Why I Bonds Are the Safest Investment You Can Make

A growing stack of money

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Zvi Bodie is the Norman and Adele Barron Professor of Management at Boston University and author of many books, including the recent Risk Less and Prosper. He believes that I Bonds are one of the best safe investments out there

I Bonds come with guarantees, tax-deferred inflation-adjusted interest, and after one year, liquidity. This could be one of the best cash investments you ever make.

I Bonds as a Safe Investment for Your Emergency Fund

I Bonds make a great second-tier emergency fund - second-tier because you can't sell them within the first 12 months of buying them, so you need other liquid funds to rely on while you build up a stash of I Bonds.

The most you can buy is $10,000 a year per person. You can open an account directly with the Treasury through TreasuryDirect. Interest is tax-deferred. Consider building up a significant holding of I Bonds and buying the maximum amount of I Bonds each and every year.

If you look online at I Bond rates, it says the fixed rates as of May 1, 2018, is 0.30%. A semiannual inflation rate is also applied, and from May 2012 to October 2018, it is 1.11, which means an annual rate of 2.22%. Where else can you get 2.2% guaranteed tax-deferred interest on a safe and liquid investment right now while knowing that if rates go up, your rate will also likely go up? This is what makes I Bonds the best safe, cash investment you can find right now.

Use I Bonds to Fund Future Healthcare Premiums

Healthcare premiums and out-of-pocket costs in retirement will run about $3,500 - $5,000 a year per person. If you start buying $3,000 - $5,000 a year of I Bonds now, as the interest they accrue is tied to inflation, you can begin cashing them in later in retirement to make sure you have safe, guaranteed, inflation-adjusted investments available to cover medical costs in retirement.

How to Buy I Bonds

You can open an account online with TreasuryDirect, link it to your bank account, and transfer money over to buy the maximum amount of I Bonds each year.

TIPS Bonds

TIPS Bonds (referred to as treasury inflation protected securities) are different than I Bonds. Unlike I bonds, the interest on TIPS is not tax-deferred, so this vehicle is best owned inside tax-deferred accounts like an IRA or ROTH IRA. Unfortunately, you can't open an IRA account directly at TreasuryDirect, so TIPS in your IRA need to be purchased through a brokerage account.

Learn more: TIPS vs IBonds.