5.4% I-Bonds | Should I Buy I-Bonds In 2023?

hello ibon fans the video you've been asking and waiting for 5.4 I bonds that's what you should expect to earn in your first 12 month holding period if you've already bought your I bonds after November 1st 2022 or if you're planning on buying them before the end of this month April 2023. this 5.4 I bond rate assumes you're a long-term ibon investor like we are and excludes the early withdrawal penalty of the last three months interest if you redeem your I bonds between years one and five and that's what I'll be talking about in this video how much you could earn in the first 12 months if you've bought or are planning on buying I bonds between November 2022 and April 2023. why we're buying twenty thousand dollars more of I bonds plus our overall I Bond plan and who should and should not consider buying more eye Bonds in 2023 here's how much you could earn in the first 12 months if you've bought or are planning on buying I bonds between November 2022 and April 2023. for the first six month holding period you'd get the current actual annualized I bond rate of 6.89 divided by two because it's just for six months if we assume an initial investment of ten thousand dollars here's the amount of interest earned over the first six month holding period and here's your I Bond balance principal plus interest at the end of the first six months in the second six month holding period here's the expected annualized I bond rate come May 1st this includes the current 0.4 percent fixed rate if you've bought or are planning on buying I bonds between November 2022 and April 2023. remember that the current 0.4 fixed rate stays the same for the 30-year term of an i Bond so here's what the expected annualized I bond rate come May 1st includes the current fixed rate of 0.4 percent plus the semi-annual inflation rate times two which we now know is 3.38 plus the inflation adjustment on the fixed rate or the bump as many of you I Bond oldies know that I call it of 0.01 and with a bit of rounding this gets us to the expected annualized I bond rate for the second six month holding period of 3.79 percent let's divide this by two because again it's just for six months this ending balance after the first six month holding period is the beginning balance for your second six month holding period because I bond interest is compounded every six months here's the estimated interest earned over the second six month holding period and here's your projected I Bond balance principle plus interest at the end of the second six months for an estimated annualized I bomb return of 5.4 percent over the first year as I mentioned earlier this assumes your long-term I Bond investor like we are and excludes the early withdrawal penalty of the last three months interest if you redeem your I bonds between years one and five point four percent is okay but it's not really something to break out the champagne for given where rates are right now on CDs and even more liquid t-bills money market funds and some high-yield savings accounts so I know some of you have been a bit Curious by our decision to add more I Bonds in April to our portfolio so let's talk about that next as many of the super Savers who've been with us for quite some time already know we bought our first I bonds at an annualized rate of 7.12 with the expectation that we would exit our eye bonds that we would redeem them once inflation Falls and I Bond rates fall which appears to be What's Happening Now based on the latest data well our perspective on i-bonds has evolved over time with Rising interest rates and ongoing Market uncertainty as I mentioned in an earlier video for us I bonds now serve a dual purpose one as a way to inflation-proof a part of our portfolio and two as part of our longer term and or excess emergency savings so first let's talk about I bonds as a way to inflation proof a part of our portfolio what if inflation isn't over or what if there's another bout of high inflation when we retire or close to retiring those are some of the dinner table conversations that have been floating around over the past few months as I always say everyone's Financial journey is different do keep in mind that we that's me and my husband Marcus we're thinking from the perspective of a couple who's in their 40s and 50s with 15 to 20 years Runway to retirement and a large part of our brokerage and retirement savings invested in equities 80 to 90 percent depending on whether the Market's having a bad or a good day and before the fed's rapid rate hikes that number was closer to nearly a hundred percent equities those Equity Investments are what grows our wealth because remember I bonds by Design are not a wealth growing investment as I've also mentioned in earlier videos that's what the stock market is for if you have a long-term perspective to investing I bonds rather are a wealth protection tool and that's the purpose they serve in our portfolio eye bonds protect a part of our wealth it's certainly not the sexy part of our portfolio at least not in my mind but it's the safe part because if