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I Bond Returns: Almost Too Good To Be True

Updated: 11/01/2022 by Financial Samurai 81 Comments

Some people think sugary processed foods are why we get soft. Other people argue transitioning from a labor-intensive to a capital-intense economy makes us less active. I’m going to argue high I Bond returns are the real reason for making us not try so hard!

Investing in an I Bond today is almost too good to be true. How amazing is it that we can borrow at a negative real rate, yet earn a positive real guaranteed rate? This is an anomaly that won’t last forever. Take advantage.

From May 1, 2022 through October 31, 2022, every person could have bought $10,000 worth of I bonds with a 9.62% interest rate! This is was up from 7.12% at the beginning of 2022. After six months, the interest rate will float, depending on inflation. But with inflation elevated, you might as well take advantage.

If you’re married, you can buy $20,000 worth of I bonds in December and buy another $20,000 of I bonds in January the following year. If you each own a business or trust, now you’ve got four entities able to buy $10,000 worth of I bonds each year. In other words, your combined unit could purchase $80,000 worth of I Bonds in a short period of time.

Just know I bonds can’t be redeemed for one year. You can cash them after one year. But if you cash them before five years, you lose the previous three months of interest. 

I would invest ~80% of my net worth for a guaranteed 9.62% return if I had the option. After such a massive run-up in risk assets, locking in a guaranteed 9.62% return feels nice!

Therefore, at the very least, I’m going to be buying the maximum amount of I bonds this year and next. You can check TreasuryDirect for more I Bond info.

From November 1, 2022 through April 30, 2023, the new Series I Bond interest rate is 6.89%. Not bad as the third highest rate. But more importantly, the drop in I bond returns signifies inflation has peaked.

What High I Bond Returns Means For Your Investments

The implicit assumption from I Bonds paying 9.62% is this: Your investments better return more in 2022 or else why bother taking more risk? Further, why bother working so hard? This is how we get soft.

I’ve touched upon the topic of what to do when your investment returns make more than your active income. When this crossover point happens, it’s natural to want to slack off a little bit.

To clarify, I don’t mean going to the extreme like only working two hours a day like some in tech do. But maybe you take more vacations or slow down your responsiveness to requests.

Sure, earning a 9.62% I Bond interest rate is due to temporarily elevated inflation. However, it’s still a real positive return. Further, if lower return assumptions for stocks and bonds come true, then all the more reason to appreciate a 9.62%, risk-free nominal return.

The entire American active investing world will look at this I Bond hurdle to beat. If they don’t, what use are they? They might as well change careers for providing negative alpha. Of course, there are no guaranteed returns.

When you’ve got a high guaranteed return, you take less risk. Offering high government bond yields is one way the government soaks up excess liquidity in the system. At the margin, liquidity stops chasing speculative investments to find more safety in government bonds.

An Investment Exercise To Conduct Due To High Guaranteed Returns

The true risk-free rate is the 10-year bond yield since there is no cap on how much one can purchase. However, the I Bond yield is also a worthwhile risk-free rate. Use it to think about how you will asset allocate going forward.

Take all your risk assets and multiply their value by 100% + the I Bond rate. In this case 109.62%. For example, if you have a $1 million in stocks and real estate, you’d get $1,096,420. Now ask yourself whether you’d be satisfied with this much money 12 months from now or not. And if you’re not, then you’ve got to take more risk to try and earn a greater return.

Now let’s say you have a $10 million in investments. Would you be happy with $10,964,200 in 12 months? I would assume more of you would be happier with $964,200 versus $96,420, even though the percentage increase is the same. $964,200 is big bucks for doing nothing.

In other words, the wealthier you get, the more you should enjoy lower risk or risk-free returns. Because losing money on a $10 million portfolio is far more painful than losing money on a $1 million portfolio. Given the government understands this loss aversion reality, it limits the amount of I Bonds each individual can purchase.

Remember, the first rule of financial independence is to not lose money. The second rule of financial independence is to never forget the first rule. The third rule is to live as long as possible.

