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By Jeremy Keil, CFP

When the Bureau of Labor Statistics announced the March 2022 CPI inflation rate on April 12th, they did more than clue you in to how high inflation has been over the last year. They also showed keen observers what the May 2022 inflation rate will be on U.S. Series I Savings Bonds (I Bonds).

Jeremy Keil, CFP®, CFA, is a retirement-focused financial planner with Keil Financial Partners, and host of the Retirement Revealed blog and podcast.

Jeremy Keil

With the current 6-month rate of 7.12% still standing on April purchases, and the 6-month renewal rate listed at 9.62% you know that buying I bonds in April 2022 will get you 8.54% over the next 12 months.

But act fast because you only know what the next 12 months will bring you for I bonds if you purchase them by April 28th.

Why? Because even though the current purchase rate is for April, when you buy a savings bond today on Treasury Direct it is effective for the next business day. With April 30th on a weekend, Thursday, April 28th, is the last day you can buy an I bond and know the rate you’ll get over the next 12 months.

Knowing that 12-month rate only happens for about 2 weeks, twice per year, and is highly important since I bonds carry a minimum 12-month commitment.

How do I Bonds Work?

I bonds have an annual interest rate made up of two components:

  • A fixed interest rate (currently 0%) that lasts for the entire 30-year length of the bond. 
  • An ‘inflation rate’ that is announced and updated semiannually.

If your fixed rate is 0%, and the inflation rate is 2%, then you would earn 2% interest at your semiannual renewal rate.

Interest, if any, is added to the bond monthly and is paid when you cash the bond.

When you buy an I bond you’ll get your initial rate for 6 months. After six months you’ll get a new six-month rate, and your money will grow by that new rate.

Your April 2022 I bond purchase will turn your $100 into $103.56 just 6 months later. This is a 7.12% annualized rate.

At the 6 months mark, you’ll start getting 9.62%, and your $103.56 from above will turn into $108.54.

That’s an 8.54% annual rate! Compared to the average 12-month CD at 0.14% and 1-year Treasury rates of about 1.7% the I bond offers a compelling rate.

What’s the Catch?

  • You have to hold them for 12 months minimum. You can’t cash out before then. 
  • If you cash out between the end of year one and the end of year five, you lose your prior three months interest as a penalty. 
  • You can only buy $10,000 per person (or entity), per year, and you have to do it at TreasuryDirect.gov

Now many people are incredibly turned off by the concept of a penalty, but let’s walk through what would happen if you cashed out immediately at the 12-month mark.

You would lose the prior 3 months of interest (which would be based on the most recent interest rate).

Buying in April 2022 would mean your $100 turns into $108.54 in April 2023. Subtracting the 3-month interest penalty turns into $106.05. That’s still a 6% annual interest rate!

Another idea is to hold the I bond for 15 months instead of 12. Chances are you’d only cash out the bonds if you don’t like the renewal rate 12 months from now, which means it is lower than the rate you were getting. Since you lose the ‘prior’ 3 months interest, wait until month 15 and lose the 3 months of interest from the rate you don’t like!

Buying in April 2022 turns your $100 into $108.54 in 12 months. Losing that next 3 months of interest as a penalty means you still have the same $108.54 should you cash out at 15 months. Your annualized rate over the 15 months would be 6.78%! Imagine today a 15-month CD (certificate of deposit) at 6.78%!

Other people might think that $10,000 per year is too low of a cap and it's not worth their effort to purchase the I bonds. That’s a personal decision but think of ways you can increase your purchases.

If there are two of you in the family, you could each go up to the $10,000 cap. If you have a revocable living trust, or perhaps an LLC, then each of those entities could go up to the $10,000 cap.

Imagine a couple with a rental property inside an LLC, and a revocable living trust. They could go up to $40,000 each year between those four accounts!

When you’re looking at bank rates that are too low and considering ways to increase your yield, make sure to explore your options in the interest rate world before you start increasing your risk through the bond and stock market.

When considering the rules and returns on I bonds over the next 12 months, chasing this yield seems like a good deal.

About the author: Jeremy Keil

Jeremy Keil, CFP®, CFA, is a retirement-focused financial planner with Keil Financial Partners, and host of the Retirement Revealed blog and podcast.

This material is for educational purposes only and is not investment advice, nor a recommendation. Please consult your financial advisor before making any investment decision.