue Oct 26, 2021 5:15 pm
AnotherMike wrote: Tue Oct 26, 2021 5:06 pm At $20k per couple per year it’s not a bad place to accumulate college tuition funds for your grandchildren!
That's fair. At the same time, $20k/couple/year won't be worth beans in terms of tuition in a few years. Tuition has increased at a much higher rate than inflation over the past decade. And I don't see that stopping anytime soon.

Edit: I shouldn't be so quick to trivialize it. $20k/couple/year is a lot from grandparents.
Depends on where and what school. $20k pays for three years at local U that wife graduated from and their tuition has increased slower than inflation over the past decade. Another option, about 2hrs drive from us, is even cheaper and they haven't raised tuition at all in 5yrs (but we'd have to pay room & board, unlike if they attended local U which is 5 miles from our home).

Our kids have $28k each in 529s and we're done, that covers 4yrs at local U at current rates. We are considering starting to buy I-bonds to give us some flexibility in case tuition skyrockets or they decide to go to a more expensive school (and we decide we'll fund the difference).
mikejuss
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Re: i-bonds will become useless.

Post by mikejuss »

SnowBog wrote: Tue Oct 26, 2021 9:46 pm
MattB wrote: Tue Oct 26, 2021 4:24 pm 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.
I think I'd rather have an extra $1.3m in equities than $800k in i-bonds at retirement.

How do you think about this?
[OT comment removed by admin LadyGeek]

The people that are seriously looking at I Bonds as part of their portfolio have already decided to hold bonds. So if you want to offer a comparison - then explain why you think other bond options are better...

Otherwise you are arguing being 100/0 when someone has already decided on an AA of 80/20 (or in my case 60/40 @ 45 because we'll have "enough" and have long passed the point we have more to lose than we need to gain). It's a mostly pointless argument as ones AA is based on need/willingness/ability to take risk - not which ends up with the biggest terminal balance in a bull market...
I agree. This line of thinking strikes me as silly. Hey, I'd like to be able to put $100,000 a year directly into my Roth IRA, but the fact that I can add only a mere $6,000 to it doesn't make the account "useless."
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Patzer
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Re: i-bonds will become useless.

Post by Patzer »

I-Bonds remain one of the best savings vehicles, but to have a meaningful amount in them you do have to start earlier.
I just started this year at 40. I wish I had a few years earlier.
So, I will only have about 100K in them when I retire at 50, but I will keep buying them in retirement and be at 200K by 60.
They will never be a large portion of my portfolio, because of the limits but they will still provide some tilt towards inflation protection over something like Total Bond.

If things remain as they are though, I could see in 50 years them not being worth bothering with at all, but as they currently are, I think they are worth buying and putting some of your asset allocation towards.
MrJedi
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Re: i-bonds will become useless.

Post by MrJedi »

I do think somebody does have to be a little careful about accumulating a lot of them in their 20s. They might actually end up with a whole of bonds that mature and get taxed after 30 years while they are still mid/late career and earning decent income. Sort of like an RMD tax bomb while you are still working.
Walkure
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Re: i-bonds will become useless.

Post by Walkure »

lotusflower wrote: Tue Oct 26, 2021 11:26 pm
MattB wrote: Tue Oct 26, 2021 4:24 pm 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.
Given that the purchase limit has changed several times in recent history, OP why are you begging the question with the likely false premise that the limits will never change again?
Because the recent changes have all been in the wrong direction for seemingly arbitrary reasons that in no way suggest that inflation was even considered among the factors that went into setting said limits.
JackoC
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Re: i-bonds will become useless.

Post by JackoC »

SnowBog wrote: Tue Oct 26, 2021 9:46 pm
MattB wrote: Tue Oct 26, 2021 4:24 pm 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.
I think I'd rather have an extra $1.3m in equities than $800k in i-bonds at retirement.

How do you think about this?
[OT comment removed by admin LadyGeek]

The people that are seriously looking at I Bonds as part of their portfolio have already decided to hold bonds. So if you want to offer a comparison - then explain why you think other bond options are better...

Otherwise you are arguing being 100/0 when someone has already decided on an AA of 80/20 (or in my case 60/40 @ 45 because we'll have "enough" and have long passed the point we have more to lose than we need to gain). It's a mostly pointless argument as ones AA is based on need/willingness/ability to take risk - not which ends up with the biggest terminal balance in a bull market...
My impression is that OP is seeking other people's opinions and knowledge with the right intentions. But yeah, lots of threads on this forum purport to focus on the strong or weak points of a particular type of 'bond' (TIPS, I-bonds, nominal treasuries, CD's, muni's etc.) but a lot of the posts are really about asset allocation, the step before you decide *which* bonds if the answer to the allocation question isn't zero bonds. IMO the idea 100% stock because bond yields are low doesn't make much sense*, but it's strictly logically upstream of the question *which* bonds if you decide on any. And the simple answer to that question, how I-bonds stack up among so-called riskless bonds, is 'terrific' because the variable rate is floored at 0% whereas the closest comparison, the 5 yr TIPS (I-bonds are redeemable at par with full interest at 5 yrs) yields -1.7%. I-bonds are a no-brainer now among US federal govt bonds unless the purchase limit is truly trivial relative to one's portfolio, though there could always be a further discussion credit risk vs. return of muni's vs federal govt bonds for people in very high tax brackets.

