Retirement Investing - Savings Bonds and Inflation

Papabear — Mon, 13 Nov 2006 05:07:37 +0000

Most of us have bought some of US Savings Bonds at one time or another. They’ve been around in one form or another since 1776. Many of us still do. If you work for a major company, it’s a very easy and painless way to sock away a few dollars every payday.

The biggest downside to savings bonds has been that the interest rate has always been very low. Often it’s not even kept us with inflation. That’s why the Government introduced the Series I (for inflation) savings bond.

The interest on a Series I bond is divided into 2 parts. There is a fixed rate that remains the same for the life of the bond. In addition, there is an inflation-adjusted adder rate that changes every 6 months, based on the Consumer Price Index.

The US Treasury changes the fixed rate periodically, but once you’ve bought your Series I bond, it’s locked in. Over the last 5 years, the fixed rate component has ranged from a high of 3.6% in 2000 to a low of 1% in 2004.

Series I bonds are worth taking a look at as part of your overall retirement savings plan, but you should also consider other alternatives. The average rate for an insured 6-month CD is 4.69% when this is written. You can check the current rate at Bankrate.com. Since this is the average, some banks are obviously offering more and some less. Our local bank is currently paying 4.4%. Online, E-Loan’s bank is currently offering 5.5%. You can check out what they are currently offering here. E-Loan

Series I bonds have some advantages. They are exempt from state and local taxes, and you don’t have to pay federal taxes on the earnings until you cash in the bond. On the other hand, unlike a 6-month CD, you must keep a Series I bond at least a year before you can cash it in. Also if you cash in a Series I bond before you’ve had it at least 5 years, you won’t get the last 3 months interest.

You may be able to do better on interest at your local bank or online, but those rates aren’t guaranteed to adjust with inflation. Check it out and compare. In addition to federal tax deferred interest, there may be other things to consider. Where you live and whether you must pay state and local income taxes can make a big difference. So check with you tax advisor to see if adding Series I bonds to your retirement investments makes sense for you.

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