“All good things must come to an end.”
From the dozen roses you bought last valentines day to the new car smell in your 1994 Pontiac Grand Prix, the things we prize today will soon lose their luster. The same may be true of the I Bond you purchased back in May of 2022. Remember the warm feeling knowing you were receiving an annualized 9.62% on an asset that was backed by the full faith and credit of the federal government. What a steal! But do you have any idea what it is worth today and what you should do with it now?
First, a little bit about how the rate on I Bonds is calculated. I Bond rates change every 6 months based on inflation. The rate can go up, the rate can go down. The rate is comprised of a fixed rate and an inflation rate.*
Fixed Rate – the fixed rate never changes and is set based on the current interest rate environment when the I Bond was purchased.
Inflation Rate – the inflation rate is reset every 6 months based on the current inflation environment.
In addition to the rate, I Bonds also have limits on sales. You may not sell the I Bond for 1 year after date of purchase, and if you sell within the first 5 years, you will forfeit the previous 3 months of interest.
So let’s consider that I Bond you purchased back in 2022. At its peak, the fixed rate was 0.00% and the inflation rate was 4.81% for six months**. Adding those together, you received an annualized 9.62%. Not bad for a risk-free investment! No wonder the website had trouble managing the traffic as investors purchased I Bonds. Fast forward to today. The fixed rate on your 2022 I Bond hasn’t changed, and the inflation rate has gone down to 0.95% Combined this gives you a 1.9% annualized rate. Not so great!
However, Current I Bond rates are much better. Because interest rates have gone up, an I Bond that you purchase today has a fixed rate of 1.20%, and remember, that never changes. The current inflation rate is 0.95%, so annualized the current total rate is 3.11%. That’s 1.21% better than your 2022 I Bond. If you like the idea of locking in 1.20% fixed rate and having the benefit of the inflation protection of the inflation rate, you could sell your 2022 I Bond and purchase a 2024 I Bond. Or, if you have time and a higher risk tolerance, invest the proceeds in another account for higher returns.
But wait a minute, what about the penalty? Here is where I give you permission to skip the next paragraph which contains far too many calculations but must be included to support my conclusion in the paragraph that follows.
Because you sold the 2022 I Bond within 5 years of purchase, you will be penalized 3 months of interest. But since your current rate is 1.9%, this penalty will be 0.475% (1.9% / 12 months * 3 months). The monthly difference in the rate of the 2024 I Bond and the 2022 I Bond will be 0.10% (3.10% (2024 I Bond) – 1.90% (2022 I Bond) = 1.2% annual /12 months = 0.10%) It will take you 5 months of higher rates to exceed the penalty for selling your 2022 I Bond.
So if you wish to continue to have a long term, inflation adjusted, safe investment that has a locked in 1.2% rate but is adjusted as inflation demands, consider selling your current I Bond and purchasing a new I Bond. Your small penalty will be recouped within half a year. Remember that you are limited to $10,000 of I Bond purchase per year, so if you have more than one, consider selling and buying one before December 31, then selling and buying one after next year.
While you can’t do anything about your valentines day flowers or the old beater parked in your drive, you can trade in your current I Bond for a new I Bond that will bring back the warm, fuzzy feeling of getting a good return on a safe asset.
Did You Know?
Your employer sponsors this financial wellness benefit from Francis LLC. The benefit connects you with down-to-earth financial planners who educate and advise on any money matters…without the sales pitch. We are exclusively engaged by employers like yours and have no investment products to sell, so you can feel confident that you will always receive objective advice.
Your financial planner will help you set priorities and achieve your money goals, without judgment or financial jargon. Know that all discussions are kept strictly confidential. This service is offered as an employee benefit with no per-session co-pays, so you can meet with a financial planner as often as you wish. Services are paid by your retirement plan or your employer.
Connecting with a financial planner is easy! Here’s how:
- Visit FrancisWay.com > Services > Participant Portal
- Call (866) 232-6457
Download the free mobile app (Search for Francis LLC)
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