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
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Gas prices have dropped about 50-60 cents per gallon since they peaked here where I live. That’s somewhere between a 10-20% drop and I’m not complaining :).
I work in a poorer area of San Diego, which also means gas prices are around the lowest in the county. I don’t even look at the prices very often since I know I’m paying the lowest price around, just fill up and see the total damage haha.
I set up an order to buy another $5k on April 29th. That’ll be my $10k for the year. I wanted to get them in pretty quickly so that the year deadline is up faster. I foresee needing to add more than the 401(k) contribution limit in bonds each year and it would be nice to have some extra room. I bought some this year to see how it goes and whether it’s something I want to contribute to in the future. Pushing the taxes off for 30 years is a pretty nice idea when I could hit the 33% tax bracket in another few years.
I’m not sure that I’ll buy any more until the mortgage is paid off, but this wasn’t a bad move for part of my 12-month emergency fund since I was considering CDs. This is a better plan since at least they keep up with inflation. So now I have 6 1/3 months’ expenses in savings, 3 1/3 months’ expenses in i-bonds, and another 4 months’ expenses in stock index funds.
Nice I’m still waiting to see what my fiance’s student loan package will look like. That will determine a lot about what I do with my savings this year.
12 month EF is pretty solid but I’m not sure I would consider the 4 months worth of stock funds in my EF since you never know when you’ll need to cash that out.
Psst it’s fiancé for a guy and fiancée for a girl. So if you only use one e, it means you’re marrying a guy 😉
I really only see myself as having a 6 month EF with an extra 3 months’ expenses as backup and then the stock funds are really just the next step that I would access since the rest of my money is tied up in retirement accounts or in my condo. I really only count the stock funds as 2 months (half of value).
Sounds like you’ll just be piling up cash for a few months until you know more what’s going on? Are you going to max out your 401(k) for 2013?
Wow really?! I never knew that, I’m so ashamed of my poor grammar.
Ok that makes sense, I think 6-9 months is plenty for someone in your situation anyways.
That’s exactly what I’m doing, saving up cash(stockpiling!). I’ve been debating over whether to max out 401(k) or not. I don’t know if I could fully get there, but I would get pretty close if I make the change within the next paycheck or two. Decisions, decisions…
It’s French! They do gendered stuff, unlike English.
If it was me, I would totally max it out, haha. I don’t know all your numbers and it would depend on how much cash I had stockpiled already, but you can never get that room back! By July or so, I should have little enough left to put into the 401(k) that I could finish maxing it out with one paycheck!
Good post. I didn’t even notice about the gas price but that is good news.
Yea I didn’t notice either but either way, is $4/gal really that low?