- Jacob Patterson
Updated: Sep 20, 2022
When you hear the word “investment” you probably think about stocks, but many investors fail to consider bonds. Specifically, Interest Bonds (also known as “I-Bonds”) which are issued by the US Treasury and are practically risk-free. The current real interest rate on I-Bonds is about 48 times higher than the average savings account. With a current real rate of return of 5.54%
These bonds are designed to counteract inflation, which is currently at an all-time high. They must be held for a minimum of one year and mature after 5 years. If you cash out the I-Bond before 5 years, you must forfeit the last 3 months of interest.
I-Bonds have a few different components: a fixed rate, a semiannual rate (which changes every 6 months), and a holding requirement.
Currently, the fixed rate is 0% and has been quite low for the past decade. The current semi-annual rate is 9.62%, and the next semiannual rate will be determined in November by the US Treasury. It is expected to be set at around 6%. If you buy I-Bonds right now, you will receive the 9.62% return for the first six months, but if you wait until the new rate is announced, you will receive a lower return. Another advantage of I-Bonds is that you only need to pay the federal income tax on interest (but not state and local).
Example of I-Bond Returns (held for one year):
Principal (what you contribute): $1,000
Interest (Fixed Rate):
· 0% * $1,000 = $0
· First six months (at 9.62%): $1000 * 9.62% * (6/12) months = $48.1
· Second six months (estimated at 6%): $1000 * 0.06 * (6/12) months = $30
Total return (if cashed out at 1 year):
$48 + $30 - $15 (penalty) = $63
Real Return (After a 12% tax rate):
$63 * (88%) = $55.44 (5.54%)
In the end, I-Bonds are currently a great way to preserve the value of your savings and are much less risky than the stock market.