Speculators in cryptocurrencies and in meme stocks like
have been bragging for months about earning “10X” or even “100X”—10-fold or 100-fold profits.
Here’s how you can make more than 170X, raising your return 177-fold in a single trade. Move your cash from a bank account, where it’s probably earning about 0.02%, into an inflation-protected U.S. savings bond, which will yield 3.54% annualized. Unlike daredevil stock or crypto trading, buying an “I bond” is almost risk-free and delivers significant tax advantages.
Economists say there’s no such thing as a free lunch, but I bonds offer a guarantee from the U.S. government that you can recover your original capital plus any increases in the official cost of living along the way. The only catch is that this isn’t an all-you-can-eat buffet: The maximum purchase is $10,000 per year per account holder (unless you elect to take your tax refund in the form of an I bond).
Ironically, the less you earn and have to invest, the more powerful a tool I bonds are. Sorry, Mr. Bezos.
In today’s yield-parched world, money-market funds are paying 0.02%, bank savings accounts 0.13%, a three-month Treasury bill 0.15% and even a 30-year Treasury bond only 2.25%. The income on I bonds is so juicy, it’s barely below that of leading high-yield or “junk” bond funds, which are much riskier.
If you’ve never heard any of this before, don’t feel bad. Zvi Bodie, a consultant on retirement issues who formerly taught finance at Boston University, says he regularly speaks to groups of financial advisers. When he asks how many are familiar with I bonds, “less than half the hands go up” in the audience.
“I bonds are the best-kept secret in America,” says Mr. Bodie. With a total of just $46.4 billion outstanding, they amount to less than 0.17% of all U.S. debt held by the public, according to the Treasury Department.
That’s partly because financial advisers have no incentive to sell I bonds, which don’t pay commissions or charge expenses and are available exclusively from the U.S. government (see TreasuryDirect.gov).
If four family members each put $10,000 into I bonds, that’s $40,000 on which a financial adviser can’t assess a management fee. At a typical 1% charge, that’s $400 a year the adviser won’t earn.
“So all the advisers, all the brokerage firms—all the places people go to for investing advice—aren’t going to say a word about I bonds,” says Marvin Vinluan, a 34-year-old software developer who lives near Binghamton, N.Y. He often posts information about the securities on Bogleheads.org, a website devoted to low-cost investing.
Introduced in 1998, I bonds were conceived to provide primarily small savers with a positive long-term return after inflation. Their yield consists of a fixed rate for the 30-year life of the bond and an inflation rate, which adjusts semiannually. The current 3.54% applies to I bonds issued until Nov. 1, 2021 and will reset every six months unless the official government rate of inflation stays constant.
What if interest rates or inflation head lower? Yes, the yield can decline. But, unlike with Treasury inflation-protected securities, or TIPS, the yield on I bonds can never go below zero. So they protect against both inflation and deflation, which is pretty amazing.
Interest on I bonds is exempt from state and local income tax. In confiscatory states like California, Hawaii, Minnesota, New York and Oregon, a household with $400,000 in taxable income would have to earn roughly 4% on a taxable asset to equal today’s after-tax I-bond return if rates don’t change.
For income-tax purposes, you can choose to defer declaring your I-bond interest until maturity or you redeem, whichever comes first. That income may be tax-exempt for lower- and middle-income families that use the bond to pay for college tuition.
I bonds aren’t as liquid as a bank account, money fund or Treasury bill. You can’t cash out until you’ve held for 12 months. If you redeem within the first five years, you’ll forfeit the last three months of interest. But they’re as liquid as other 30-year bonds—and, if you sell after the first five years, your full recovery of principal and your ability to match or outpace inflation are both guaranteed.
If you buy an I bond at today’s 3.54% rate and sell it one year and a day from now, you’ll earn 2.65% after the penalty (assuming the rate doesn’t change). That’s roughly quadruple what you’d get from a one-year certificate of deposit or ultra-short-term bond fund.
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How are you protecting your portfolio against inflation? Join the conversation below.
Two types of people need to keep much of their money safe: those who shun risk, and those who seek it.
Cautious folks want a moderate return at low risk. But speculators in hot stocks, cryptocurrencies and whatever else is hopping also need to safeguard some of their assets—to protect against the big losses that big risks can lead to.
For the risk averse, earning a 170-fold return by moving your money from a bank to I bonds is “like GameStop but safe!” exclaims Mr. Vinluan. You get the thrill of giving your return a big boost, while taking no more risk.
For risk seekers, I bonds insure against the chance that some of your bets will go bad.
For everyone, with the Biden administration proposing trillions of dollars in government spending, I bonds are a way of making sure that at least some of your money keeps pace with inflation.
I’m buying I bonds, and so should you.
Write to Jason Zweig at email@example.com
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