The Inflation Hedge You’ve Never Heard Of
If rising prices have you worried, one way of insulating your nest egg comes straight from the government: Series I savings bonds. Right now they’re paying 7.12%.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
Inflation readings reached four-decade highs of 7.5%, the Bureau of Labor Statistics reported on Feb. 10, and the potential of further erosion of real purchasing power has everyday consumers and investors worried. Over 70% of participants in a recent USA Today/Suffolk University study indicated that inflation is their main economic concern, versus just 24% who cited jobs. Many investors are asking themselves how they might insulate their portfolios.
Gold, commodities, Treasury inflation-protected securities (TIPS) or maybe bitcoin come to mind when thinking of inflation hedges. While all tend to work to some extent, each has its own quirks, and none cleanly moves in lockstep with inflation.
Enter I bonds
Series I savings bonds, or I bonds, are issued and backed by the full faith and credit of the U.S. government and pay an interest rate directly tied to inflation. In short, as prices rise, so does the interest earned. Series I bonds are different from other bonds, so it’s important to understand how they work when deciding whether they are a good fit for your personal savings or portfolios. It’s also worth noting that I bonds are subject to interest rate and market risks.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Distinctive rate structure
One of the things that sets I bonds apart from other investments is their rate structure. There are two components that help determine the Series I bond rates: the fixed rate and the inflation rate. The fixed rate is set at issuance and persists for the life of the bond. The second component resets semi-annually based on the non-seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) for all items, including food and energy. The inflation rate and the fixed rate, adjusted for inflation, are combined to get the overall interest rate.
The bonds accrue interest monthly until they reach their 30-year maturity or you cash them, whichever comes first. For the current period running from November 2021 to April 2022, the fixed rate is 0.00% and semiannual inflation rate is 3.56%, amounting to a composite rate of 7.12%. Rates will reset again in May, and with the way inflation has been going investors can expect yields on I bonds to likely stay elevated.
They’re also tax efficient. You can defer tax reporting on interest until the bonds are redeemed, expire or some other taxable disposition. Interest is subject to federal income tax, but not state or local taxes. Check with a tax professional to see what makes sense for your situation.
Any gotchas?
Kind of. An investor must hold an I bond for at least 12 months before redeeming it. After the first year an investor can redeem their bond, but redemption before five years have elapsed will result in a penalty worth the interest of the previous three months. For example, if you redeem a bond after 18 months, you will receive the principal plus the first 15 months of interest.
Purchases are limited to $10,000 per person per year and only available through TreasuryDirect.gov. You can buy up to $5,000 additional bonds using your federal income tax return for a total annual purchase amount of $15,000.
Deployment within a financial plan
Investors with larger portfolios will quickly run into the annual purchase limit if they try to use I bonds to hedge inflation entirely. Such investors may want to consider using I bonds with other inflation-hedging strategies, such as TIPS or a broad-based commodities basket. An investor may also consider swapping out low-yield cash savings for I bonds, particularly those past their 12-month lock up period, as part of their emergency fund.
Amid volatile markets and escalating inflation, I bonds can help investors achieve a higher yield with the safety of a bond backed by the U.S. government. I bonds can hedge your portfolio against inflation, but it’s important to remember the money invested is tied up for the first year. When in doubt, check in with a financial adviser or professional who can help guide you.
Series I bonds can be a good fit for some investors, and are especially worth exploring in an inflationary environment.
-
5 Vince Lombardi Quotes Retirees Should Live ByThe iconic football coach's philosophy can help retirees win at the game of life.
-
The $200,000 Olympic 'Pension' is a Retirement Game-Changer for Team USAThe donation by financier Ross Stevens is meant to be a "retirement program" for Team USA Olympic and Paralympic athletes.
-
10 Cheapest Places to Live in ColoradoProperty Tax Looking for a cozy cabin near the slopes? These Colorado counties combine reasonable house prices with the state's lowest property tax bills.
-
Don't Bury Your Kids in Taxes: How to Position Your Investments to Help Create More Wealth for ThemTo minimize your heirs' tax burden, focus on aligning your investment account types and assets with your estate plan, and pay attention to the impact of RMDs.
-
Are You 'Too Old' to Benefit From an Annuity?Probably not, even if you're in your 70s or 80s, but it depends on your circumstances and the kind of annuity you're considering.
-
In Your 50s and Seeing Retirement in the Distance? What You Do Now Can Make a Significant ImpactThis is the perfect time to assess whether your retirement planning is on track and determine what steps you need to take if it's not.
-
Your Retirement Isn't Set in Stone, But It Can Be a Work of ArtSetting and forgetting your retirement plan will make it hard to cope with life's challenges. Instead, consider redrawing and refining your plan as you go.
-
The Bear Market Protocol: 3 Strategies to Consider in a Down MarketThe Bear Market Protocol: 3 Strategies for a Down Market From buying the dip to strategic Roth conversions, there are several ways to use a bear market to your advantage — once you get over the fear factor.
-
For the 2% Club, the Guardrails Approach and the 4% Rule Do Not Work: Here's What Works InsteadFor retirees with a pension, traditional withdrawal rules could be too restrictive. You need a tailored income plan that is much more flexible and realistic.
-
Retiring Next Year? Now Is the Time to Start Designing What Your Retirement Will Look LikeThis is when you should be shifting your focus from growing your portfolio to designing an income and tax strategy that aligns your resources with your purpose.
-
I'm a Financial Planner: This Layered Approach for Your Retirement Money Can Help Lower Your StressTo be confident about retirement, consider building a safety net by dividing assets into distinct layers and establishing a regular review process. Here's how.