Once you’ve built your financial nut large enough where it is generating a steady amount of livable passive income, you’re set! Don’t lose money because you will ultimately lose time.

US historical inflation rate chart and I Bond Returns

More Logic Behind Investing In I Bonds

We know the average return for the S&P 500 is about 10%. We also know the average return for the aggregate bond market is around 5%. Therefore, if you construct a simple 60/40 portfolio, the expected return based on historical figures is about 8%. But of course, there is risk involved and the portfolio could lose value.

If you can earn a guaranteed 9.62% return through an I Bond, then most investors who invest in a 60/40 portfolio would probably choose the guaranteed return. Based on my asset allocation model between stocks and bonds, we can assume the target I Bond investor is age 40 and over.

Even for people who prefer real estate, a 9.62% return without having to do any work is very attractive. Cap rates on the coasts are around 2% – 4%. While cap rates in the heartland are around 6% – 10%. Negative real mortgage rates will remain a tailwind for the real estate market.

Be On The Lookout For Getting Too Soft

High I Bond returns are great. Just be careful taking things too easy due to easy money.

Perhaps the greatest challenge for personal finance enthusiasts is not slacking off too much. Because some of us have diligently saved, invested, and earned side hustle income for so long, life has become much easier. Don’t forget the thrill of a difficult challenge!

One of the reasons why retiring early and doing nothing is a bad idea is because your mind gets weak. When you don’t constantly challenge your mind it begins to get hazy. Further, once you lose purpose, the will to live tends not to be as great. Again, we go back to the, why bother, attitude.

Therefore, we need to seek out failure by continuing to try new things. By doing so, we will stay motivated to be more productive. Of course, we should relax once in a while and lock in those free guaranteed returns. But the real fun about financial independence is not fearing the devastation that sometimes comes from taking new risks.

Finally, if you have kids, they tend to observe everything you do whether we realize it or not. If we lose our work ethic, the side effect might be raising spoiled and entitled children.

In addition to buying I Bonds, investors should also consider buying U.S. treasury bonds. Treasury bonds don’t yield as much as I Bonds, but there is no limit to how much treasury bonds you can buy. If you want to buy $100 million worth of treasury bonds, you can!

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Readers, how do you stay motivated to keep earning and producing when I Bond rates are so high? The government is also providing so much support that it feels harder to work harder. Are all developing nations destined to get soft? How do we teach our children to better appreciate their opportunities?

For more nuanced personal finance content, join 50,000+ and sign up for my free weekly newsletter. This way, you’ll never miss a thing. Please take full advantage of I Bonds today!

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Filed Under: Investments

Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.

I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.

In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.

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Comments

  1. Mindy says

    January 16, 2023 at 2:00 pm

    I bought ibonds in late 2022. Should I buy more now in 2023?

    Reply
    • Financial Samurai says

      January 16, 2023 at 2:10 pm

      I am.

      Reply
  2. John M. says

    September 26, 2022 at 7:24 am

    Thinking about buying some more. Invested $10k at the end of last year at 7.12% Now it looks like I’m getting the current 9.62%. Way better than leaving it in a savings account! Thanks for the heads up.

    Reply
  3. Chris Charles says

    March 30, 2022 at 7:51 am

    Hi Sam, I have a question. So if my wife and I both contribute $10k each, can we contribute another $10k each for both our our minor children? It looks like you can as a gift for them. Thoughts?

    Chris-

    Reply
  4. cato says

    December 26, 2021 at 9:51 am

    Best risk free real on the planet. Load up!!

    Reply
  5. Rob says

    December 24, 2021 at 6:05 am

    Am I the only one running into this need to mail in a form after setting up the account at Treasury Direct. Got this message for both myself and my wife. No way to get this done before year end now it seems.

    The following error(s) have occurred:
    We haven’t received your TreasuryDirect Account Authorization form (FS 5444E) so a hold has been placed on your account. To remove the hold, print and mail us the completed form which can be found at http://www.treasurydirect.gov/pdf/rs/acctauth.pdf.

