Does looking at your portfolio these days make you feel a little anxious? Do not bother consulting WebMD: It sounds like you may be suffering from flogging in the stock market.
With inflation at a 40-year high of 8.6% and interest rates rising sharply, investors are looking for safe havens.
Enter savings bonds. Since they involve little risk, you would normally expect a modest return on investment. But as inflation and interest rates rise, they move closer to average stock returns, making them a tempting alternative to a bear market.
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Bonds are like a loan to the state
Essentially, a US savings bond is a bond issued by the US Treasury – or in simple terms, it is a loan to Uncle Sam. You can purchase them online at the US Treasury Department’s TreasuryDirect.gov website.
A savings bond earns interest until it “matures” to 30 years and you can redeem without penalty at any time after five.
When you repay your savings bond, the government repays the amount you owed them, plus interest – similar to a deposit certificate.
There are currently two types of US savings bonds available for purchase – EU Series and I Series.
EE series US savings bonds are also known as “patriotic bonds” and you buy them at face value. This means that if you want to buy an EU $ 50 savings bond, you pay $ 50 for it. The interest you earn on EE series bonds increases every six months, adding to the nominal value of the bond. When redeeming EU savings bonds, you receive the full face value plus your interest plus.
EU series bonds currently offer a fixed interest rate of 0.10%. However, if you hold your EU bond for 20 years, the government will make a one-off adjustment to ensure that it is worth twice what you paid for it, regardless of your interest rate.
Series I. US savings bonds protect against inflation, which is what the “I” stands for. You buy Series I bonds at face value and earn half-year interest-bearing interest for up to 30 years plus additional earnings based on the inflation rate. In a deflationary economy – such as during the Great Recession – your rate of return could possibly be lower than a flat rate, but it will never fall below zero, so your initial investment is safe.
The interest rate on Series I bonds consists of two components: one for the fixed interest rate for the life of the bond and one for inflation, which is adjusted every six months. The current interest rate from July 1 is 9.62% – this is based entirely on the inflation component, as the fixed interest rate is currently 0%.
What makes them such a safe investment
Bonds generally function as an effective portfolio diversification tool. Because they have little correlation with other categories of investment assets, when you add them to your portfolio, they can help deal with the shock of market crash.
To help distribute your risk, financial advisers have traditionally recommended the 60/40 investment rule – 60% stocks and 40% bonds. While the 60/40 rule has lost its force in recent years with low bond yields, with inflation rising, these low bond yields are reversing.
Savings bonds are one of the safest types of investments. To lose your money, the government itself must collapse. Since this is unlikely to happen, the biggest risk would be to earn a zero interest rate on a Series I savings bond if inflation were negative.
In addition to diversifying your portfolio, savings bonds can also complement your retirement savings. With EE series bonds and I bonds, you can invest up to $ 10,000 in each type per year, which means a lot of more deferred tax savings beyond the IRA or 401 (k) contribution limits.
Not everything is upside down, though
That said, there is one important thing to consider with savings bonds – they are temporarily non-liquid, which means that the money you invest is not readily available if you need it.
You can not touch your savings bonds for the first year. And if you redeem it five years ago, you will sacrifice three months’ earned interest. This means that if you redeem a bond after 18 months, you will only earn 15 months interest.
Savings bonds are more for stable, long-term savings than for unexpected emergencies. You should have already set up an emergency fund, ideally in a high-yield savings account.
When you have a lump sum that you would like to invest in for a longer period of time, savings bonds can help balance the risks associated with the stock market. But because of the lower yields, it is generally not a good idea to put all your eggs in the savings bond basket.
When the time comes for redemption
To get the most out of savings bonds, keep them until they mature to take advantage of the increased interest.
As of February 2022, the government has reported that more than $ 26 billion is dormant in unpaid, overdue savings bonds. If you can have money tied up in old savings bonds, you can look it up at TreasuryHunt.gov.
Remember that you will have to pay federal taxes on the interest you earn. You can choose to pay tax on the interest you earn each year or you can pay it at the same time when you redeem, leave the property or when the bond expires.
One gap to avoid federal taxes on your interest income is to use it for higher education expenses for you, your spouse or your dependents. There are some eligibility requirements, but if you qualify, it’s an easy way to boost your return on investment.
Hopefully this will help you tidy up your stomach when you think about your portfolio these days. And if not here’s a new product just for you!
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This article provides information only and should not be construed as advice. It is provided without any guarantee.