US Treasury Series I Savings Bonds vs S&P 500

Investing
#1

Current inflation rates are reported to be at 8.5% in March of 2022. Inflation has been on the rise.

I wanted to hear everyone’s opinions on I-bonds due to the current inflation rates and if the short-term I-bonds will be beneficial over S&P 500 investments.

Quick information about I-Bonds (copy-paste from slickdeals)

  • What is a Series I bond?

  • “A savings bond that earns interest based on combining a fixed rate and an inflation rate.”

  • You may use Series I bonds to:

  • Save in a low-risk product that helps protect your savings from inflation

  • Supplement your retirement income

  • [Give as a gift]

  • [Pay for education]

  • What interest does a Series I bond earn?

  • A combination of a fixed rate that stays the same for the life of the bond and an inflation rate that is set twice a year.

  • For bonds issued from November 2021 through April 2022, the combined rate is 7.12%

#2

Hi David!

It’s a good question, because I bonds sure do look attractive right now! The current rate is 7.12% as you noted. The I Bond interest rate resets in May. The new rate hasn’t been announced yet, but it is based on March 2022 CPI-U data which has been released. So, it looks like the May rate will be 9.62%!

BUT I Bonds are very different from the S&P 500. You invest in the S&P 500 when you are comfortable taking risk, have a longer time horizon and would like growth of capital. There are a number of nuances associated with I bonds. In addition to what you noted above, here are a few things to keep in mind.

  • You can only buy $10K per year per person (there are ways to buy slightly more, such as through a tax refund or through an entity, but it’s best to think about it as $10K per year).
  • The interest rate resets every six months. The rate has an inflation component to it, so that’s what has been driving the huge increase recently and why they are getting so much attention.
  • You can’t cash in your I Bonds for the first 12 months of owning them. If you cash in your I Bond and held it between 1-5 years, you lose the last three months of interest.

We had a post about I Bonds a few months ago as well! It’s not letting me link it right now, but I’ll try to get it to work!