In defense of the lowly Series EE Savings Bond: Why this investment makes sense

EE Savings BondLast week I posted on both the Series I Savings Bond (which I have been buying for years) and the Series EE, which I haven’t bought – or even thought much about – since 1992. But that post on the EE Bond got me thinking: How is this not a good investment?

My advice last week was to buy the EE Bond before Nov. 1, because the Treasury might alter a key term of the bond: That your investment is guaranteed to double in value if held for 20 years. When the announcement came on Monday, the Treasury retained the double-in-20-years policy, but it dropped the permanent EE Bond’s fixed rate from 0.3% to 0.1%.

At the same time, it raised the fixed rate for inflation-adjusted I Bonds purchased from now to April 30, 2106, to 0.1% from 0.0%.

EE Bonds, really? This investment only makes sense if you are 99.999% sure you can hold it for 20 years. If you do, you will earn 3.5% on your money. If you don’t, you will earn 0.1%. So I am assuming anyone buying an EE Bond is committed to holding it 20 years. And remember, this money compounds tax-deferred. There is no tax liability until you sell.

[Update: One more thought on EE Bonds; a chart explains it all …]

Back in 1992 … The last time my wife and I bought EE Bonds was in August 1992, after we sold a house and had cash to put away. At the time, EE Bonds were guaranteed to double in value in 18 years, creating a yield of 4.0%. Because of a complex dual-track rate system on EE Bonds at the time, our EE Bonds have actually yielded 5.04% over 23 years. They are still earning 4.0% a year until maturity in 2022.

It’s was my wife’s idea to buy the EE Bonds. I thought it was a horrible idea. I argued but, hey, I had to admit it was a no-risk investment. Today, $10,000 of those EE Bonds are worth $31,432, and they are still growing at 4.0% a year, all tax deferred. Good move, wife.

One more fact to complete this idea: In August 1992, a 30-year nominal Treasury was yielding 7.64%, 364 basis points higher than the official yield of the EE Bond and 260 basis points higher than the resulting effective yield.

And in 2015? EE Bonds purchased today earn a pitiful 0.1% for 19 years, 11 months, and then one month later suddenly double in value, creating an effective yield of 3.5%. How does that compare with a 20-year nominal Treasury? It is yielding 2.65%, 85 basis points below the yield on an EE Bond. Even a 30-year nominal Treasury has a yield of 3.00%, 50 basis points below the EE Bond.

So in fact, in 2015, EE Bonds are a much more attractive investment versus Treasurys than the were in 1992.

EE Bonds versus I Bonds. I remain a huge fan of I Bonds was a way of pushing inflation-protected, tax-deferred money into the future. But I think EE Bonds could make a nice addition to the super-safe allocation of your retirement portfolio.

Think of it this way: I Bonds have a fixed rate of 0.1%, meaning they will out-perform inflation by 0.1%. EE Bonds held 20 years have a yield of 3.5%. So inflation will have to average higher than 3.4% over the next 20 years for I Bonds to beat EE Bonds as an investment. Will inflation average higher than 3.4%? Who knows! It could, and that is why I like I Bonds. It might not, and that is why I like EE Bonds.

I say, buy them both.

I Bonds, of course, are a much more flexible investment. They can be sold after one year with only a 3-month interest rate penalty (same with EE Bonds), and then after five years with no penalty. No need to hold an I Bond for 20 years.

And so, I’m making a weird move. Since the I Bonds I bought in 2013 with a fixed rate of 0.0% have been composite yielding 0.0% since July 2015, I decided to sell out of that position in Treasury Direct. The 3-month interest penalty is $0. When that money comes into my savings account (within a week?) I will then purchase the new I Bonds with a fixed rate of 0.1%, up to the limit ($10,000 per person).

And … I’ll be buying EE Bonds up to the limit for the first time since 1992.

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12 Responses to In defense of the lowly Series EE Savings Bond: Why this investment makes sense

  1. S VanderSteen says:

    I think the idea of selling the I bonds with a 0% fixed rate and buying the new 0.1% rate is a good idea. My question is however I have already bought my maximum $10,000 of the 0.1% I bond. Am I allowed to sell my 0% I bonds and buy the 0.1% I bonds or do I have to wait until after January to purchase them in the new year?

    • tipswatch says:

      S, if you bought I Bonds up to the maximum in 2015, you can’t buy any more until January. You also can’t sell any I Bonds you bought in 2015, because you have to hold them one year. You can sell older ones, but that doesn’t let you go over the $10,000 per person cap.

  2. Newbie says:

    I just bought $10,000 of the 0.1% I bonds. Can I also sell my 0.0% I bonds and buy the 0.1% I bonds now or do I have to wait until Jan. ?

    • tipswatch says:

      Newbie, selling I Bonds doesn’t affect the $10,000 per person cap. You can still only buy $10,000 per person in a calendar year. So you could sell the 0.0 fixed rate I Bonds in December and reinvest the money in January.

      • Newbie says:

        So I could sell my November 2014 0.0% I bonds now but can’t use the money to buy the current 0.1% I bond until January correct? Thank you

  3. tipswatch says:

    Newbie, that sounds right. The only iffy thing would be if the Treasury considers Nov 2014 to have been held one year in Oct or Nov 2015. If it’s November you’d have to wait until December.

  4. Len says:

    Sorry but I remain unconvinced. Many people buy into the stock market believing they’ll be holding on for twenty years and get the reputed 10% annually, but it usually doesn’t work that way it seems.
    A thirty year TIPS ~ 1.25% and you’re protected against inflation.If one were really committed to these lengthy holding periods you wouldn’t care if interest rates rise putting you under water.

    • tipswatch says:

      Len, I am not dissing TIPS at all, but 30-year TIPS aren’t a great buy-and-hold investment for me at age 62. So I am favoring the 10-year TIPS and I Bonds with their flexible maturities, and bank CDs when I find something appealing. EE Bonds will be a new addition. And I still own stock funds, too.

  5. Pingback: One more thought on EE Bonds; a chart explains it all … | Treasury Inflation-Protected Securities

  6. Mike Jones says:

    Let me make sure I understand you correctly. If I bought $10,000 worth of tips today, and held to maturity, I have a guaranteed $20,000 grand at the end of the tunnel. Do I understand you correctly?

  7. tipswatch says:

    Mike, this isn’t a TIPS investment, it is Series EE Savings Bonds. But yes, if you bought EE Bonds today and held them for 20 years, you double your money, guaranteed, tax-deferred.

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