inflation is not over or if we have another bout of high inflation when we're nearing or in retirement our eye bonds that's the part of our portfolio that will not be eaten Away by Rising prices now let's move on to number two eye bonds as part of our longer term and or excess emergency savings because the other dinner table conversation that's been floating around and this one since 2021 is what happens if we retire into a down Market or a recession what if stock and or bond prices get pummeled when we need the cash for an emergency or when we want to draw down on our retirement savings well that's again where our eye bonds come in because no matter how bad the Market's doing the principal value of our I bonds will not go down of course that also means that however good however well the market is doing the principal value of our I bonds will also not go up and it will not make us wealthy but remember for this part of our portfolio we are in wealth protection mode in safety mode in gen sleeps better at night mode with our eye bonds because if we do have a massive emergency or if we retire into a down Market or recession we'd have the option of first redeeming our I bonds the principal value of which is not subject to Market movements rather than sell our other Investments and options in my mind should be a part of every sound financial plan and by the way while we are thinking about this mostly from a retirement perspective in the bigger context I bonds as an inflation-protected emergency fund can be used at nearly any age even if you're not nearing or in retirement and here's a real life example a client of ours A young professional in her 30s completely wiped out the emergency savings that she had sitting in her bank account recently due to a series of unfortunate setbacks At first she thought her only options were to sell some of the investments in her Roth IRA and pull that money out or to take out a double-digit APR personal loan in the end she didn't have to do either instead she redeemed the I Bond she had as part of her excess emergency savings with treasury Direct now this client did have to pay the early withdrawal penalty of the last three months interest because she hadn't held her eye bonds for five years yet but that early withdrawal penalty was less than the loss she would have taken by selling some of her Roth IRA investments in an unfavorable market and way less than the interest payments on a double-digit APR personal loan do keep in mind my emphasis on the Ward's longer term and excess when using I bonds as an emergency savings tool when I say excess emergency savings that savings beyond the basic or starter emergency fund of at least two to three months of living expenses that should be sitting completely liquid and easily accessible in a bank or credit union account somewhere and perhaps for you that basic or starter emergency fund is six months or more depending on your circumstances and preferences I bonds should generally not be used as a basic or starter emergency fund and especially not if you know or suspect that you'll be needing that money in the next 12 months because there is a minimum holding period of 12 months for eye bonds during which time they are E-liquid meaning you cannot redeem them under almost any circumstance for those of you who've been following our ibon and Tebow Journey we're at the point now where most of our I bonds are liquid they're redeemable because we've held them for more than 12 months of course we still have to pay the early withdrawal penalty on our I bonds if we do dip into them for an emergency because we haven't hit the five-year Mark yet but that's a hit we're willing to take if it gets to that by using these I bonds as our longer term emergency fund we're able to free up the excess emergency savings that we've been laddering into shorter term T bills for whatever investment opportunities may arise in the future whether that may be in the equity Market or in the longer term bond market when rates go higher so our I Bond strategy is to keep buying I bonds and building out our inflation-protected emergency savings with them I already delivered Marcus's ibonne gift for this year so he's maxed out on his ibond limit for 2023. Marcus will deliver me my ibon gift when I tell him about our plan or if he watches this video before I get to telling him so I'll also have maxed out my I Bond limit for 2023. this means though that we have another twenty thousand dollars of liquidity in our ibon emergency fund and the current plan is that this month April 2023 will buy five thousand dollars of I bonds via our trust and sometime in October another five thousand and for those of you with a spouse or partner who've already maxed out your ibom purchase limit for 2023 and you have no trust another way you could do this is to gift your spouse five thousand dollars of eye bonds this month and another five thousand dollars in October for delivery in a year when your spouse stops buying I bonds I think most of you are already familiar with how gifting eyeballs works but if you're new to us then I've linked