I Bond at 7%???

[genchan]

I read that the I bond will be paying almost 7% interest due to the latest inflation report. Is this true? How do you calculate this and is it too late to get the 7% interest?

[jeffrey]

Yes, it appears so. The will be paying anywhere between 6.69% and 7.49% depending what the fixed rate portion of the bond is pegged at. The interest rate portion added onto the fixed rate will be 5.69%.

I-Bonds have to be held a minimum of 1 year (actually less...you can buy them at the end of the month and still get the entire month's interest for them) - there is a 3 month interest penalty if you sell them before 5 years, but even with the penalty, you'll still come out ahead of the current savings rates (even Emigrant at 4%) that banks are offering.

You can get more information on them at <a href="http://www.treasurydirect.gov/indiv/products/ibonds_glance.htm">treasurydirect.gov</a>

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<a href="http://www.i-bondrate.com">I-Bond Rate</a>

[VJW]

I-Bonds have been THE investment for a number of years now.

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[baselle]

Its not too late - the 7% I-bond starts in November, 2005.

[jmjj215]

What happens if you pull it out prior to the requisite one-year holding period?

[ken1706]

Originally Posted by jmjj215

What happens if you pull it out prior to the requisite one-year holding period?

Don't think early withdrawals are possible. You have to wait that one year.

That's one advantage bank CDs have over savings bonds. At least with a CD, you can usually take the penalty and do a withdrawal.

About the 7%, it's important to note that you'll get this rate only for the six months. It changes based on inflation (although there is a fixed component). A few years ago there was a period in which I bonds were paying under 3%. In the long term, it averages out.

Also, if you redeem the bond before 5 years, you lose 3 months of interest. But even factoring this 3-months penalty, a 12 to 15 month term with the savings bond bought this month will have some nice returns.

[genchan]

If it were you who had $5000 to invest in the Ibond, would you favor beginning in October or beginning in November?

[suedavids]

Information about I bonds

You must hold I-bonds 1 year but you can hold them up to 30 years. f you sell between 1 year till 5 years, there is only a 3 month penalty for withdrawls. The amount that you make on i-bonds is recalculated every 6 months depending on the inflation rate. It has 2 portions that are figured, the base rate (which never changes and is dependent on when you purchased the bond (rate at the time) and the inflation rate). These i-bonds serve as a hedge for inflation.
They have the following characteristics:

Federal guarantee:
i-bonds are completely guaranteed by the United States government! Wonderful! You can't loose your principle and will earn a set variable interest rate which changes and is set every 6 months( could go higher or lower depending on inflation).

Taxes advantage:
You have deferred federal taxes until you sell the bonds. Also, the gains are completely state tax free! If you are in a high tax state, this is important. If you have children, I-bonds can be federal tax exempt if you fall into set income limits and use the proceeds for college expenses. I believe the income cap is at $80,000 or below. Check it out at the below website.


Amounts you can buy:
You are allowed to buy $30,000 paper i-bonds and $30,000 electronic i-bonds per year per person. Go to www.savingsbonds.gov to learn about and purchase electronic i-bonds. They can also be purchased at your bank. Do not pay anyone to buy these for you!!!! There are no fees for purchase!! These can be purchased in small denominations (I believe $25)all the way up to large denominations (like $5,000). THis makes it very flexable and wonderful as you can buy little by little or in one large lump.

Employers
Employers often offer the ability to purchase i-bonds through a paycheck deduction. I am participating in this at my work.


closing
We have owned i-bonds for several years now. Honestly, we've made more money in stocks but for a secure saving vehical, these can't be beat. I am planning on purchasing some for myself and my husband on Nov. 1st when the new rates come out.
It is important to balance your portfolio risk. This is a wonderful savings bond that is very safe. They may also be safer than many other bonds Often bonds are linked to the interest rates. As rates go up, bond prices (even what you payed for them) can go down. You can actually loose on these. That is NOT how these bonds work. You will not loose your priciple and you will earn interest. How sweet it is!!!

[genchan]

Originally Posted by suedavids

We have owned i-bonds for several years now. Honestly, we've made more money in stocks but for a secure saving vehicle, these can't be beat. I am planning on purchasing some for myself and my husband on Nov. 1st when the new rates come out.

