Given heightened and potentially persistent inflation, I want to address an investment option for certain people who might benefit from a slightly illiquid form of savings that pays interest correlated to the current inflation rate.
The Series I Savings Bond (I Bond) is a government savings bond that pays a variable semiannual inflation rate based on changes in the Consumer Price Index for All Urban Consumers, or CPI-U. An I bond's rate combines two different rates: a fixed rate and an inflation rate. The fixed interest rate remains the same throughout the bond's life. Its inflation rate is announced by the Bureau of the Fiscal Service and can change twice a year, in May and November.
The combination of an I bond's fixed rate and inflation rate creates its composite rate. This is the interest rate an I bond will actually earn. Currently, I bonds are offering a composite rate of 9.62% through October 2022 (0% fixed rate + 9.62% annualized inflation rate). They can be purchased as paper bonds or electronic bonds, which may be preferable to most people, as paper bonds need to be physically maintained and returned to cash in.
As its makeup suggests, an I bond's rate is heavily impacted by inflation. As inflation changes, the inflation rate adjusts to offset those changes. This can help protect your money's purchasing power.
And while that 9.62% I bond rate is making headlines in the news, it may change in six months when the new inflation rate is set. You're also required to hold your bond for at least a year before you can cash it in, and there are interest rate penalties for cashing in within five years.
Upsides:
Very low-risk investment in terms of default potential (similar to US Treasury bonds)
Temporarily attractive investment return compared to other investments of similar risk profile
Good way for medium-term investment to withstand inflationary pressure
Limitations/Risks:
1 year hard lockup with no access (not appropriate for cash you need to have available)
If money is removed before 5 years, you forgo the prior 3 month’s interest
Variable interest is recalculated every 6 months, so if inflation drops dramatically, we are potentially locked into a lower yielding investment for another 6 months (not our base case)
Maximum of $10k per person (actually a good thing in this case)
Not likely to be a good long-term investment
Instructions to Invest:
This investment must be made directly from your checking/savings account, so you’ll have to set up the account and make the purchase.
Purchase electronic I Bonds ($25 up to $10k per person per year
“Individual > set up account > link bank (double check this)
Purchase electronic I Bond
For kids, set up minor-linked account in child’s name and gift to them
**This is in no way an offering to purchase any investment, and should not be considered advice that this is an appropriate investment for any particular individual. Rather, this is simply a means of increasing awareness about a unique type of investment that is available to all and is slightly unique and under the radar. We in no way benefit from anyone potentially researching/purchasing such investments, and you should reach out to your own financial advisor to see if this investment is appropriate for your specific situation before making any decision.