Series I Bonds Interest Rate Jumps to 9.62%
What’s guaranteed by the US government and pays a nearly 10% interest rate per year? Series I Savings Bonds!
The case for buying Series I Bonds has never been stronger. With inflation at its highest level since the 1980s—and most banks paying less than 0.50% interest per year on checking/savings accounts—it’s hard to find a decent, safe return on investment.
Add to that the growing uncertainty on global stocks amidst the Russia and Ukraine crisis and rising interest rates pressuring bonds, it’s become more important than ever to be creative with building your portfolio beyond the traditional stock and bond mix.
Series I Bonds are US Treasury Bonds with an interest rate tied directly to inflation. As inflation rises, the interest rate on these bonds goes up and vice versa. As you can imagine, these bonds weren’t very popular five and ten years ago, however, as inflation has risen dramatically (in part as a result of the Covid-induced stimulus), these bonds have been more attractive than ever. The Wall Street Journal recently outlined a few key facts related to the new interest rate update.
How do Series I Bonds Work?
Series I Bonds are issued directly by the federal government and are only available through the (somewhat outdated) Treasurydirect.gov website. They pay an interest rate which is updated at least twice per year and linked to the Consumer-Price Index (CPI), a measure of inflation in the US.
The most recent interest-rate update occurred on May 1, and any Series I Bonds purchased between May 1 and October 31 pay a whopping 9.62% interest rate per year!
This rate can never drop below 0%, so unless the federal government defaults (in which case, we’d have bigger issues at play), then you are guaranteed your initial investment back when you redeem your bonds. You will earn the current interest rate for the first 6 months of owning the bonds, and your rate will adjust based on the updated interest rate change for the next 6 months.
Importantly, you must hold on to Series I Bonds for at least a year, and if you redeem the bonds within the first five years, you’ll forfeit the last three months of interest.
The Upside
9.62% current annual interest rate
Interest rate grows when inflation rises
Yield can never go below zero (you’ll always get your principal back)
Tax-free interest at the state level
Guaranteed by the federal government
The Downside
Liquidity constraints – must hold for one year
Minimum purchase – $10,000 per calendar year per person
Taxable interest at the federal level (you might be eligible to avoid federal taxes if you redeem for qualified education expenses)
Must be purchased and held through Treasury Direct (you can’t hold in brokerage account)
Series I Bonds can serve to supplement your cash reserve at the bank where you might be earning close to no interest. In addition, they can diversify your traditional stock and bond portfolio by offering a guaranteed rate of return, albeit with some liquidity constraints.
If you’re looking for additional ways to fight inflation, check out 5 Ways to Protect Yourself from Inflation.
Do you want to learn more about how Series I Bonds can help you curb inflation? Reach out to me at Ben@coveplanning.com or schedule a free consultation call.
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Ben Smith is a fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional with offices in Milwaukee, WI, Evanston, IL and Minneapolis, MN, serving clients virtually across the country. Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI).
Ben acts as a fiduciary for his clients. He does not sell financial products or take commissions. Simply put, he sits on your side of the table and always works in your best interest. Learn more how we can help you Do Well While Doing Good!
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Ben Smith, and all rights are reserved. Read the full Disclaimer.