I Bonds rates are expected to skyrocket when they adjust in May and it’s time to pay attention to them again. This is the single best investment you can make this year and safer than any other alternatives.
Never heard of an I Bond before? Don’t worry, you’re not alone. They haven’t been popular for 20 years, but here’s why I Bonds will become a hot trend this year.
Ninja Update: I Bonds purchased now will immediately get the 9.62% rate. You’ll get this rate for 6 months and then an unknown rate (determined in November) for the following 6 months. This is a great opportunity to lock in a high return with zero risks.
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I Bonds Overview
It seems like inflation is everywhere these days. Soaring gas prices, sky-high construction costs, and expensive Uber rides. There’s a lot to complain about!
But complaining doesn’t get you anywhere. Instead, consider how to make money as inflation heats up with I Bonds.
What are I Bonds?
I Bonds, short for Series I Savings Bonds, are inflation-indexed U.S. savings bonds. It’s designed to protect the value of your cash from inflation.
I Bonds are a unique, very low-risk investment backed by the U.S. Treasury with a holding period from 12 months to 30 years. Think of Series I Bonds like bank certificate of deposits (CDs) that are liquid after 12 months.
You can’t redeem an I Bond within the first 12 months and if you cash it out before five years have passed, you’ll incur three months’ worth of interest as an early withdrawal penalty.
It earns a composite rate; one rate is a fixed interest rate determined at the time you buy an I Bond and the other rate is a variable inflation rate that gets adjusted for inflation every six months. Combine the rates together and you get the composite rate (which is the total rate you earn interest on).
The variable rate essentially guarantees I Bond buyers that they’ll never lose the value of their money because of inflation.
I know, I know – this isn’t as thrilling as showing off your free cryptocurrencies, but you’ll make a great deal more money now with Series I Bonds than parking your cash in a traditional savings account.
Why didn’t you recommend I Bonds before?
Because I Bonds haven’t been relevant for 20+ years. Inflation has been so low for the past couple of decades that there were better places to safely invest your cash for a higher return.
When I Bonds first came out in 1999, they were offering a whopping 7% composite rate. Since then, I Bonds rates have sunk to the bottom of the ocean floor with a fixed interest rate of 0% and a mediocre inflation rate.
However, the next inflation adjustment will be in May 2022, and that’s what everyone’s excited about!
I Bond Rates for May 2022 – October 2022
Inflation numbers released at BLS.gov allowed us to predict what I Bonds rates will be starting in May 2022.
I say predict because we can only calculate what the variable inflation rate will be, and not the fixed interest rate. Remember that I Bonds is a composite of the two rates.
The fixed rate formula is unknown, but it’s linked to the yield of short-term Treasure Inflation-Protected Securities (TIPS). Short-term TIPS are near zero and therefore the fixed interest rate for I Bonds will likely stay at 0%.
Ninja Note 5/1/22: Fixed rate has been confirmed to remain at 0%.
Every six months, your I Bonds rates will adjust. The fixed rate will always stay at the same rate at the time of your purchase, while the variable rate will be based on inflation changes.
New Variable Inflation Rate
Consumer Price Index for Urban Consumers, or CPI-U for short, was 274.310 in September 2021 compared to a CPI-U of 287.504 in March 2022.
287.5 / 274.3 = 1.0481, or a semi-annual increase of 4.81%. So…
Semiannual inflation rate = 4.81%
Fixed interest rate = currently 0% (determined separately)
Using the formula below, we can determine the minimum rate an I Bond buyer would get starting in May 2022:
Total rate = Fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)
Total rate = 0.000 + 2 x 4.81 + (4.81 x 0)
Total rate = 9.62%
Earning 9.62% is a heck of a terrific deal! You’re enjoying stock market like gains with zero risk.
The fixed rate was as high as 3.60% back in May 2000. Those lucky I Bond holders would now earn an incredible 13.22% for the six months starting in May 2022 (3.60% fixed + 9.62% variable).
Predicting November 2022 – April 2023 I Bond Rates
Now that we’ve established that if you buy I Bonds between May 2022 and October 2022, you’ll receive a guaranteed 9.62% return for the first six months of ownership.
You may be wondering what you’ll earn after the initial six months. This question would also apply for anyone that buys new bonds between November 2022 and April 2023.
