Here’s a Rare Chance to Beat Inflation and Earn 9.62% Without Taking Big Risks
The U.S. was blindsided recently when inflation got an unexpected bump to 8.6%, the highest rate in 40 years. Then, on Monday, we officially entered bear market territory.
It’s time for investors to rethink their moneymaking strategy and pivot into protection mode — and I have just the thing:
A new investment vehicle that’s actually designed to help you beat inflation.
Not only does it currently pay out an annual yield (9.62%) well above today’s record-high inflation rate, but it will automatically pay you even more in the future if inflation continues to surge.
This investment vehicle can even help protect you from the worst-case scenario — where the inflation rate falls dramatically or even turns negative (deflation) — by guaranteeing that you would at least get your original investment back.
You might be thinking this sounds a little too good to be true…
But you’d be wrong.
The investment I’m talking about is absolutely real — and it has nothing to do with traditional high-yield investments, crypto “stablecoins,” or any kind of questionable financial schemes.
In fact, it comes directly from the U.S. government itself…
I’m referring to Series I savings bonds, or “I bonds” for short.
I Bonds: Explained
As the name implies, I bonds are a type of savings bond that offers interest payments that are indexed to inflation. In this way, they’re similar to another type of government bond known as Treasury Inflation-Protected Securities (TIPS), but the way they work is much simpler and easier to understand.
In short, I bonds are sold at face value in denominations ranging from $25 to $1,000. And like traditional Series EE savings bonds, I bonds pay interest for up to 30 years (or until you cash them in), compounded semiannually (every six months).
Compared to traditional savings bonds, which only pay a fixed rate of interest (currently just 0.10% per year), the interest payment on I bonds is based on a combination of a fixed rate and an inflation rate. Now, the fixed rate on I bonds is currently set to 0.0%. But the inflation rate is recalculated at the beginning of May and November each year and is based on the change in consumer price inflation over the previous six months.
That means, based on the latest semiannual inflation rate on May 1, 2022, I bonds currently pay an annualized yield of 9.62%.
That’s more than three times the interest you’d earn holding 30-year Treasury bonds today, but without the risk of loss if you decide to sell early. (More on this in a moment.)
And if you thought that was impressive, consider that it’s roughly 100 times more than you’d earn from traditional savings bonds and most bank accounts today.
Even better — the interest on I bonds is exempt from both state and local taxes, and is even exempt from federal taxes in some circumstances when used to fund qualified higher-education expenses.
As a result, I bonds are one of the rare long-term bonds that offer a compelling risk-to-reward proposition today. And I think they could be a great way to protect a portion of savings from inflation without taking a lot of risk.
However, before you consider investing, there are a few additional details you should know.
I Bonds: Buying Limitations
First, individuals are limited to buying no more than $10,000 worth of I bonds each calendar year, though the government will allow you to buy up to an additional $5,000 per year with any federal tax refund you receive.
This means I bonds probably aren’t a worthwhile investment for folks with substantial nest eggs.
I Bonds: Selling Restrictions
Next, there are some important selling restrictions. Specifically, investors must hold these bonds for at least one full year before selling. There is also an early-redemption penalty — equal to the previous three months of interest — for those who sell within the first five years of ownership.
This means I bonds also aren’t ideal for any money you might need within a year at minimum, and ideally within the next five.
I Bonds: Payments Based on Inflation
Because the inflation rate is recalculated every six months, there is also a risk that the payments on these bonds could drop significantly if inflation moves much lower. (Though as I mentioned earlier, you are guaranteed to get your original investment back even in the extreme case that inflation turns negative.)
I Bonds: Interest Rate Schedule
It’s also important to understand that the interest rates on individual bonds are reset on a different schedule than the inflation calculation I mentioned earlier. While the inflation rate is recalculated in March and November, the rate on individual bonds is updated every six months from their original issue date.
For example, while the inflation rate will next be recalculated (higher or lower) on Nov. 1, 2022, folks buying I bonds today will continue to receive the current 9.62% rate until Dec. 1, 2022. Of course, this could be considered a positive or a negative depending on the path of inflation over the next several months.
I Bonds: How to Purchase
Investors are required to purchase I bonds directly from the U.S. Treasury itself. The easiest way to do so is through the TreasuryDirect website.
While most folks should be able to navigate this site without too much trouble, it’s not exactly “user friendly.” (As one financial planner recently put it: “Imagine if the DMV had an online store — that’s what this experience is like.”)
I Bonds: NOT Regular Income Payments
And finally, even though the interest on I bonds compounds every six months, you won’t actually receive those payments until you sell. So, I bonds also aren’t ideal for folks looking for regular income payments.
Still, despite these limitations, I bonds offer a rare chance for individual investors to earn a real return with very little risk today. And I think they could be a great place to park a portion of your longer-term savings you don’t expect to need in the next few years.
As always, I’d love to know what you think at [email protected]. I can’t respond to every email, but I promise to read them all.