I Bonds - Best Safe Investment You Can Make
Best Cash Investment To Fund Each Year
At a class I attended in 2012, I and other financial advisors in the room, were accused of malpractice by a well-known professor. What caused such an accusation? We were neglecting to advise our clients to take advantage of the best safe investment out there… I Bonds.
It was Zvi Bodie, the Norman and Adele Barron Professor of Management at Boston University, and author of many books including the recent Risk Less and Prosper that made the accusation.
What Makes I Bonds So Great?
After hearing his arguments, I must say I came to agree with him. 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.
Below are some ideas on how to use I Bonds as a safe investment in your retirement and investment planning.
I Bonds as a Safe Investment for Your Emergency Fund
I Bonds make a great second tier emergency fund. I say second-tier because you cannot 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. I can see no downside to building up a significant holding of I Bonds, and I would agree with Zvi that everyone should buy the max amount of I Bonds each and every year.
If you look online at I Bond rates, it says the fixed rates for 2011 and 2012 are zero. Don't let this mislead you. There is also a semiannual inflation rate that is applied, and from May 2012 - October 2012 it was 1.10, which means an annual rate of 2.20%. 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.
Learn more: I Bond Basics and How to Use I Bonds.
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.
Learn more: Rising Healthcare Costs and How to Budget for Them.
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.
Learn More: How to Buy Treasury Securities Direct.
What About 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.
For additional resources on making safe, risk-free investments I would highly recommend you check out Zvi's series of videos.