With inflation in the news more and more, it’s not surprising that more investors are looking for ways to build enough long-term growth characteristics into their portfolios to make sure their purchasing power stays ahead of the increasing cost of basic goods and services. In fact, in another recent article, we looked at some of the basics of inflation and how it can affect your financial planning.
But equity investments (stocks) may not be right for every investor. Those with more conservative risk profiles may wish to avoid exposing a larger percentage of their holdings to the volatility inherent in the stock market in order to achieve inflation-beating rates of return.
But there is another way to build some inflation protection into your investments without taking on more stock market volatility risk. Since 1998, the US Treasury has been issuing Series I bonds (as you can probably guess, the “I” stands for “inflation”), which, though not intended to make up a huge percentage of any individual portfolio, still offer both the backing of the full faith and credit of the US government, along with a periodic adjustment to the interest rate, pegged to inflation.
There are few things to keep in mind when considering the purchase of Series I Bonds:
- They can only be purchased directly from the US Treasury, and ownership is not transferable (i.e, you cannot sell your Series I bonds in the secondary market; they can only be redeemed from the US Treasury). There are three ways to buy Series I bonds:
1. Online purchases from the Treasury, using a free Treasury Direct Account;
2. Paper certificates, which can only be purchased using your federal income tax refund (you’ll need to file Form 8888);
3. Payroll deduction through your employer (if your employer offers this option).
- You must hold your Series I bond for at least one year after purchase. After that, you can redeem the bond at any time for its face value plus accrued interest. However, if you redeem your bond sooner than five years after purchase, you’ll pay a penalty of three months’ interest. The bonds mature in 30 years.
- The annual limit on purchases of Series I bonds per individual Social Security number or tax identification number is $10,000 for online purchases and $5,000 for paper certificates. Keep in mind that this applies to the bond owner; if you want to gift Series I Bonds, each recipient is subject to their own limit, depending on whether the gifted bond is electronic or paper.
It’s also important to keep in mind that Series I Bonds basically have two different interest rates: the fixed rate and the inflation rate. The fixed rate is guaranteed for the life of the bond, but the inflation rate resets every six months (in May and November), based on the Consumer Price Index (CPI). Right now, the fixed rate on I-bonds is 0%, which basically amounts to a guaranteed return of principal. However, the current inflation rate for Series I Bonds purchased between November 2021 and May 2022 is 7.12% (according to the latest reading, the rate of inflation as measured by the CPI is 6.8%).
Next May, the rate is subject to change, based on whatever the CPI is at that time; it could be higher or lower than the current rate. The fixed rate is set for the life of the bond, however. Learn more about how the Treasury calculates the combined yield of the fixed and the inflation rate.
At Mathis Wealth Management, one of our chief goals is to make sure our clients have all the information they need to make smart decisions about their investments. Learn more about how we work with you to create a financial plan and investment strategy that is tailored to your unique needs.