this ibon gifting 101 video in the description below in any case just like we dollar cost average every month into our retirement savings will be dollar cost averaging into our I Bond emergency fund every April around tax time and every October before Halloween and there's no exact science to the around tax time and before Halloween dates I've chosen it's just what's easy for me to remember I know that some of the longer term ibon investors in our community do it this way While others by May and November when the ibon rate resets and still others who just buy everything at the beginning of the year or whenever they have the cash my personal preference is for buying two times a year because it allows us to capture all the fixed rate resets to hedge a bit so to say so if the fixed rate in May ends up higher than the current fixed rate of 0.4 percent I get that also and if the fixed rate in May ends up lower I still haven't lost the current fixed rate of 0.4 percent now I did do this analysis for one of our January videos showing the I Bond fix rate typically tracks the real yield on 10-year tips to some extent albeit with a bit of lag time for those of you new to tips tips are treasury inflation protected securities and my prediction at that point in time was that the I Bond fixed rate in May would be in positive territory and I still think that it will be in positive territory but whether that's 0.2 percent 0.4 or 1 is really not possible to say especially since the real yield on 10-year tips has fallen significantly over the past few weeks as investors fled to the safety of treasuries after the overnight collapse of Silicon Valley Bank here's where the real yield on 10-year tips was on March 8th just before svb blew up and here's where it is now at the time of this taping wowzers as I told a journalist recently when I was interviewed by Bloomberg for an article there's all sorts of speculation that the ibon fixed rate tracks X or Y but the reality is nobody knows because unlike with the variable rate that changes every six months treasury direct does not disclose any information on how the fixed rate is determined even though it stays the same throughout the 30-year term of an eye bond perhaps this is by Design so that treasury direct can give themselves a bit of flexibility in managing their budget right so in addition to the five thousand dollars we're planning to buy this month and the five thousand dollars we're planning to buy in October which I just talked about we'll be doing the same for Diamond nesting because well I like the idea of an inflation-protected emergency fund for my business as well and if the fixed rate does end up knocking me off my chair then maybe I'll think about gifting Marcus another ten thousand dollars of I bonds I'll take a wait and see approach to this one though now I did mention earlier that this is the real yield on tenure tips at the time of this taping and that this real yield on tips is in a nutshell the fixed rate equivalent for an i bond for those of you who are wondering why would buy more eye bonds at a fixed rate of 0.4 percent versus tips with a higher real yield the reason is because we're using I bonds as part of our longer term our excess emergency savings so the possibility for Redemption at face value is important with eye bonds I know that if I put ten thousand dollars in I'll get the full ten thousand dollars back anytime after the first year if I have to redeem in case there's an emergency plus a bit of interest and less any applicable early withdrawal penalty if I've held those eye bonds for less than five years this isn't the case with tips which can only be sold on the secondary Market if I need to sell tips in an emergency situation I'd have to accept whatever price the market is willing to pay at that moment in time and that price may be at a loss if I'm rushed selling during a market downturn which is when most emergencies seem to happen these days or if I'm Rush selling in a rising interest rate environment like the one we're currently still in having said that if you're looking for just inflation protection and not necessarily an inflation-protected emergency fund like we are then there is a real case for looking into tips which also offer inflation Protection Plus a higher real yield at the moment the current I Bond fixed rate of 0.4 percent check out this video here if this is you to learn more about tips and the pros and cons of tips versus I bonds I've also linked it in the description below so basically if you're like us you're looking to inflation-proof a part of your portfolio and or build out a stable longer term emergency fund then you should consider buying more eye Bonds in 2023 however everyone's Financial journey is different and here's who should not consider buying more I Bonds in 2023 generally speaking one if you don't have a basic or starter emergency fund of at least two to three months of living expenses sitting completely liquid and easily accessible in a bank or credit union somewhere everyone's basic or starter emergency fund varies if you're in or nearing