*most people who feel this way seem to assume expected return of stocks is some constant independent of bond yields, but that's a mystifying assumption to me. There's no barrier between the two markets. It stands to reason the market would already have bid up stock prices, resulting in lower expected stock return from now, in reaction to lower bond yields. If you were to assume anything a constant it would be the return advantage of stocks *over bonds*, so the relative attractiveness would be independent of bond yields. IMO the relative advantage of stocks over bonds has probably actually diminished recently, ie. the bad news for investors is how much lower bond yields are now than they used to be, and the worse news is that investors piling into the stock market in search of absolute return have narrowed the expected Equity Risk Premium too.
HD192
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Re: i-bonds will become useless.

Post by HD192 »

Agree that you have to decide if you want bonds or not.

If you want bonds, I-Bonds are really nice right now.
invest4
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Re: i-bonds will become useless.

Post by invest4 »

JackoC wrote: Wed Oct 27, 2021 9:03 am
The people that are seriously looking at I Bonds as part of their portfolio have already decided to hold bonds. So if you want to offer a comparison - then explain why you think other bond options are better...
Agreed.
MrJedi wrote: Wed Oct 27, 2021 8:30 am I do think somebody does have to be a little careful about accumulating a lot of them in their 20s. They might actually end up with a whole of bonds that mature and get taxed after 30 years while they are still mid/late career and earning decent income. Sort of like an RMD tax bomb while you are still working.
Never fear as I would wager that few people in their 20s are accumulating bonds at all...and likely nil for i-Bonds. Most frequently, the advice given is not to worry too much about bonds at all until you are in your 40s or 50s. To that extent, accumulating a sufficient amount of i-bonds to make a reasonable impact on your portfolio remains a potential challenge...and part of the reason I choose not to pursue it. YMMV.
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Re: i-bonds will become useless.

Post by iamblessed »

I wonder why the limit was dropped from 30k to 10k?
HD192
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Re: i-bonds will become useless.

Post by HD192 »

iamblessed wrote: Wed Oct 27, 2021 10:51 am I wonder why the limit was dropped from 30k to 10k?
https://www.forbes.com/2010/02/25/i-bon ... c7f1b552b8

Here's a good article that shows what the Treasury previously said about it--as well as speculation on the real reason: They don't want to give you a ton of additional tax deferred space.
mervinj7
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Re: i-bonds will become useless.

Post by mervinj7 »

HD192 wrote: Wed Oct 27, 2021 11:06 am
iamblessed wrote: Wed Oct 27, 2021 10:51 am I wonder why the limit was dropped from 30k to 10k?
https://www.forbes.com/2010/02/25/i-bon ... c7f1b552b8

Here's a good article that shows what the Treasury previously said about it--as well as speculation on the real reason: They don't want to give you a ton of additional tax deferred space.
It was too useful, so they limited it.
:(
2pedals
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Re: i-bonds will become useless.

Post by 2pedals »

I am in the process of eliminating them. We are in early retirement and we didn't focus on using them as a primary source for long-term investments and they are about 1.5% of our portfolio. Since then we have set up a revocable living trust and want to avoid having the heir deal with too many complications and extra accounts. Even though they are a good deal now relative to other fixed investments it would take a long time to accumulate a meaningful investment in them. We are not planning on setting up a trust account with treasury direct.
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grogu
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Re: i-bonds will become useless.

Post by grogu »

invest4 wrote: Wed Oct 27, 2021 10:13 am
Never fear as I would wager that few people in their 20s are accumulating bonds at all...and likely nil for i-Bonds. Most frequently, the advice given is not to worry too much about bonds at all until you are in your 40s or 50s. To that extent, accumulating a sufficient amount of i-bonds to make a reasonable impact on your portfolio remains a potential challenge...and part of the reason I choose not to pursue it. YMMV.
Yeah, I made a similar point in the mega-thread. When you're young and in your prime earning years you probably ought not to be buying I-bonds (except perhaps as an emergency fund). But then when the time comes that you want to downshift your high equity holdings into (I-)bonds, the $10k limits largely prevent you from doing so.
2pedals
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Re: i-bonds will become useless.

