How Retirees Can Use I Bonds To Protect Against Inflation

You can’t turn on the news or go online without seeing the word “Inflation” plastered across headlines. Due to several external factors like the war in Ukraine, ongoing complications with COVID-19, supply chain issues, and more, the inflation rate is reaching historic 40-year highs.

As inflation continues creeping up, the purchasing power of your hard-earned savings continues to drop. Many retirees are concerned about the effects of inflation on their portfolios, and understandably so.

The good news is that I bonds can serve as a hedge against the corrosive effects of inflation. Here’s what retirees should know about them.

What’s an I Bond?

I bonds are also known as Series I Savings Bonds, and they’re issued directly by the U.S. Treasury Department.

Because I bonds are backed by the full faith of the U.S. government, they’re one of the most secure bond investments an individual can make. They are purchased via the Treasury direct either online or by paper.

You can individually purchase up to $10,000 per calendar year online, meaning you and your spouse may invest up to a combined $20,000. If you purchase via paper, the calendar year maximum is $5,000.

The minimum online purchase is $25, and you can buy any penny increment between $25 and $10,000. For paper purchases, you can buy in increments of $50, $100, $200, $500 or $1,000.

How Do I Bonds Work?

I bonds stand out from the crowd because they actually have two interest rates: fixed and inflation-adjusted. The latter is what gives I bonds an important advantage when combatting today’s historical inflation.

The fixed 30-year interest rate is adjusted every six months and is currently set at 0%. As of now, any interest earned will come directly from the inflation-adjusted interest rate, which is currently set at 9.62%. This interest rate is based on changes in the Consumer Price Index for all Urban Consumers (CPI-U).

Similar to the fixed-rate, this number is also adjusted every six months. Any bond issued between May 2022 and October 2022 will include that 9.62% rate. Compared to CDs or high-yield savings accounts with rates 1% or less, this is a much more lucrative option that’s designed to keep pace with inflation.

The interest on your I bonds will compound twice a year. After six months of owning the bond, any interest accrued will be converted to the principal. 

What Is the Maturity of I Bonds?

I bonds can accrue interest for up to 30 years. However, you may start cashing out after one year. If you do decide to cash out before the bond reaches five years, you will lose the previous three months’ worth of interest. You may cash the bond penalty-free at anytime between five years and full maturity (30 years).

How Are I Bonds Taxed?

After cashing your I bond, you will receive a 1099-NEC. The interest earned in an I bond is taxed as ordinary income at the federal level but not at the state or local level.

If a loved one inherits the I bond after your passing, they may be required to pay estate or gift taxes at the federal and state level on the interest accrued.

Do I Bonds Belong In a Retiree’s Investment Strategy?

Retirees don’t have time on their side when it comes to riding out volatility in the markets. That’s why fixed income is an important component in their portfolio.

I bonds offer a good hedge against inflation, which is putting some serious stress on retirees’ savings. They’re effective at protecting a portion of your money during this particularly tough economic state.

Note: I Bonds Can’t Be Consolidated

If consolidation is a goal of yours during retirement, I bonds may add some complexity to the mix. You must purchase them via treasury direct, so this will make another account for you and your spouse to keep track of. This may not be a deal-breaker for you, but it’s worth noting for those trying to make their accounts as streamlined as possible.

Determining If I-Bonds Are Right For You

Market volatility and economic upheaval are scary for anyone to face, let alone those preparing to leave the workforce. 

Taking a conservative stance with their savings is often the first move retirees make when faced with a stock market downturn. And because of today’s record-breaking interest rates, I bonds are a secure way to do just that.

Before making any big moves regarding your retirement savings, we urge you to reach out and talk to our team. We can help review your current standings and offer tailored advice on what to do next.

Reach out anytime; we look forward to working with you.

I bond, Inflation, Retirement income planning, Retirement Planning
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