I have a question. Why would you buy them on November 1? From what I have read (please note I'm still a newbie with this concept), the interest is paid for the entire month even if you purchase the ibond at the end of the month. Wouldn't it be better to earn an extra month of interest in a bank account and buy them at the end of November instead of November 1? or am I missing something?

[suedavids]

you can buy them before Nov 1st but they are paying ( in this 6 month period) about 4.8%. If you bought them in oct. you would get this rate for the next 6 months then they would pay another rate 6 months latter( depending on the calculations of base + inflation). Because the CPI rate that was just relesed was so high, this indicates that a high inflation rate will boost the I-bond rates in November. So if you wait for Nov. they will probably be over 5-6%. Now there are people posting that these may get to 7%. Not sure if that will be the case. However, if they go to 7% for the 6 month period and you bought them in Oct. you would not get that rate (instead you would get 4.8% for 6 months). In other words, you would get the rate within the 6 month period that you bought it. As I mentioned before though, 6 months latter it will be set at a new rate. I am just hedging my bet that I can earn a little more % with the Nov. issue over the October issue. Keep in mind, the rate set Nov. 1st will follow all bonds issued for 6 months.

On the website www.savingbonds.gov there is a bondwizzard that you can download onto your computer and it will automatically udate your rate, value and interest earned on your bonds to keep track. All you have to do is enter your bond #'s and it is an excellent way to manage your bonds. It also keeps track of the bond numbers in case something happens to the paper bonds. My husband still likes paper but if you loose them it is a hassel to have them search for them. If you have the numbers they can retrieve and honor the bonds. The wizzard manages these and is an electronic record of your bonds. You will also be able to see that depending on when you bought the bonds, they will have different rates each 6 months. I wouldn't worry too much about this factor but that is one reason I am waiting till Nov. Now in the past they have lowered the base rate but I don't think they are going to do that this time. At least there is no indication of that.

[suedavids]

One additional thing. You were correct to say that to buy these latter in the month does count for the entire month. If you want to buy it towards the end of the month this is o.k. but do allow time for the bond to be issues. This may take several days. I once bought some i-bonds 3 or 4 days before the end of the month and they were issued the next month. I actually missed out because I did not allow enough time. They may have resolved this issue but not sure.
If you purchase these via the web (electronically) it has an easy 4 step process using your router number on your check to pay for these. It use to be you could charge these ( Uncle Sam wised up). I use to earn 1 % on my credit card with the purchases. No more... at the time it was sweet.

[baselle]

Ah, more I-bond experts. Nice not being the only one.

Cleanup points on this discussion: If you are (were) living in an area officially declared a federal disaster area, you can redeem savings bonds younger than 1 year. That's the only exception.

Savings bonds are issued once a month, and the interest is applied once a month. If you buy a bond in the next week or so, its issue date will be 10/2005, you can redeem it on 10/2006 (effectively shaving off a month of penalty because you bought it late in October), you can redeem it on 10/2011 without penalty, and its maturity date is 10/2035, when it stops earning interest and you pay taxes on the interest it has accrued. (Maturity is not a goal, its a limit.). Interest is applied on the first of the month, so on Nov 1 your 10/2005 bond's interest rate will change to the higher rate, and will keep that total interest rate for 6 months when it changes to a new one.

So should you buy a bond now for 10/2005 or wait until the end of November for an 11/2005 bond? Well it depends. I-bond rates have two components - the variable rate based on the inflation rate calculated from CPI-U (changes every six months), and a fixed rate set by the Treasury Dept (the thought is that it is based on the TIPS fixed rate).

Your fixed rate stays the same through the life of the bond but frankly is what makes your bond more or less valauble. Right now the fixed rate is 1.2%, which is on the low end of what it has been. If November's fixed rate is higher than 1.2%, then November's the bond to buy. If its the same, it doesn't much matter.

[ken1706]

Originally Posted by baselle

Your fixed rate stays the same through the life of the bond but frankly is what makes your bond more or less valauble. Right now the fixed rate is 1.2%, which is on the low end of what it has been. If November's fixed rate is higher than 1.2%, then November's the bond to buy. If its the same, it doesn't much matter.