Post by 2pedals »

grogu wrote: Wed Oct 27, 2021 11:47 am
invest4 wrote: Wed Oct 27, 2021 10:13 am
Never fear as I would wager that few people in their 20s are accumulating bonds at all...and likely nil for i-Bonds. Most frequently, the advice given is not to worry too much about bonds at all until you are in your 40s or 50s. To that extent, accumulating a sufficient amount of i-bonds to make a reasonable impact on your portfolio remains a potential challenge...and part of the reason I choose not to pursue it. YMMV.
Yeah, I made a similar point in the mega-thread. When you're young and in your prime earning years you probably ought not to be buying I-bonds (except perhaps as an emergency fund). But then when the time comes that you want to downshift your high equity holdings into (I-)bonds, the $10k limits largely prevent you from doing so.
This has been my experience as well. Unfortunately, very low-interest rates on fixed investing have made them look more attractive and I can see why BHs are trying to maximize their usefulness.
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greg24
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Re: i-bonds will become useless.

Post by greg24 »

Nice clickbait subject line, that really has nothing to do with the original post.
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beyou
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Re: i-bonds will become useless.

Post by beyou »

2pedals wrote: Wed Oct 27, 2021 11:46 am I am in the process of eliminating them. We are in early retirement and we didn't focus on using them as a primary source for long-term investments and they are about 1.5% of our portfolio. Since then we have set up a revocable living trust and want to avoid having the heir deal with too many complications and extra accounts. Even though they are a good deal now relative to other fixed investments it would take a long time to accumulate a meaningful investment in them. We are not planning on setting up a trust account with treasury direct.
I think about cashing out in the name of simplication.
Can’t add much going forward (not buying E again to wait 20 years and not buying in separate account for each family member) so my purchase limit is 10k/year. I may add the 10k in i bonds, but as my older 30k bonds mature, and all I have left is a handful of newer, smaller and zero fixed rate i bonds, simplification will drive taking the remaining amounts out rather than add more. Yes a larger annual purchase limit may change that.

For younger folk, the 10k limit seems fine given the small % bonds one should hold now. Will it be insufficient later, maybe, and then you get to the same “simplification” argument to close a small account.

Inability to rebalance means you shouldn’t keep all your fixed income in savings bonds anyway. Nice supplement but can live without this.
inbox788
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Re: i-bonds will become useless.

Post by inbox788 »

mikejuss wrote: Tue Oct 26, 2021 4:59 pm
MattB wrote: Tue Oct 26, 2021 4:52 pm No. I do believe in holding bonds in a retirement portfolio. I think it's essential. I think it makes sense to hold all equities until about 15 years from retirement, then rapidly increase one's bond holdings to 10-15x expenses over the last 15 years. You can't do that with i-bonds. You would have to purchase $10k/year ($20k/couple/year) in i-bonds, for 30 years, to get to about 8x expenses at retirement.

My point is that i-bond limits need to be increased. The the above problem will only get worse over time. At the inflation numbers we're currently seeing, the $10,000 purchase limit will relegate i-bonds to uselessness in only a few years.
Um--but couldn't you just purchase some other kinds of bonds as well as iBonds in order to hit your goal of 8 times expenses at retirement? I guess I take your point that over the years $10,000 is worth less and less--and, yeah, the limit should probably be adjust upward just as those for the 401(k) and IRA have been--but no one is saying that iBonds are all that one needs in a bond portfolio.
If the issue is the limit, it may be raised, if not indexed, stepped up to allow larger fraction fill of the fixed income allocation. In the meantime, having fixed income in long term or intermediate term bonds isn't a terrible alternative during those last 15 years.

And if i-bonds are still terrific in retirement, you can keep going for another 15+ year while retired. [taking taxes into additional consideration]

Whether it's by design or not, it looks like it's best used by spreading out, so plan accordingly.
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MattB
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Re: i-bonds will become useless.

Post by MattB »

Northern Flicker wrote: Tue Oct 26, 2021 7:15 pm This may not be optimal when real rates are negative like today, but I think in general an inflation-indexed bond portfolio that is a mix of TIPS and I bonds has some attractive properties.

For simplicity, suppose you hold TIPS and I bonds and both have a real yield of 0.5%. If you need to liquidate some of them to realize income for spending after real rates have risen to 1%, it will be more attractive to liquididate at par some of the I bonds paying 0.5% then to liquidate some of the TIPS at that point in time.

But if real yields instead fell to 0% then the TIPS would have appreciated and would be a good source of liquidity. On the other hand, an I bond with a 0.5% real yield when rates have fallen to zero has a notional value from continuing to hold it that is greater than its liquidation value at par. There is opportunity cost to liquidate it.

By holding a mix of the two assets, liquidity of the combined portfolio is enhanced. This is a diversification opportunity.
Thank you for this. I think this may be the most personally helpful piece of advice I've picked up from this thread.
Orthodoc1.
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Re: i-bonds will become useless.