retirement or if you're the sole Breadwinner in your family your basic or starter emergency fund maybe more than two to three months of living expenses two if you need your eyeball money in the next 12 months remember the minimum holding period for an eye bond is 12 months you cannot redeem your I bonds before that three if you have high interest debt such as credit card debt that you should pay down first this one's self-explanatory I think 4. if you have a company retirement match you haven't maxed out that company retirement match is your money a part of your compensation package so to say you shouldn't be leaving that money on the table for your employer five if you're a short-term investor looking for higher yields there are a lot of super savers on this channel who hops into eye bonds when they were at an annualized rate of 7.12 and 9.62 basically for the I bond rate at that time and not necessarily for the inflation protection feature which is completely fine that's how things started for us as well but if this is you if you're expecting to redeem your I bonds after 12 months then T bills CDs and possibly money market funds and some high yield savings accounts may be the better choice in the current environment especially when you consider the liquidity Factor because while this is the estimated annualized I bomb return of 5.4 over the first year that I showed you earlier this number does assume your long-term eyeball investor like we are and it excludes the early withdrawal penalty of the last three months interest if you redeem your I bonds between years one and five if you redeem your I Bonds in month 13 and have to pay the early withdrawal penalty of the last three months interest your estimated annualized I Bond return of 5.4 goes down to 4.42 percent and practically all the T bills with a maturity of less than 12 months are paying more than 4.42 at the time of this taping plus you can sell T bills on the secondary Market if you buy them via a brokerage company now the price you get on the secondary Market may not necessarily be what you want depending on market conditions but at least you can access that money that you put into those t-bills if you absolutely need to unlike with I Bonds in the first year there are also quite a few 12-month CDs as well as high-yield savings accounts that are paying above five percent at the moment just keep in mind that interest earned on CDs and high yield savings accounts is subject to local state and federal income taxes unlike interest earned on T bills and I bonds which is subject to only federal income taxes and not the state and local income taxes and let's not forget money market funds quite a few of the ones at leading brokerage firms like Fidelity Schwab and Vanguard currently have seven day yields in the mid to high fours if your priority is more on short-term yields rather than long-term inflation protection then check out these videos here to learn more about money market funds and the top CDs and high-yield savings accounts right now for us we're still holding two to three months of emergency savings at our FDIC insured Bank we're laddering 13-week t-bills with our brokerage company until a better investment opportunity comes along and we're buying more eye bonds to build out our inflation-protected emergency fund what about you are you planning on buying more eye bonds and if so when or are you planning on redeeming your I bonds and if so also when and what are you putting your money into next drop a comment below and let me and the other super Savers know and for those of you who are planning on buying more eye bonds before the end of April I'd suggest putting in your purchase order a few days before Thursday April 27th orders are typically processed the next business day meaning that if you put your order in on Thursday April 27th it should get processed on Friday April 28th and you'll still get the current I bond rate of 6.89 percent I usually like to give myself a bit of a buffer in case anything goes wrong so I'll be buying my I bonds after I finish this video remember that if you put your order in on Friday April 28th it will get processed in May and you will get the new ibarn rate that treasury direct will announce on May 1st alright Super Saver I hope this eyebomb video was helpful as always if you enjoyed this video and learned something new don't forget to share with those you care about and of course hit that thumbs up and see you again very soon with another brand new wealth building video

Channel: Diamond NestEgg

Views: 142,908

Keywords: 5.4% I-Bonds | Should I Buy I-Bonds In 2023?, Buy I-Bonds 2023, Should I Buy I-Bonds in 2023, may 2023 i bond rate, may 2023 i bond rate prediction, i bond fixed rate prediction, i bond fixed rate, may 2023 i bond fixed rate, are i bonds still a good investment, i bonds, i bonds 2023, series i savings bonds, i bonds explained 2023, i bonds 2023 predictions, should i buy i bonds, i bond interest rate, i bond interest rate 2023, jennifer lammer, diamond nestegg

Id: hwBPBWRht3I

Length: 23min 9sec (1389 seconds)

Published: Fri Apr 14 2023