I wrote yesterday about how the lowly Series EE Savings Bond is actually a pretty attractive investment in today’s interest-rate environment, if held for 20 years. I didn’t expect many people to agree with me. So far, everyone seems to be much more interested in the new I Bond with a fixed rate of 0.1%. That’s OK, I am buying that I Bond, too.
But there’s a real possibility that the EE Bond will outperform the I Bond over the next 20 years, because if you pair off the two investments, the I Bond gets an inflation-breakeven rate of 3.4%. It will under-perform against the EE if inflation averages less than 3.4%.
I created this chart to show how an EE Bond will perform against other very safe investments, in different inflation environments:
The blue area shows that the EE Bond outperforms all the other options up to average inflation of 2.5%. At that point and above, the 20-year TIPS outperforms all the other investments. The EE Bond outperforms the I Bond up to an inflation rate of 3.0%, and just barely under-performs at 3.5%.
The 20-year Treasury is the big loser in this chart. It under-performs at all inflation rates. The I Bond is never a big loser or a big winner; it can’t outperform a 20-year TIPS yielding 0.92%, but it does offer tax advantages and a flexible maturity.
Treasury Inflation-Protected Securities 
Have you ever mentioned, if enthusiastic, you can purchase up to an additional $5000 in savings bonds via your income tax refund? You can simply over-pay your estimated tax, but you must space the payments approximately evenly. If you attempt to add $5000 to your final quarterly payment it will be rejected.
I am still unconvinced about the EE bonds. If (?) interest rates rise I’d rather be able to re-invest my coupons at the new higher rate. The 5 year TIPS is starting to look interesting…. .40%
MGK, the numbers are the numbers. If inflation stays muted for the next 20 years, you get a 0.1% real return with an I Bond. And the EE Bond out-performs. This is a $20,000 investment for two people. It is not going to make or break your future existence. It just offers a bit of balance.
And yes, the the tax-deferred advantages apply to both EE and I Bonds. I have been buying I Bonds for years. This is a first dabble into EE Bonds in a long time. If sh*t rains down, I can handle it, well … unless …
yeah, I see what u mean.
I totally agree with your assessment and have been a buyer of EE Bonds since 2012. I only wish I had started sooner!
Keep up the good work!
David, we Davids need to stick together. Thanks for your feedback. I agree and I had overlooked EE Bonds as a possible source of retirement income 20 years into the future.
So, for a complete newbie, will less than $1,000 invested in all treasuries combined, is it better to get a solid base of EE or I first?
Silver, what I fail to say, and I should repeat it more often, is that I Bonds appeal to people who have a very solid nest egg and are just trying to preserve capital. They are pushing that money into the future. If you are still building your nest egg, I can’t see how 0.1% over inflation will help you all that much. If that fixed rate begins rising – it might in the next few years – I Bonds would again be a great investment for everyone. So for someone still building a nest egg, a good portfolio of low-cost stock and bond funds, very broadly diversified, makes sense. But this isn’t my area of expertise, so …
I appreciate that advice.
I fully agree with diversifying. I’m into the traditional 401(k), E-trade, grabbed a cheap condo (improved interior, sell for the gain down the road), and as my name says, I like to collect metals.
I’m just thinking of ways to lock up some extra cash I have that I don’t believe I’ll need or miss for a number of years, but also don’t feel like like losing. I’m talking say $300 a quarter, $1,200 a year.
Net worth is in the $200k range in my early 30s, so I just wanted to have some extra money say for a dream vacation, or perhaps tax free aid for a future child’s college.
Really enjoying the articles.
They make great gifts. Glad the .1% is back. Still not happy with the end of paper bonds. Liked getting younger relatives as tangible asset they could hold and see.
I’m confused. Does this take into account how changes in real rates impact the comparison? And, if nominal rates change, does the relative magnitude of the two components of the Fisher equation make a difference in the outcomes? . It seems like there could be some important aspects to the results of comparison under various scenarios that might not be obvious when you look just at inflation, which is just one component of the Fisher equation. It’s way over my head, but I’d like to know
I think what you may be missing in your analysis is the embedded option in the IBond which allows you to put it back to the Treasury with a small penalty. If interest rates rise, you can then cash in and purchase higher yielding iBonds.
The EE bonds have an extremely expensive put option which requires you to give up 20 years of interest at 3.5% if you want to roll it into another security. If you buy a 20 year Treasury bond today at 2.66%, at least you will actually get 2.66% until you roll it.
I know you talk about holding to maturity, but analytically that is not an assumption that one can make given that the future is uncertain.
And as I’ve mentioned to you before, you are not as constrained in your iBond purchases as you think. You can purchase them individually, as you know. You can buy them for living trusts or other trusts. You can buy them for kids. You can buy them for a business even if it is not incorporated (your blog, for instance). You can buy them for your charitable donations (make it a family charitable account). There is no reason that you cannot purchase a reasonably large amount every year.
Keep up the good work!
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Elliot, the negative of no current income is also a positive in the sense of no current taxes. Everything compounds tax-free. In 20 years, you know you will have $40,000 of income (for a couple) and you can plan around that, possibly avoiding other income and lessening any tax impact.
It’s amazing to me that an EE Bond in 1992 guaranteed to double in 18 years when the 30-year Treasury was paying 7.6%, which would double in 9 1/2 years. Today, the EE doubles in 20 years, while a 30-year Treasury is paying 3.0%, which would double in 24 years.
Of course, it’s possible some of that 30-year income could be reinvested in higher rates. But that would be after taxes.
Isn’t the “no current taxes” and non-taxable compounding true of the I-Bond as well? and the point about the extremely expensive put seems to be quite well-stated, and is the killer for me. It is not trivial to have to wait 20 years — who knows what kinda’ sh*t can rain down at our ages?