Post by Orthodoc1. »

No disrespect intended but you are comparing apples to oranges. I bonds are among the safest investments that are designed to never lose value and backed by the full faith of the U.S. Stocks, on the other hand, are neither despite historically being a much better long term investment when purchased in aggragate. I think you need both for different purposes. I agree that the annual limits should be higher. My wife and I have been buying them for many years. There was a time when we bought 30k per year each with a credit card without any additional service fee and received the 1% credit card rebate also. Those old bonds will pay more than 10% rate come Nov 1.
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MattB
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Re: i-bonds will become useless.

Post by MattB »

Noobvestor wrote: Tue Oct 26, 2021 7:23 pm Let's consider the usual options and their limits per year:

Roth IRA limit: $6,000 (and I'm above the income threshold, so $0 for me)
401(k) limit: $19,500
I Bond limit: $10,000
EE bond limit: $10,000

I buy the maximum allowed of Series I and EE bonds annually. Together, that's more than I'm able to put into tax-advantaged retirement accounts. Seems like a lot to me. Sure, I wish the limit were higher, but $20K/year in tax-deferred bonds adds up over time, like anything. I don't really see the issue.
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.
This isn't really a question about I Bonds specifically, just bonds in general. My answer is: yes, I want bonds. Then I ask myself: which ones? Then I look at what's available, and sure enough, Series I and EE are very attractive to me.
Thank you for your response. I disagree (to some extent) with your last point, specifically that this isn't an i-bond specific question.

This is an i-bond specific question because the limits on i-bonds are what they are: Let's say I decide to accumulate $1m in bonds over ten years. I can't do that with i-bonds because the purchase limits are what they are. If, instead, I decided to accumulate $1m in total bond or tips or something. No problem.

Moreover, this problem is made worse over time. There is a strict limit to the amount of i-bonds one can hold at any given time. And that limit is shrinking. Assuming 2% inflation, and current base rates holding at 0, a couple who purchases $20k i-bonds/year for the next thirty years will have ~$800k in i-bonds in 2051 dollars. Wait to start purchasing for 10 years. That same couple will ~$800k i-bonds in 2061 dollars. Another ten. ~$800k i-bonds in 2071 dollars. The limit stays the same, I guess, in nominal terms. But in real terms that amount is worth less and less.

The situation is not so critical now that i-bonds are useless. But in time they will be. And between now and then, they will be less useful every year provided their limits are not adjusted with inflation or otherwise increased.
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MattB
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Re: i-bonds will become useless.

Post by MattB »

Horton wrote: Tue Oct 26, 2021 7:36 pm
LittleMaggieMae wrote: Tue Oct 26, 2021 5:32 pm I don't think the target market for I-Bonds (or EE bonds) are high income earners.



If one has access to a 401K (or the wherewithal to open an IRA or Roth) and have 20K or less to 'save' yearly - then I-Bonds are definitely not the best use for the bulk of their yearly available "investment" money.
The first and last statement seems at odds with one another.

That said, I was going to make a similar point. Let’s say the priority for contributions is:

1) 401k up to match (Roth or non-Roth)
2) Roth IRA
3) 401k up to limit
4) HSA up to limit
5) I bonds

You need to be saving (and, therefore, making) a lot of money before I bonds are a consideration, with the exception of emergency funds and other savings.
I generally agree with your sentiment but want to point out one alternative way of looking at it.

There are probably people, many people, who work long careers, can only save a few thousand dollars each year, and don't have access to a 401k match. For those people, i-bonds may make sense as their primary investment for many years. They may or may not have the ability to take risks in stocks, or even bonds with interest rate risk. So, i-bonds are perfect for them.
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MattB
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Re: i-bonds will become useless.

Post by MattB »

000 wrote: Tue Oct 26, 2021 8:01 pm
But for me I'm not sure that a guaranteed after-tax real loss with no zag potential and some liquidity issues is an investment I want to make for 30 years anyway.
The "no-zag" property is precisely the reason I like i-bonds. Though I agree that the thirty year time-horizon is problematic.
SnowBog
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Re: i-bonds will become useless.

Post by SnowBog »

MattB wrote: Wed Oct 27, 2021 1:10 pm
Noobvestor wrote: Tue Oct 26, 2021 7:23 pm Let's consider the usual options and their limits per year:

Roth IRA limit: $6,000 (and I'm above the income threshold, so $0 for me)
401(k) limit: $19,500
I Bond limit: $10,000
EE bond limit: $10,000

I buy the maximum allowed of Series I and EE bonds annually. Together, that's more than I'm able to put into tax-advantaged retirement accounts. Seems like a lot to me. Sure, I wish the limit were higher, but $20K/year in tax-deferred bonds adds up over time, like anything. I don't really see the issue.
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.
This isn't really a question about I Bonds specifically, just bonds in general. My answer is: yes, I want bonds. Then I ask myself: which ones? Then I look at what's available, and sure enough, Series I and EE are very attractive to me.
Thank you for your response. I disagree (to some extent) with your last point, specifically that this isn't an i-bond specific question.