    Reply
    • Katl says

      December 29, 2021 at 8:16 am

      In mid December I opened a personal account and one for my business. The personal account opened up fine and I purchased my I bonds. The business account had the issue you reported and I needed to take that authorization form to a bank. My business bank no longer does guarantee signatures so I had it done at my credit union and mailed the form on the 20th. They still haven’t unlocked the account so I won’t get to purchase through my business until they review it. SO dumb.

      Reply
  6. Ryan says

    December 24, 2021 at 5:52 am

    Just note if interest rates increase the fixed rate of I-bonds may increase above zero. I own some with a fixed rate of 0.5 so I get this plus the every 6 month adjustment. At the time they looked like not that great but the fixed rate was the good part as I’m always earning above inflation with almost zero risk.

    Reply
  7. MacGyver says

    December 23, 2021 at 10:16 pm

    For the $10,000, up to $15,000 if you use your tax refund. I wonder if one could make an estimated tax payment now to make sure you’re getting at least $5,000 back, to ensure you can buy at least $15,000 in 2022?

    Reply
  8. Blackvorte says

    December 23, 2021 at 9:08 am

    Done. Thanks Sam.
    Personally, I am not seeing this as stocks vs bonds, but bank account vs bonds.
    When you view it like that, no brainer.

    Reply
  9. Esp says

    December 20, 2021 at 7:42 pm

    If one wanted to invest a more sizeable sum and either werent married or didnt have a business, couldn’t they legitimately circumvent the $10k limits by just creating EINs and register more accounts as Sole Proprietorships? Sole props don’t complicate taxes at all since it goes right onto your personal 1040 return… and no requirement for business bank account either. EINs can be created for free in like 10min via IRS website. I know it would be kind of a pain to manage the separate Treasury Direct accounts, but simply keeping track of account numbers in a spreadsheet with uniform password should solve that.

    Am I missing something? Is this not allowed for some reason?

    Reply
  10. Ravi says

    December 18, 2021 at 3:23 pm

    Hi,

    We have most of our bank accounts under the ownership of our revocable family trust – my wife and I are the trustees of this trust.

    I bought I bonds for $10k max each for me and my wife last week. Can I buy additional $10k for our family trust?

    Thanks
    Ravi

    Reply
  11. Joe says

    December 17, 2021 at 11:45 am

    My wife has $5,000 in I bonds from 2016. Not sure what it’s worth now. 7% is really good! I think the previous rate was around 3.5% so it’s a huge jump.

    I’ll try to free up $20,000 to buy some more I bonds before the end of the year.

    Reply
    • Mat says

      December 21, 2021 at 11:27 am

      Hey Joe, the good news is that all I Bonds adjust every 6 months, so your wife’s I Bonds bought in 2016 are not earning 7%.

      Reply
  12. Scott MacKie says

    December 17, 2021 at 10:55 am

    Bought some for myself and my wife and studyin’ on buying one as a gift for my college age son to help fund the remaining years of formal education/development.

    Now for my LLC: if I buy one under the LLC, and shut down the LLC, can I transfer bond ownership to myself, my beneficary, or as a gift, and what is the tax implications of said transfers?

    Reply
  13. Joe West says

    December 17, 2021 at 7:32 am

    When can I cash (redeem) an I bond if I need the money?

    You can cash your Series I bonds any time after 12 months. You receive the original purchase price plus interest earnings. I bonds are meant to be longer-term investments; if you redeem an I bond within the first 5 years, you’ll lose your last 3 months interest. For example, if you redeem an I bond after 18 months, you’ll receive the first 15 months of interest.

    So, you are locked in for a year, and to not lose part of the interest…5 years.

    Emergency fund in it? What if you need it in 2 months?

    I would think it should be a portion, but not a great portion.

    Looking at the past rates when the fixed is zero…it is about 2%. ok, but not great for a 5 year investment.

    Reply
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