Ask an advisor: What should I do with all my I bonds?

Ask an advisor: What should I do with all these I bonds I bought last year?

June 2, 2023 5:41 PM

The interest rate from I bonds is tied to inflation, which made them a hot commodity in 2022.

Welcome back to "Ask an Advisor," the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.

Inflation has a way of making little-known investments suddenly very popular. Last year that investment was I bonds, also known as Series I Savings Bonds, which yield an interest rate that's tied to rising prices.

In the spring of 2022, as inflation soared to levels not seen since the early 1980s, the return on I bonds reached 9.62% — the highest rate in the bond's history. In October, demand for the security grew so intense that the U.S. Treasury website that sells them temporarily crashed.

But all good things come to an end. The Treasury updates the interest on I bonds twice a year, and as inflation came down, so did those astronomical rates. Today, the return from Series I paper is 4.3% — not insubstantial, but less than half what it was at its peak.

Now that gravity has kicked in, some of the investors who crashed that Treasury server are having second thoughts. One of them, a lawyer in New York who invested very heavily in I bonds, is wondering what to do with his purchase. Should he sell? Switch to another investment? Or simply wait for the bonds to reach maturity? The ambivalent bond buyer turned to the experts for help. Here's what he wrote:

Dear advisors,

I bought a total of $20,000 in I bonds in May 2021 and January 2022. I'm considering redeeming them later this year, when the 6.48% rate ends, and switching to a TIPS (Treasury Inflation-Protected Securities) fund in my 401(k). The new rate for my I bonds is 3.38%, lower than you can get on cash. Or I could just leave everything alone and consider the I bonds a longer-term investment. What should I do?

For context, I'm a 35-year-old lawyer in Brooklyn, New York. Apart from bonds, I'm also invested in index funds (in a taxable account), a 401(k) and a Roth IRA. The whole portfolio is about financial independence and retirement. Realistically, my goal is to retire at 50 years old.

Last year, thanks to historic inflation, I bonds outperformed everything else by double digits. But now that inflation is coming down, they're not exciting. What should I do with them?

Sincerely,

Ambivalent in Brooklyn

And here's what financial advisors wrote back:

Go for it

Tom Balcom, a certified financial planner and the founder of

1650 Wealth Management

in Lauderdale-By-The-Sea, Florida

Pull the trigger and either roll your I bonds into short-term bond ETFs offering yields close to 5%, or invest in private credit funds offering higher yields. Both investments offer more flexibility than I bonds, meaning you can redeploy opportunistically in the future without delay.

I invested in I bonds in both my personal and business accounts last year and will be doing the same this year.

Also, with a longer-time horizon, you can use the proceeds to invest in funds, ETFs or other investments that provide the opportunity to possibly earn a higher rate of return between now and your retirement in 15 years. Hope this helps.

Steer clear of TIPS

Devin Pope, a certified financial planner and senior advisor at

Nilsine Partners

in Salt Lake City, Utah

I would recommend you sell the I bonds when the rate ends (that is what I'm doing personally). I also wouldn't recommend TIPS. TIPS do well when there is the expectation that inflation is going to rise. Ever since the Fed started raising rates, TIPS have gone down in value. With your goal of retiring at 50, I would recommend putting the funds in a brokerage (taxable) account and investing for growth. You are going to have 9.5 years until you can tap into your 401(k), so you will need a good chunk in a taxable account.

Think long-term

James Reardon, a certified financial planner and the chief financial officer of

ProActive Capital Management

in Topeka, Kansas

Several of my clients have I bonds. They provide fixed rate stability and protection against inflation, they are a good alternative to Treasury bond funds and they are only available in limited amounts.

Given the number of existing accounts, I suspect your I bonds constitute just a small fraction of your portfolio, which appears to be higher risk. Don't overlook the added benefit that I bonds are tax-deferred. You also need to factor in the loss of one of your eight quarters of interest, which is a penalty if you liquidate before five years.

Given the wild market fluctuations we have seen over the past two decades, the stability of these investments can be comforting, even if they're not very exciting. They should be thought of as long-term investment, not suitable for in-and-out trading.

Two ways to look at it

Ron Strobel, a certified financial planner and the founder of

Retire Sensibly

in Meridian, Idaho

There are two things for you to consider:

1) Do you want an investment that is focused on keeping pace with inflation? If so, the TIPS or I bonds can offer that benefit.

2) Do you want an investment that pays the highest yield, and are you willing to do the work to regularly move the funds and chase after those highest yields? If yes, then CDs, money market funds and other higher-yielding investments might offer better rates, although it will require more work.

Don't overthink it

Noah Damsky, a chartered financial analyst and principal at

Marina Wealth Advisors

in Los Angeles

There are two ways to look at this, financially and practically.

Financially, it may be appropriate to have some diversification in your bond portfolio with exposure to various maturities and credit. This could lead to higher returns and lower risk over time. In 2022, you hit the jackpot, but how repeatable is that?

Practically, potential fixed income "outperformance," especially if it's such a small portion of your portfolio, likely won't meaningfully drive marginal end results. Odds are this could be more of a brain drain than benefit to your finances. With your expertise and value as an attorney, the hours you'll spend arriving at a proper conclusion probably are not worth the potential "outperformance" of this strategy. Let your fixed income allocation be the cushion and your equities drive growth.

Other financial planning considerations, such as tax savings strategies, for example, may drive more meaningful results with an equal amount of time invested.

Consider hiring professional help. An advisor that's a good fit for you can, and should, deliver value in excess of fees. Don't be afraid to fail and experiment with multiple advisors before you find the right one. It's like dating; the trial and error part can be a challenge, but finding the right person makes it all worth it in the end!