This is an i-bond specific question because the limits on i-bonds are what they are: Let's say I decide to accumulate $1m in bonds over ten years. I can't do that with i-bonds because the purchase limits are what they are. If, instead, I decided to accumulate $1m in total bond or tips or something. No problem.

Moreover, this problem is made worse over time. There is a strict limit to the amount of i-bonds one can hold at any given time. And that limit is shrinking. Assuming 2% inflation, and current base rates holding at 0, a couple who purchases $20k i-bonds/year for the next thirty years will have ~$800k in i-bonds in 2051 dollars. Wait to start purchasing for 10 years. That same couple will ~$800k i-bonds in 2061 dollars. Another ten. ~$800k i-bonds in 2071 dollars. The limit stays the same, I guess, in nominal terms. But in real terms that amount is worth less and less.

The situation is not so critical now that i-bonds are useless. But in time they will be. And between now and then, they will be less useful every year provided their limits are not adjusted with inflation or otherwise increased.
Another way to look at this...

A few years ago Subway 12" sandwiches could be purchased for $5. Thus $10k of I Bonds could buy 2000 sandwiches.

Assuming Subway pricing and I Bonds follow inflation, that original I Bond purchase can continue to buy 2000 sandwiches as the price rises.

But let's say the price is $10 in a few years. A new $10k I Bond can only purchase 1000 sandwiches, half the "purchase power" of years before.

Ideally, it would be great if I Bond limits were adjusted with inflation like IRA and 401k. And if there isn't any future changes to the limit, this could eventually be problematic. But I'm not sure that makes them "useless".
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Re: i-bonds will become useless.

Post by AlmstRtrd »

A lot of folks here have issues with the "low" annual purchase limit for I-Bonds. I get that, but it seems that one aspect of whether or not buying them anyway is worthwhile often gets overlooked.

Because I-Bonds can't be held in either tIRA or Roth accounts, shouldn't the concern as to whether they will ever constitute a meaningful percentage of one's investments be looked at only from the "taxable account" perspective? In other words, despite the purchase limits, can we still accumulate a meaningful percentage of I-Bonds in our taxable accounts?

For DW and I, our tIRA & Roth accounts make up about 55% of our investments. The taxable side holds the other 45% and our I-Bonds are all in that part of the portfolio (obviously, I guess). Admittedly, we have been accumulating them for a while, but they do constitute almost a quarter of our non-IRA assets.
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Re: i-bonds will become useless.

Post by SnowBog »

AlmstRtrd wrote: Wed Oct 27, 2021 1:59 pm A lot of folks here have issues with the "low" annual purchase limit for I-Bonds. I get that, but it seems that one aspect of whether or not buying them anyway is worthwhile often gets overlooked.

Because I-Bonds can't be held in either tIRA or Roth accounts, shouldn't the concern as to whether they will ever constitute a meaningful percentage of one's investments be looked at only from the "taxable account" perspective? In other words, despite the purchase limits, can we still accumulate a meaningful percentage of I-Bonds in our taxable accounts?

For DW and I, our tIRA & Roth accounts make up about 55% of our investments. The taxable side holds the other 45% and our I-Bonds are all in that part of the portfolio (obviously, I guess). Admittedly, we have been accumulating them for a while, but they do constitute almost a quarter of our non-IRA assets.
Agreed - I like savings bonds as they extend the amount of tax-deferred savings, despite being a "taxable" account. So I'm generally dismissive of the "limits too small" arguments.

But I think OP's point is since the limit itself isn't adjusted for inflation, left unchanged you'll be buying an ever smaller amount of savings bonds as in effect the limit is "shrinking" (as inflation increases).

As an example, $10k of I Bonds is still a "meaningful" amount compared with $6k IRA and $19.5k 401k. But let's say over the next several years those limits double (since they are indexed to inflation), you'd have $10k I Bonds still (not indexed to inflation) with $12k IRA and $39k 401k. And it only gets worse from there...

For my 2 cents, I'm assuming that they'll continue to adjust I Bond limits. As I understand them, they are completely in the control of the Treasury, so there isn't a law or the need for political action to get them changed. So I'm inclined to think this "problem" will get addressed.

Arguably I'm more concerned that they'll decide to quit selling savings bonds entirely at some point. But nothing I can do about that... I just keep picking from the best available options as I have the money to invest, and if those options change, my choices might be forced to change as well.
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Re: i-bonds will become useless.

