For retirees, I bonds represent a robust portfolio option in 2023 — and savvy investors know it.
Take the March 2023 I bond composite rate, which stands at 6.89%. That’s a good and safe return for retirement investors, who know only too well that capital preservation is the name of the game in retirement.
Add a decent and guaranteed asset appreciation, and it’s no surprise that investors are lining up to purchase I bonds. In January 2023, I bond sales crested $4.2 billion — that’s a new record for any January since I bonds were created in 1998.
[See: 11 Tips for Retirement Investing.]
What do retirees need to know about I bonds, and how to buy them? Here’s a quick checklist.
1. I Bonds Defined.
2. Return Risk.
3. Laddering Strategy.
4. Good Tax Benefits.
5. How to Buy I Bonds
6. Investment Caveats.
I Bonds Defined
Known more formally as Series I U.S. Savings Bonds, I bonds are inflation bonds issued by the U.S. government. They’re especially useful for retirees, who need guaranteed income and asset appreciation in retirement.
“For retirees, they’re a safe investment,” says Rachel Christian, senior writer for The Penny Hoarder and a certified educator in personal finance. “The U.S. government has never defaulted on its bonds, so your money is well-protected. If inflation goes back up, you’ll get a higher interest rate, which can be a great hedge against inflation during retirement.”
The government offers I bonds to all investors, but especially retirees, as a personal firewall against runaway inflation.
“In a high inflationary period — like today — investment and economic risk are very real for retirees,” says Paul Tyler, chief marketing officer at Nassau Financial Group. “The tradeoff is that the rate is guaranteed only for six months versus other kinds of bonds that offer a set interest rate for the duration of the bond.”
I bonds don’t pay interest as you own them. Rather, the interest accrues and you get paid when you sell or the bond matures.
“You can cash them in after a year of purchase, but if redeemed within five years you will lose three months’ worth of interest,” says Brian Walsh, senior manager of financial planning at SoFi.
[READ: 10 Rules for Investing After Retirement.]
Returns Are Solid, But Falling
It wasn’t long ago that I bonds were recording supersized returns for savings bonds.
“I bonds track the overall increase of inflation over a six-month period, with rates changing every May and November,” Christian says. “Although inflation is still high, it isn’t rapidly increasing the way it was a year or so ago.”
For this reason, the rate on I bonds has fallen from 9.62% from May 2022 to November 2022, to 6.89% over the same period in 2023.
“With inflation ebbing, it’s likely to fall again when the new rate changes in May, with some bond experts believing it will fall below 4%,” Christian adds. “If that happens, I bonds become a less appealing investment for a retiree.”
Ladder Up
As a retirement planning strategy, a 50-year-old couple could invest $20,000 per year ($10,000 per Social Security number) in I bonds and build laddered income for retirement.
“Begin by purchasing $20,000 of I bonds per year for the 15 years,” says Robert Reilly, finance faculty specialist at Providence College School of Business. “Then, at age 65, that couple would have a 15-year ladder of an annual inflation-adjusted $20,000 of real purchasing power as part of their reliable income for retirement.”
“Given the current rate of interest of 6.89%, that’s a very competitive proposition,” Reilly adds.
Robust Tax Benefits for Retirees
I bonds are a great idea for retirees and other investors looking for competitive inflation-adjusted returns.
“They offer such a great deal that the government limits the annual purchase amount to $10,000 per Social Security number,” Reilly notes. “There are no coupon payments. Accumulated interest is tax-deferred and is received when the I bonds are sold.”
“Like all U.S. Treasurys, interest is exempt from state and local taxes,” Reilly adds.
[See: 7 Retirement Investment Strategies to Avoid.]
How to Buy I Bonds
Investors can buy I bonds directly from the U.S. Treasury via TreasuryDirect.gov.
“Setting up an account with TreasuryDirect is a three-step process where you select the account type, provide personal information including Social Security number, and create login credentials,” Walsh says. “Purchasing I bonds is a relatively straightforward process that does not charge commission or expenses, but the user experience may seem a little outdated if you are used to working with most brokerage companies and especially fintech companies.”
Retirement savers can purchase up to $10,000 in I bonds per year.
“Another option is buying I bonds at tax time with your tax refund, which the IRS allows,” Christian says. “You can buy I bonds in increments of $50 this way. You don’t need to put your entire refund in bonds — you can earmark just part of it.”
The Caveats on I Bonds for Retirees
I bonds can certainly be a good investment for retirees, but there are caveats.
“The risk-free nature of I bonds is definitely attractive for retirees,” says Robert Johnson, professor of finance at Heider College of Business at Creighton University. “However, one mistake many retirees (and those approaching retirement) make is taking too little risk — that is, de-risking their portfolio too much.”
Given advances in medical science and positive lifestyle changes, many underestimate how long they’ll live in retirement.
“The life expectancy for men aged 65 years in the U.S. has gradually increased since the 1960s,” Johnson says. “Now men in the United States aged 65 can expect to live to 83 years of age. Women aged 65 years can expect to live to 85 years of age. Many people will live well beyond those ages and one’s retirement assets must last if one is fortunate enough to be a positive outlier on the age spectrum.”
While de-risking a portfolio when one nears, or is in, retirement is a good idea, that doesn’t mean that one should completely de-risk their portfolio.
“Given life expectancies, one should still have exposure to risk assets like equities,” Johnson says. “It simply means that the percentage of assets committed to equities should decrease as one ages.”
[READ: How to Invest $10,000 for Retirement]
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Are I Bonds a Good Investment for Retirees? originally appeared on usnews.com
