Inflation remains top-of-mind for investors and their respective portfolios. With inflation continuously on the rise, investors naturally want to look for ways to hedge against it. The good news is that there's an excellent option to help hedge against inflation: I Bonds. In this blog post, we help you make an informed decision on if you should add I Bonds to your portfolio.
What are I Bonds?
I Bonds are a type of savings bond backed by the U.S. Treasury that earns interest based on combining a fixed rate and an inflation rate. It's a great option to protect your money from losing value due to inflation. I Bonds earns a combination of a fixed rate that stays the same for the entire life of the bond and an inflation rate is set twice a year (May 1st and November 1st). This type of bond has a maximum purchase of up to $10,000 annually and earns interest for 30-years.
What interest rate will you earn on an I Bond?
Bonds purchased through October of 2022 are earning a combined rate of 9.62%. That rate applies for 6-months following the initial purchase. Again, keep in mind that the inflation rate resets bi-annually every May and November. For example, if you purchase I Bonds in July of 2022, the combined rate of 9.62% would apply through December 2022. The new rate would then apply every January 1st and July 1st.
For more information you can check out the I Bonds rate chart here.
What are the downsides to I Bonds?
When it comes to redeeming I Bonds, some rules apply. Once you have purchased your I Bonds, they can be cashed out after one year. However, you forfeit the final three months of interest if you cash them out within five years. While this might sound concerning, with the 9.62% interest rate, the return would likely still be positive even if you cash out following the one year.
When and why are I Bonds a good addition to your portfolio?
Series I savings bonds are ideal for people with excess cash above emergency reserves, intermediate-term goals (think 1 – 5 years), and to make up a portion of the fixed income strategy specifically for individuals with non-qualified accounts.
If you want an investment backed by the U.S. government that can help protect your cash against inflation, then this is it. Moreover, the penalty for cashing out your investment within those first five years is relatively small.
How you can buy I Bonds.
I Bonds can be purchased electronically through the TreasuryDirect website or by using your federal income tax refund (only up to $5,000). Electronically, I Bonds start at $25 and come in any amount to the penny. I Bonds can be purchased by individuals, living trusts, and business entities.
Should you add I Bonds to your portfolio ASAP?
I Bonds are a safe and effective way to protect your cash against rising inflation rates. However, the interest rate on I Bonds are established every six months. The current rate of 9.62% only applies through October 2022. So now is your chance if you're looking to take advantage of this investment.
Our fiduciary financial advisors can help you make the best decisions for your portfolio. Are you interested in learning more?
As an investor in a volatile market, have you considered your best options? Check out our blog post Three Actions Investors Consider During Times of Uncertainty.