Post by Northern Flicker »

There is no loss of real return of TIPS due to taxes if held in a tax-advantaged account. In a tax-deferred account there may be a very slight loss due to taxes because TIPS are indexed to CPI-U and tax brackets are indexed to chained CPI.
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Re: i-bonds will become useless.

Post by Noobvestor »

MattB wrote: Wed Oct 27, 2021 1:10 pmThank you for your response. I disagree (to some extent) with your last point, specifically that this isn't an i-bond specific question. This is an i-bond specific question because the limits on i-bonds are what they are: Let's say I decide to accumulate $1m in bonds over ten years. I can't do that with i-bonds because the purchase limits are what they are. If, instead, I decided to accumulate $1m in total bond or tips or something. No problem.
This is an order-of-operation issue. I want bonds. I decide I Bonds are my top pick. So I buy $10K/year of I Bonds. Then I have 90K/year to allocate across other bonds, like Treasuries or TIPS. It's not my ideal world scenario, but it works. Or I could just decide that with the $10K cap it's not worth it to me to manage one extra account so I'll buy lower-yielding TIPS instead, but that's just a question of personal tolerance for complexity. This seems to me like an outlier scenario, though -- who is buying 100K/year in bonds? My guess: someone so rich that super-optimizing yield doesn't really matter.
MattB wrote: Wed Oct 27, 2021 1:10 pmThe situation is not so critical now that i-bonds are useless. But in time they will be. And between now and then, they will be less useful every year provided their limits are not adjusted with inflation or otherwise increased.
Sure. $10K in I Bonds bought you ~20% more in real-dollar terms 10 years ago. Over many decades, that percent drop will likely grow. And maybe they'll discontinue I Bonds entirely at some point. I can't speak to the far future. But I have no regrets about my I Bond investments to date. If anything, looking back on it, I'm so glad that I've been slowly maxing out I and EE bonds for about a decade now -- it's really starting to add up!
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: i-bonds will become useless.

Post by prioritarian »

HD192 wrote: Wed Oct 27, 2021 9:47 am Agree that you have to decide if you want bonds or not.

If you want bonds, I-Bonds are really nice right now.
But that's an investment decision based on a 6 month rate.

It's possible that unexpectedly high inflation may persist long enough to make I bonds a decent form of "ballast" but it's also possible that I bonds will greatly underperform. In fact, I look at I bonds as a bet that we will not have persistent levels of low inflation.
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Re: i-bonds will become useless.

Post by Mel Lindauer »

SnowBog wrote: Tue Oct 26, 2021 9:21 pm I think "useless" is overstated...

But it would be nice if there was an inflation adjustment to the limit like there is for IRA & 401K accounts.

Although since they have changed the limits in the past, I suspect they'd do so again were they to get to your conceptual "useless" point.

Frankly, I'm more concerned they'll discontinue savings bonds completely...
Here's a 10-year old Forbes column I did on the possibility of Treasury killing off the Savings Bond program. It could happen folks.

https://www.forbes.com/sites/theboglehe ... eba082a8d8
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Re: i-bonds will become useless.

Post by Grt2bOutdoors »

Mel Lindauer wrote: Wed Oct 27, 2021 2:52 pm
SnowBog wrote: Tue Oct 26, 2021 9:21 pm I think "useless" is overstated...

But it would be nice if there was an inflation adjustment to the limit like there is for IRA & 401K accounts.

Although since they have changed the limits in the past, I suspect they'd do so again were they to get to your conceptual "useless" point.

Frankly, I'm more concerned they'll discontinue savings bonds completely...
Here's a 10-year old Forbes column I did on the possibility of Treasury killing off the Savings Bond program. It could happen folks.

https://www.forbes.com/sites/theboglehe ... eba082a8d8
As they say....the pen is mightier than the sword. Write to your local representatives in those white storied halls and see what happens.....
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Re: i-bonds will become useless.

Post by MattB »

000 wrote: Tue Oct 26, 2021 8:01 pm I don't think the contribution limit really affects the opportunity cost at the margin.
I think it does.

The contribution limits for those who want to accumulate i-bonds for retirement to do so over a longer time frame than they would need to if those contribution limits were higher. This means two things. The alternatives to be considered include stocks, which one might otherwise purchase 30 years out from retirement. The alternatives must be weighed in terms of their impact over a long time period.

Both of those impacts are directly related to i-bonds contribution limit.
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Re: i-bonds will become useless.

Post by MattB »

000 wrote: Tue Oct 26, 2021 9:04 pm Anyway, I was really just answering OP's question "How do you think about this?" and that's how I think about it.
I appreciate that. Thank you.
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Re: i-bonds will become useless.

Post by MattB »

tomsense76 wrote: Tue Oct 26, 2021 9:31 pm
MattB wrote: Tue Oct 26, 2021 4:24 pm 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.
I think I'd rather have an extra $1.3m in equities than $800k in i-bonds at retirement.