For those who plan to own the savings bonds for the long term, this fixed rate is what's important, and no one knows if it's going up, staying the same, or going down in November. If it does follow the TIPS fixed rate, it'll likely go up some. If it's used to balance the inflation component it may not go up and could go down .

I remember back in 2000 when it was 3.6%. Those I-Bonds bought then will be doing very well when the next period's inflation component gets added.

[Russell]

So when is the base rate for I bonds supposed to be highest ? Is it directly proportional to the interest rates ? If so, since we're in the rising interest rate market wouldn't it be better to wait and then lock in the highest rate when moving your large chunk from ED/ING to I-Bonds ?

[ken1706]

Originally Posted by Russell

So when is the base rate for I bonds supposed to be highest ? Is it directly proportional to the interest rates ? If so, since we're in the rising interest rate market wouldn't it be better to wait and then lock in the highest rate when moving your large chunk from ED/ING to I-Bonds ?

The fixed rate does seem related to interest rates. You can see the history of the two from the I Bond rate history and the Feds fund rate history. Note the biggest drop in the fixed rate was in 2001 when it dropped from 3.4% to 2% and the Feds funds rate went from 6.5% to 1.75%.

[baselle]

Originally Posted by Russell

So when is the base rate for I bonds supposed to be highest ? Is it directly proportional to the interest rates ? If so, since we're in the rising interest rate market wouldn't it be better to wait and then lock in the highest rate when moving your large chunk from ED/ING to I-Bonds ?

First of all, I-bonds beat out ED/ING interest rates even when the fixed rate was truly crappy at 1.0%. I know, because that's when I bought them.

The other thing is you really don't want to buy in a "large chunk" IMHO. Buying a large chunk o'savings bond means that you're redeeming a large chunk o'savings bond which means that you are paying taxes on the interest of a large chunk o'savings bond. And locking in something means a bit less when the rate is set for 6 months at a pop. Why not space your large chunk into 6 medium-sized chunks?

Also, another time tested trick is to buy consistently, month after month. When you have enough bonds that are older than a year, decide on the basis of the fixed rate whether you want to redeem them and buy new bonds. For instance, if the November fixed rate is going to 1.3%, I'm seriously thinking of redeeming my fixed rate 1.0% bonds to buy the 1.3%.

[suedavids]

Be careful with churning the bonds yearly. The older bonds have historically been worth more because of the base rate. You also loose a 3 month penatly for withdrawing less than 5 years. I would plan on holding these for at least 5 years and only liquidate them if needed.

People are banting about that the new rate will be about 7%. This will probablly be unlikely to get this high. We will see shortly.

[baselle]

Originally Posted by suedavids

Be careful with churning the bonds yearly. The older bonds have historically been worth more because of the base rate. You also loose a 3 month penatly for withdrawing less than 5 years. I would plan on holding these for at least 5 years and only liquidate them if needed.

Thank you for the warning! I was planning to think about it based on the spread between the fixed rates, rather than yearly. Any thoughts on when it would make sense?

[jmjj215]

Originally Posted by baselle

First of all, I-bonds beat out ED/ING interest rates even when the fixed rate was truly crappy at 1.0%. I know, because that's when I bought them.

The other thing is you really don't want to buy in a "large chunk" IMHO. Buying a large chunk o'savings bond means that you're redeeming a large chunk o'savings bond which means that you are paying taxes on the interest of a large chunk o'savings bond. And locking in something means a bit less when the rate is set for 6 months at a pop. Why not space your large chunk into 6 medium-sized chunks?

Also, another time tested trick is to buy consistently, month after month. When you have enough bonds that are older than a year, decide on the basis of the fixed rate whether you want to redeem them and buy new bonds. For instance, if the November fixed rate is going to 1.3%, I'm seriously thinking of redeeming my fixed rate 1.0% bonds to buy the 1.3%.

Isn't the interest fed/state tax free?

By buying in smaller chunks you're "diversifying" in a sense - sounds good down that avenue also.

[suedavids]

I would probably wait till the next issuance (nov-april). If you had followed this advice following the last issuance, you were ahead.