Chris Farrell: Why Bonds Should Be In Most Investor’s Portfolios

Question: My financial advisor wants me to buy $ 10,000 7.12% I Savings Bonds through April ?? I know that is changing, and I would leave it there for a few years so as not to be penalized. Good idea? … That sounds like a better deal than leaving the money in a savings account for little or nothing. JB

A: The quick answer: Bonds I – Series I US Treasury Savings Bonds – are a smart way to save money. Period.

Shortly after receiving your question, I received an email with the “I Bond Manifesto”. The Manifesto was released in September by six personal finance experts, including Zvi Bodie, professor emeritus of finance at Boston University. Influenced by the Savings and Bonds I conversations with Bodie, I have long advocated for households to put money into Bonds I.

The recommendation has been a lonely position given that most financial planners, wealth advisers and other professional fund managers routinely ignore them. That is to say until now.

What changed? The 7.12% return you mentioned, on the one hand. The other reason reflects current concerns about higher inflation. Bonds I are designed to protect savings against erosion by inflation. To be clear, even if inflation rates fall in 2022 and the bond I composite rate falls, the savings bond will still be a great way to save for the typical middle-income household.

Among the attractions of bonds I mentioned in the Manifesto: they are risk-free; they protect against inflation; interest income is tax-deferred; and no state and local taxes are levied at the time of the refund.

Your savings are tax-sheltered for 30 years or until the bond is redeemed. You cannot redeem your first year I bonds. In the event of redemption before the five-year mark, you will lose the interest of the last three months. There is no refund penalty after this. You will pay federal income tax on the gain once it is cashed. You can buy up to $ 10,000 of I Bonds per year.

Interest on I bonds is a combination of a fixed rate that does not change during the life of the bond and a variable rate indexed to the consumer price index. The composite rate for bonds I until April 2022 is 7.12%.

Finally, I Bonds perform well as a key part of your emergency savings fund, especially with rates on FDIC insured savings accounts approaching zero.

Chris Farrell is a senior economic contributor to American Public Media’s Marketplace and a commentator for Minnesota Public Radio.

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