How do you think about this?
The thing is if one is maxing out all their retirement accounts (especially as a couple). They could be putting away mid-5 to low-6 figures per year. That's before getting to saving bonds. In all likelihood one is spilling over additional savings in taxable. Assuming they are starting out saving, one is putting away that amount per year (not to mention growth of a stock orientated portfolio) for say a 30yr time horizon. So they already will be getting into the millions by retirement. The absence of less than half a million by buying saving bonds instead of stocks won't even be noticeable.
I think you hit on the heart of the paradox.

Those who could best use i-bonds may have better alternatives. People who can't max out their retirement accounts might be best doing that before i-bonds. Though there is a compelling case to the contrary for people who earn the least.

Those would don't need i-bonds can purchase them with relatively little consequence. As you suggest, 0.1-1m doesn't really matter for people who will have 5-6m at retirement.
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Re: i-bonds will become useless.

Post by MattB »

SnowBog wrote: Tue Oct 26, 2021 9:21 pm I think "useless" is overstated...

But it would be nice if there was an inflation adjustment to the limit like there is for IRA & 401K accounts.

Although since they have changed the limits in the past, I suspect they'd do so again were they to get to your conceptual "useless" point.

Frankly, I'm more concerned they'll discontinue savings bonds completely...
Someone else already touched on this. But your perspective seems to be ill-informed. The treasury has recently changed the limits downwards, not up. So, all else being equal, it seems they are more likely to discontinue savings bonds completely than to increase purchase limits.
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Re: i-bonds will become useless.

Post by 000 »

MattB wrote: Wed Oct 27, 2021 3:54 pm
000 wrote: Tue Oct 26, 2021 8:01 pm I don't think the contribution limit really affects the opportunity cost at the margin.
I think it does.

The contribution limits for those who want to accumulate i-bonds for retirement to do so over a longer time frame than they would need to if those contribution limits were higher. This means two things. The alternatives to be considered include stocks, which one might otherwise purchase 30 years out from retirement. The alternatives must be weighed in terms of their impact over a long time period.

Both of those impacts are directly related to i-bonds contribution limit.
Whether stocks are a good alternative to I bonds is a question irrespective of the contribution limit. If the I bond contribution limit were $100k, would you own no stocks because you can save enough in I bonds?
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Re: i-bonds will become useless.

Post by MattB »

SnowBog wrote: Tue Oct 26, 2021 9:46 pm
MattB wrote: Tue Oct 26, 2021 4:24 pm 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.
I think I'd rather have an extra $1.3m in equities than $800k in i-bonds at retirement.

How do you think about this?
[OT comment removed by admin LadyGeek]

The people that are seriously looking at I Bonds as part of their portfolio have already decided to hold bonds. So if you want to offer a comparison - then explain why you think other bond options are better...

Otherwise you are arguing being 100/0 when someone has already decided on an AA of 80/20 (or in my case 60/40 @ 45 because we'll have "enough" and have long passed the point we have more to lose than we need to gain). It's a mostly pointless argument as ones AA is based on need/willingness/ability to take risk - not which ends up with the biggest terminal balance in a bull market...
[Response to OT comment removed by admin LadyGeek]

Taking those things in reverse order:
  • Your position appears to be misguided.

    The people who are looking to accumulate i-bonds have already decided to hold bonds in the future. The current purchase limits require that decision to be acted on sooner rather than later. So, the fair comparison is what would people buy when they might otherwise have to begin purchasing i-bonds? The answer to that question is, or certainly could be, stocks.

    E.g., consider Joe, a 35 year old who wants to retire at 65 with $400,000 in i-bonds. Assuming 2% inflation, Joe would need to purchase $10k in i-bonds this year and every year after to accomplish his investment goal. So, Joe will have to decide whether to purchase i-bonds now, and each year hereafter, or to purchase something else now, and each year hereafter.

    Joe is 35 and has a 30 year time horizon to retirement. What might Joe purchase? Stocks would be one option. And unless you're willing to say someone who is investing for 30 years from now shouldn't consider investing in stocks. Then comparing i-bonds to stocks is reasonable. And your position appears to be misguided.
[Response to OT comment removed by admin LadyGeek]
Last edited by MattB on Wed Oct 27, 2021 4:53 pm, edited 2 times in total.
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Re: i-bonds will become useless.

Post by MattB »

tomsense76 wrote: Tue Oct 26, 2021 10:04 pm
Though I think OP's concern is on point. Basically what is the future of savings bonds? If we project no changes going forward, agree it is bleak. Discontinuation would then be a mere formality.
That's the question.
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Re: i-bonds will become useless.

Post by MattB »

AlmstRtrd wrote: Wed Oct 27, 2021 1:59 pm A lot of folks here have issues with the "low" annual purchase limit for I-Bonds. I get that, but it seems that one aspect of whether or not buying them anyway is worthwhile often gets overlooked.

