Couples can fight inflation with 7.12% risk-free interest on $40,000

RyanJLane | E+ | Getty Images

With a rising cost of living, investors may be eyeing I bonds, an inflation-protected and nearly risk-free asset, paying a 7.12% annual rate through next April. 

While I bonds have relatively low purchase limits, couples may leverage a year-end strategy to increase their holdings.   

Annual inflation rose by 6.8% in November, growing at the fastest pace since November 1982, according to the Labor Department, affecting everyday costs such as energy, food, shelter and more.

Even affluent clients are getting a little bit nervous, said certified financial planner Jon Ulin, managing principal of Ulin & Co. Wealth Management in Boca Raton, Florida.

More from Personal Finance:
This risk-free bond pays 7.12% annual interest for the next six months
Inflation pushes income tax brackets higher for 2022
Here’s how rising inflation may lead to higher tax bills

As investors seek to preserve purchasing power, I bonds may be an attractive option. However, there are risks to consider before piling in, financial experts say. 

How I bonds work

I bonds, backed by the U.S. government, won’t lose value, and there are two parts to returns: a fixed and variable rate, which adjusts every six months based on the Consumer Price Index.

“Right now, long-term Treasuries, certificates of deposit and savings accounts are earning essentially zero,” said Christopher Flis, CFP and founder of Resilient Asset Management in Memphis, Tennessee.

“But the [I bond] inflation adjustment is where you will make a little bit of bang for your buck,” he said. 

While current investors may lock in a 7.12% annual yield through April 2022, the variable rate may change in May, depending on inflation. This chart shows the history of both rates. 

One major downside is investors can’t redeem their I bonds for one year, and they pay the last three months of interest if cashed in before five years.

“You can’t use this to pay your bills every month,” Ulin added.

I bond purchase limits

Someone may also purchase more I bonds through businesses, trusts or estates.

For example, let’s say there’s a married couple who each owns a separate business. They may buy a total of $40,000 in I bonds by Dec. 31, 2021 — $10,000 per individual and business — and they can buy another $40,000 on Jan. 1, 2022, for a total of $80,000. 

“You can go from zero to a meaningful amount of I bonds in a very short period of time,” Flis explained.

Try not to become enamored with a 7.12% rate because that can be misleading.

Christopher Flis

Founder of Resilient Asset Management

Of course, there’s no way to predict how I bond rates may change every six months, and investors need to consider the opportunity cost of tying up cash that may be allocated elsewhere, Ulin said.

“Try not to become enamored with a 7.12% rate because that can be misleading,” Flis said. “The historical inflation component of those bonds can tell you what could happen in the future.”

https://www.cnbc.com/2021/12/10/couples-can-fight-inflation-with-7point12percent-risk-free-interest-on-40000-.html

Jinggo B Danuarta

Next Post

Stitch Fix shares fall, analyst says retailer has hit a 'growth wall'

Fri Aug 11 , 2023
The Stitch Fix logo on a smartphone arranged in Hastings-on-Hudson, New York, U.S., on Saturday, June 5, 2021. Stitch Fix Inc. is scheduled to release earning on June 7. Tiffany Hagler-Geard | Bloomberg | Getty Images Stitch Fix shares plummeted 24% Wednesday to a fresh 52-week low as one analyst […]

You May Like

Open chat
thank you for contacting us, for more information
please chat