Inflation protection from Uncle Sam: Here’s how I bonds can help you save
![I Bonds, composite image: inflating car tire, savings bonds](https://cdn.britannica.com/77/236377-050-CDC25A2D/I-Bonds-composite-image-inflating-car-tire-savings-bonds.jpg?w=385)
If you want hefty investment returns, you usually have to take on a fair amount of risk. But as inflation raged in the early 2020s, a high return/low risk savings vehicle rose to prominence: Series I Savings Bonds. Although “I bonds” won’t solve all your inflation woes, they’re one way to help protect your portfolio from the pain of rising prices.
Traditional high-return investments include stocks with lofty dividend yields, as well as so-called “junk” bonds. The yield on a junk bond is high for a reason: There’s a decent chance the issuer could cancel future payments or even default, leaving you in the red. Basically, you’re being paid extra to take on more risk.
Key Points
- Series I Savings Bonds, or I bonds, are offered by the U.S. government to protect investors from inflation.
- The initial interest rate on I bonds rose to 9.62% in 2022 as inflation hit 40-year highs, but has since fallen to 5.27% as of November 2023.
- I bonds have a $10,000 maximum investment, and the rate is only guaranteed for the first six months you own them.
Series I savings bonds—sometimes called TreasuryDirect I bonds or “inflation-protected bonds”—stand out from that sometimes motley mix by offering competitive yields, but with the backing of the federal government. The U.S. has never defaulted on debt, which means you’re pretty much assured of getting back every cent of your money from a Series I Savings Bond investment. And along the way you’ll be paid an attractive interest rate—at least one that keeps up with inflation.
Eye-popping interest, but not forever
What kind of interest? Well, the initial I bond rate rose to 9.62% in mid-2022 as inflation hit 40-year highs. No, that’s not a misprint, even if it seems like the kind of yield you’d normally get from a desperate company offering a big dividend to drum up cash. Why was the yield so high?
- I bonds are regularly adjusted for inflation.
- The rate is calculated twice a year and based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.
- When inflation goes haywire as it did in 2022, the I bond rate goes up, making it a more powerful investment tool.
The 9.62% rate sounds impressive, but it didn’t last beyond the initial six months. The next two resets dropped the annualized rate to 6.89% and 4.3%, respectively, but the current annualized rate—for I bonds purchased through April 2024—is 5.27%.
I bond rates: A blend of fixed and variable interest
The interest on I bonds is a combination of a fixed rate—guaranteed for as long as you own the bond—and the inflation rate, which changes every six months.
The fixed-rate component was bumped up to 1.3% in the November 2023 reset. The six-month inflation component is 1.97%. But when you run that through a compounding formula—to turn it into a 12-month rate—and add it to the fixed component, you get an annualized composite return of 5.27%.
That’s the initial rate, guaranteed for six months. After that, your yields will continue to adjust for as long as you own the bond (more on this below).
So maybe you’re thinking of rushing to put your entire portfolio into I bonds to get that low-risk/high-return yield before it’s too late. That could be an option as long as your portfolio is $10,000 or less, although it’s probably best to work some asset allocation into your planning. If you’re lucky enough to have more than $10,000 to invest, you’ll need to find other places to put the remainder, because I bonds have a $10,000 maximum purchase amount, per individual, per year.
I bonds and other savings bonds seemed kind of vanilla for many years, because they tended to have very low interest rates. With inflation under 3% for decades leading into 2020, savings bonds just couldn’t offer the kind of yields that looked good in comparison to, say, info tech stocks growing 20% a year.
All that changed after the COVID-19 pandemic. Inflation surged around the world amid worker shortages and supply chain hiccups. The consumer price index (CPI) exploded to 9.1% year-over-year for U.S. consumer prices by June 2022, a level last seen in late 1981, and remained above 8% into the fall of 2022. With an accompanying sharp loss in stock prices, I bonds and their robust inflation-adjusted yields suddenly looked more enticing to many investors.
How to buy a Series I Savings Bond
You can only buy a Series I Savings Bond directly from the U.S. government. It works like this:
- Set up an electronic account at the Treasury Department. You’ll need to provide some personal information, as you would when setting up any other financial account.
- Give the Treasury Department access to your bank account by providing the bank’s routing number (found at the bottom left corner of your personal checks) and your account number at the bank (see the center bottom of your check).
- Tell the Treasury Department how much you want to invest. The minimum is $25, and an individual can invest up to $10,000 in a given year. Your spouse or partner can also buy an I bond, but they’ll need to set up their own account.
- The Treasury Department electronically moves the money from your bank account into the account you set up at the Treasury Department.
- Collect interest at the stated interest rate—but that rate won’t last. It’s only good for the first six months you own the bond. The government adjusts the rate every May 1 and November 1.
- After six months, the interest you’ve earned is added to the principal’s value, and interest after that is earned on the new principal, but at whatever new rate the government chooses.
- You can keep the bond for up to 30 years.
If inflation drops meaningfully in the six months after you purchase your I bond, you’ll be stuck with the bond and its lower rate for at least another six months, because you can’t cash out before owning the bond for a year. And if you cash out before owning it for at least five years, you’ll lose your last three months of interest.
One more important point: You can only buy I bonds through a taxable account—a bank or other cash account—no Individual Retirement Accounts (IRAs) or 401(k) plans. So although I bonds can be part of your long-term savings plan, you can’t invest through a tax-advantaged plan, and thus you’ll owe taxes each year on the interest from your I bonds.
The bottom line
I bonds are a relatively risk-free investment that pays a competitive interest rate, particularly in a rising-interest environment. This rate could fall—and could even lag other fixed-income securities if inflation declines—but in the meantime, it could be worth parking some of your money in I bonds to keep up with rising consumer prices. Before you jump, consider the pros and cons of inflation-linked securities.