Who Needs Razzle Dazzle?Robert Barker
Sexy is the last way anyone would describe the investment I want to tell you about. It won't double by December. You can't trade it. And, even though its name begins conspicuously with the letter "I," it has nothing whatsoever to do with the Internet. It's called the "I Bond," and it's as plain as iced tea.
Just the same, a growing number of sophisticated do-it-yourself investors are coming to appreciate I Bonds. Now marking their second anniversary, I Bonds are U.S. Savings Bonds, issued by the Treasury Dept. These bonds are built to withstand the potentially withering effect of inflation--that's where the "I" comes in--on your future purchasing power.
Inflation protection is what drew Sylvia DuLaney's attention to I Bonds. She and her husband, Jim, both in their mid-50s, run a software company from their Santa Fe (N.M.) home. They also manage their own retirement portfolio, and Sylvia had been looking for fresh ballast against the volatility of their stock holdings and bond funds, which sway in value when inflation rises. She also aims to defer taxes. So she recently bought a bunch of I Bonds. "Granted, this is no razzle-dazzle investment. But it is secure and provides a great balance to a portfolio," she told me. "I can control how long I hold the bond and when I pay taxes. That's a great planning tool for people near retirement."
Are I Bonds right for you? That depends on your own situation, but they're especially worth checking out now. On Nov. 1, the Treasury is due to announce new interest rates on savings bonds and, since bond yields generally have been sliding all summer, there's a good chance that the I Bond yield will fall, too. They now pay 7.49%, a high rate next to such competing investments as a five-year Treasury note (6.07%) or a bank certificate (6.5%). Bonds bought before Nov. 1 will pay 7.49% for six months, after which the Nov. 1 rate will apply.
After that, the interest rate on an I Bond will change with recent inflation, as measured by the Consumer Price Index. The adjustment process works like this: Every six months, the Treasury unveils a new "earnings rate" for I Bonds. This is an annualized composite of a fixed base rate, now 3.6%, and an inflation-adjustment rate, now 3.89%.
What happens if consumer prices actually fall? Then the inflation-adjustment rate would be negative and eat into the fixed rate. Deflation of 1% would cut the earnings rate on an I Bond bought today, for example, to 2.6%. The Treasury does guarantee, however, that the earnings rate can't turn negative and cut the bond's redemption value.
Risks? The main one is that Uncle Sam will some day tamper with the inflation adjustment or tax deferral. I Bond investors also suffer some limitations. For one, you can't cash them in for the first six months, and if you redeem before five years you lose three months' interest.
Individuals can buy just $30,000 worth of I Bonds annually ($60,000 for couples). Bigger portfolios could turn to I Bonds' older cousins, Treasury Inflation-Indexed Securities, or TIPS, but taxes on their earnings can't be deferred. I Bonds also are new enough that clerks at many banks, where they're sold along with other types of savings bonds, aren't familiar with them. They can be bought online with a Visa or MasterCard, but only at $500 a pop. Investing $30,000 that way could get tedious fast.
Bought online or in person, I Bonds surely won't make you rich. Yet the balance of risk and reward is decidedly in your favor. An investor putting $10,000 in an I Bond today can count on seeing its purchasing power grow in five years' time to nearly $12,000. No fees. No current taxes. No interest-rate risk. No volatility. That's not sexy. It's just plain smart.
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