Because I-Bonds can't be held in either tIRA or Roth accounts, shouldn't the concern as to whether they will ever constitute a meaningful percentage of one's investments be looked at only from the "taxable account" perspective? In other words, despite the purchase limits, can we still accumulate a meaningful percentage of I-Bonds in our taxable accounts?

For DW and I, our tIRA & Roth accounts make up about 55% of our investments. The taxable side holds the other 45% and our I-Bonds are all in that part of the portfolio (obviously, I guess). Admittedly, we have been accumulating them for a while, but they do constitute almost a quarter of our non-IRA assets.
Your position is valid. But I think your question is one of personal preference. Some people choose to look at their portfolios in buckets, pre-tax, taxable, post-tax, etc. Others choose to look at them as a single piece.

Money is fungible to me. So, I tend to think about bonds in terms of "how many bonds do I want to hold at retirement." And I don't distinguish between pre-tax, taxable, and post-tax except for discounting asset values relative to their bucket. But that doesn't mean I'm right and you're wrong.

Thanks for your thoughts.
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Re: i-bonds will become useless.

Post by MattB »

Mel Lindauer wrote: Wed Oct 27, 2021 2:52 pm Here's a 10-year old Forbes column I did on the possibility of Treasury killing off the Savings Bond program. It could happen folks.

https://www.forbes.com/sites/theboglehe ... eba082a8d8
Thanks for sharing Mr. Lindauer. I feel privileged that you responded to one of my posts.
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Re: i-bonds will become useless.

Post by MattB »

Noobvestor wrote: Wed Oct 27, 2021 2:36 pm
MattB wrote: Wed Oct 27, 2021 1:10 pmThank you for your response. I disagree (to some extent) with your last point, specifically that this isn't an i-bond specific question. This is an i-bond specific question because the limits on i-bonds are what they are: Let's say I decide to accumulate $1m in bonds over ten years. I can't do that with i-bonds because the purchase limits are what they are. If, instead, I decided to accumulate $1m in total bond or tips or something. No problem.
This is an order-of-operation issue. I want bonds. I decide I Bonds are my top pick. So I buy $10K/year of I Bonds. Then I have 90K/year to allocate across other bonds, like Treasuries or TIPS. It's not my ideal world scenario, but it works. Or I could just decide that with the $10K cap it's not worth it to me to manage one extra account so I'll buy lower-yielding TIPS instead, but that's just a question of personal tolerance for complexity. This seems to me like an outlier scenario, though -- who is buying 100K/year in bonds? My guess: someone so rich that super-optimizing yield doesn't really matter.
In an ideal world, I'd buy $100k/year in bonds in each of the last ten years before I plan to retire. And in particular, I'd rather do that than purchase $33k in bonds each of the last thirty years before I plan to retire.
Noobvestor wrote: Wed Oct 27, 2021 2:36 pm
MattB wrote: Wed Oct 27, 2021 1:10 pmThe situation is not so critical now that i-bonds are useless. But in time they will be. And between now and then, they will be less useful every year provided their limits are not adjusted with inflation or otherwise increased.
Sure. $10K in I Bonds bought you ~20% more in real-dollar terms 10 years ago. Over many decades, that percent drop will likely grow. And maybe they'll discontinue I Bonds entirely at some point. I can't speak to the far future. But I have no regrets about my I Bond investments to date. If anything, looking back on it, I'm so glad that I've been slowly maxing out I and EE bonds for about a decade now -- it's really starting to add up!
+1.
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Re: i-bonds will become useless.

Post by MattB »

Grt2bOutdoors wrote: Wed Oct 27, 2021 2:57 pm As they say....the pen is mightier than the sword. Write to your local representatives in those white storied halls and see what happens.....
+1.
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Re: i-bonds will become useless.

Post by MattB »

z3r0c00l wrote: Tue Oct 26, 2021 5:03 pm
MattB wrote: Tue Oct 26, 2021 4:37 pm you can't accumulate enough purchasing power in i-bonds without investing in them over a course of 20 or 30 years.
This statement is, to my mind, the best near-term answer to the OP's post. $10,000 per year per person is more than enough for normal people. I would still find them useful when $10,000 is only worth $5,000, in the event I live long enough to see 100% inflation. I bonds will be useless to the sort who think you need $200,000 - $600,000 worth of them to make a difference. But I don't know they were intended for that sort of person in the first place. Most Americans would be pretty lucky to accumulate a few 100K total saved by retirement.

Do you really think there will be 10 fold inflation in the next 30 years?
Your post (and my premise) speaks to the cost of living variation across the country. 1x expenses may be 25-50k in the midwest. 1x expenses may be 80-160k on the west coast. That difference means "10x in bonds" might be between 250k and 1.6m depending on where you live.
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