On Tuesday, the labor department announced the latest CPI-U numbers. With these numbers, you can calculate the upcoming inflation portion of I bonds and determine whether it’s better to buy your bonds now or wait until May. As you may know, I bonds are composed of an inflation rate and a fixed rate. The fixed rate is expected to be zero again but the inflation rate actually went down from 1.76% to 1.18%. According to the labor department, the decrease is due mainly to a decrease in gas prices(I didn’t even notice!).
Buy Your I bonds Now
Even though the rate will be decreasing to 1.18% on May 1st, you can lock in the 1.76% rate for 6 months by purchasing before the end of this month(April). You would receive the higher rate for 6 months until October 2013 when you would receive the new 1.18% rate for 6 months giving you a net yearly return of 1.47%. Even though that may not seem like a lot, it’s a pretty good return for a risk-free investment. Assuming the fixed portion will be 0%, your I bond interest rate would change every 6 months according to the CPI-U.
I bonds increase in value on the first day of the month so you can actually buy your I bonds on the last day of the month and get a full month’s interest. Alternatively, when you redeem your I bonds, you want to redeem them early in the month in order to get a free month’s worth of interest.
Better Than a CD?
I own $6,000 worth of I bonds(5k purchased in 2012, 1k received as a gift in 2013) but I don’t include them in my overall retirement allocation. Since I have plenty of tax advantaged space for my bonds, I don’t feel the need to invest in bonds in after-tax accounts. Instead, I use them more like a CD or fixed rate investment. So how do they compare to the best CD rates?
Ally 1 year CD’s are currently(4/17/2013) paying 0.90% but remember you should always invest in their 5 year CD’s since there’s only a 2 month interest penalty. Ally’s 5 year CD’s are currently paying 1.54%, so if we were to invest in a 5 year CD with Ally and redeem it after one year our effective rate after the 2 month interest penalty would be 1.28%.
You should always purchase an I bond towards the end of the month but I would give yourself at least a 2-3 day cushion to make sure you get your order in on time. Assuming we buy our I bonds on Monday April 29th, 2013 that would give us an interest rate of 1.76% from April to September and a 1.18% rate from October to March. But since we can buy at the end of April and sell at the beginning of March we only need to hold the I bond for just over 10 months to get a full years worth of interest. Our net annual return after the 3 months interest penalty would be 1.40% which is a bit better than the return on a CD.
There is a mandatory 1 year holding period on I bonds so if there’s any chance you might need the money, you should probably go with an Ally CD. I like I bonds though since they’re tied to the inflation rate, which minimizes the interest rate risk and they are exempt from state and local taxes.
Readers, have you bought any I bonds this year? Does it make sense to buy now or would you wait and hope that interest rates go up in September/October?
-Harry @ PF Pro
Track All Your Accounts With Personal CapitalPersonal Capital lets you see all of your accounts in one convenient place. Sign up now for free.
Latest posts by Harry Campbell (see all)
- 3 Reasons to Sell Your Structured Settlement or Annuity - May 21, 2015
- Balance Transfer vs. Debt Consolidation: What’s the Best Way to Fix Your Finances? - May 14, 2015
- How to Use Draft to Track Your Investments - May 11, 2015