Q: A friend just told me of a way to make a guaranteed 8% over the next year by investing in Series-I savings bonds. I’m a natural skeptic and I’ve learned that if something is too good to be true, it probably is! Does that rule apply here?
A: Your friend is not wrong. But, there are some details to understand before jumping in.
In today’s inflationary environment, Series-I savings bonds are getting a lot of headlines. Technically, they will make you 3.56% over the next six months and probably another 4.8% for the six months after that. Together, that’s around 8% on your money over the next year. But, as Paul Harvey used to say, there’s more to the story.
While the headline rate is very attractive today, you should probably view it as a kind of “teaser rate.” While inflation is up wildly, if and when it subsides, Series-I savings bonds will likely lose their current luster.
To start off, the rate of interest earned on Series-I savings bonds is made up of two parts; the fixed interest rate and the inflation part. Together, this is known as the “composite rate.” The fixed rate is currently set at zero. The inflation component is as high as it’s been in decades.
You can only buy a maximum of $10,000 per calendar year of Series-I savings bonds through TreasuryDirect.gov. If you’re married, you can together purchase up to $20,000 per year. While this isn’t chump change, it might take you a long time to build Series-I savings bonds into a meaningful part of your investment portfolio.
However, there are ways to go beyond the maximum $10,000 purchase limit. You could buy Series-I bonds for your children and you can also buy them through your trust, if you have one established. Taken together, you could increase your ability to stockpile Series-I savings bonds at a faster pace.
Before going crazy, you should also consider the illiquidity of Series-I savings bonds. You are absolutely required to hold them for a full year. Given this, Series-I savings bonds aren’t appropriate for any money that you might need access to soon.
Now for the small “life hack”, as my kids would say.
If you are still interested in Series-I savings bonds, you might consider pulling the trigger before the end of April. If you beat that deadline, you’ll get to lock in the current 3.56% semi-annual rate for the first six months and then in October you will also get to lock-in the expected 4.8% rate for the next six months. That gets you to April 2023. But, if you wait until May 1, you’ll only get the expected 4.8% semi-annual rate for the first six months and then in November your Series-I savings bonds will very likely reset to a much lower rate.
In other words, by acting in the next week, you can gain an extra six months of high returns. After that, all bets are off!