We need to have CPI-U data for April 2022 through September 2022 to determine what the revised rate will be, so we’re a tad early.
However, we’re halfway there and the CPI-U reading hit 296.171 as of August 2022. This represents a 3.01% increase from March 2022’s reading of 287.504.
Using the I Bond formula from before, we now know that the next variable rate adjustment is currently at 6.02%.
We still have one more month of inflation data to go plus the potential for a fixed rate adjustment.
What if I buy I Bonds before the rate change?
If you buy I Bonds before the end of October 2022, you’ll be guaranteed a total rate of 9.62% for the next six months (based on the previous six months formula).
After that time period, your total rate could be at least 6.02% for the following six months, though this can be higher or lower depending on September’s inflation reading.
If we assume the floor is 6.02%, then in terms of the absolute worse-case scenario, where you:
- buy the I Bond before October 31, 2022
- sell the I Bond on October 1, 2023 (hold the I Bond for the minimum 12 months and incur a three-month interest penalty)
You’ll earn a 6.51% annualized return for an 11-month holding period.
You may be asking why 11 months and not 12 months. It’s because in this scenario, you bought the I Bond at the end of October. Even though you only held the I Bond for one day that month, you earn the entire month’s worth of interest.
It’s a near little trick to buy at the end of a month and gain the entire month’s interest.
Now let’s say you held that exact bond, but sold it in January 1, 2024 instead. In this case, you’d earn a 7.17% annualized return for a 14-month holding period.
In either situation, this is much higher than any available money market or CD rate out there today.
Should I buy now or wait?
I would buy now given the current data. You’ll lock in at 9.62% and then enjoy a rate of around ~6.00%. Beyond that, it’s difficult to guess how inflation will unfold given the economic uncertainty and the geopolitical chaos.
There’s no wrong choice though as both the current and potential new rates are great compared to other equivalent alternatives. Find me another savings instrument that’s safe and produces the same investment return as government bonds.
I Bonds also have special benefits compared to a money market account or CD, like:
- Exemption from state income taxes
- Redemption for higher education is exempt from federal taxes
- Tax deferral until bond redemption
- Inflation protection
How to Buy I Bonds
You used to be able to buy savings bonds by simply walking into a bank, but that’s not the case anymore. The government no longer issue bonds in paper form (besides tax refunds – more on that below), you can only buy them in electronic form.
You can buy up to $10,000 in I Bonds each calendar year through an electronic TreasuryDirect account. Open an account at TreasuryDirect.gov to do so. The minimum purchase amount is $25.
The $10,000 limit is per person, not per household. In other words, a couple can buy a total of $20,000 in I Bonds per year. A family with children can buy another $10,000 per child as long as they have a Social Security Number.
Additionally, you can buy an extra $5,000 in paper I Bonds if you have a tax refund when you file your federal income tax return. Tax software like TurboTax will offer you this option if you’re due a refund. If you do your taxes by hand, you need to complete IRS Form 8888.
The minimum purchase amount is $50 when buying through a tax refund (Paper I Bonds come in denominations of $50, $100, $200, $500, and $1,000).
Most people don’t get a tax refund of $5,000 – at least not if you’re doing your taxes right.
In instances like this where you want to buy more I Bonds and therefore want a bigger tax refund, a strategy you can use is to purposely pay more in taxes throughout the year than you actually owe.
Ninja Note: If you want to purchase more than the $10,000 annual limit, I wrote a detailed post on all the ways to buy more I Bonds.
The Bottom Line
Personally, I bought $20,000 worth of I Bonds at the end of October 2021, which has earned 3.54% for six months, is now earning 7.12% for the current six months, and will earn 9.62% thereafter.
I bought an additional $20,000 before the end of April 2022 to have another batch of I Bonds at 7.12% before switching to 9.62%. I Bonds are ultra-safe investments and this blended rate is way too good to pass up on.
The next best thing after maxing out on I Bonds is getting the best rate for any leftover cash. I’m parking mine in SkyOne’s Money Market Deposit Account, currently offering 2.20% APY with no fees or restrictions.
I keep a small amount of money outside of real estate and stock investments directed towards chasing the best bank bonuses.