What is America's least-known, least-appreciated, high-quality investment for the typical saver and family? I-bonds. Heard of them?
I-bonds are U.S. Savings Bonds designed to protect savings from inflation. The federal government doesn't really market I-bonds. Misguided cost-cutting moves over the years have obscured the benefits of I-bonds. Financial institutions don't make money off I-bonds, so they have little incentive to highlight them to customers. Reformers eager to boost savings among modest-income households always seem more enamored of coming up with something new rather than take advantage of an existing product.
Zvi Bodie, financial economist and professor emeritus at Boston University is a tireless proselytizer for I-bonds for the average saver. "It's terrible that not every person in the country has an I-bond account," he says. "It should be your emergency account."
He's right. I-bonds are a remarkable security. The I-bond is an inflation-protected, creditworthy U.S. savings bond. "It's for people of modest means," says Bodie. "It wasn't meant for millionaires."
Here are the basics. I-bonds are purchased online from the U.S. Treasury (at www.treasurydirect.gov). The calendar year limit is $10,000. No commission is charged. Your money compounds tax sheltered until the bonds are redeemed. You will pay federal income taxes on the gain, but you get to decide when to sell and trigger the tax. You can cash in your I-bonds after holding them for an initial 12 months. If you sell them before the investment is five years old, you'll lose the last three months of interest. I-bonds earn interest for 30 years.
Right now, there is a growing debate among financiers whether the U.S. faces the prospect of rising inflation in coming years or deflation (a decline in the overall price level). Each side has good arguments. An I-bond offers a hedge against both risks. Here's how: The combined rate on I-bonds is made up of two parts. First is a fixed rate that stays the same for the life of the bond. The second is an inflation rate that adjusts twice a year. The combined rate for bonds issued May 2020 through October 2020 is 1.06%. Your savings maintain their purchasing power if consumer price inflation heads higher and holds its value if deflation emerges. That's a good deal.
I-bonds should have a key role with emergency savings. If you don't need the money in a pinch, your I-bonds can always go toward retirement, home remodeling projects and other long-term savings goal.
Chris Farrell is senior economics contributor for "Marketplace" and Minnesota Public Radio.