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Yeah, you read that right… a 7.12% return with Series I Savings Bonds. Sounds pretty good, right?
Right now, it’s a real struggle to figure out what to do with the cash you’re just sitting on. I talked about that in a post earlier this year, “We Have a Lot of Cash in Hand Now… Too Much!“
The problem is that interest rates are so low. While that’s great if you’re buying a house, it’s not so good on the money you’re saving and not investing.
As part of our early retirement financial plan, we have a bucket strategy in place. That means we’re always going to be sitting on a fair amount of cash.
And that’s ok. Cash is inherently going to be more secure than your other investments (in theory, at least!). Along with that though… no risk = no reward. Uninvested money that you are just sitting on isn’t going to be making you a ton of dough.
Even so, we all want to get the biggest bang for our buck regardless. So what can you do?
Right now, an online savings account (I use Ally bank) is paying 0.50%. On one hand, that’s a heckuva lot better than the waste-of-time big banks like Chase, which is offering a measly 0.02% for their best savings account.
Online banks provide ridiculously better rates than brick-and-mortar banks. And because we need a place to store the current year’s living expenses, Ally works well for that. But it’s still nothing to write home about.
CDs aren’t much better – Ally is currently offering a rate of 0.55%. And just like savings accounts, the big banks are offering much, much less – Chase’s best right now is a laughable 0.05%.
There are other options such as short-term bonds, TIPS, and various other investments. However, none are impressive in today’s low-interest times without needing to take some risk.
So when a loyal and astute reader and fellow retiree, KevG, dropped this comment in my post last week, I took notice…
“I noticed that Series I government bonds are paying 7.12% for next six months. Not bad for a cash stash. You need to hold for at least 1 year to cash them, and cashing before 5 years costs 3 months interest. But still not bad. There is a $10k buy limit per account per year – but you can also buy $5k more with a tax refund. Could make accidentally overpaying estimated taxes look inviting!”— KevG
I hadn’t ever bought Series I Savings Bonds before so I did some research on it first. But KevG was dead on the money with the information provided (thanks, Kev!). Here’s the scoop:
- The interest rate for Series I Savings Bonds is set every 6 months based on inflation (derived from a fixed rate and a semiannual inflation rate). Right now, it’s 7.12% and a new rate will be announced in April 2022 for the next 6 months.
- The interest rate doesn’t go below 0 and the redemption value of the bonds doesn’t go down to less than you paid for them.
- You can keep them up to 30 years with the rate changing along the way as mentioned above.
- If you keep them 5 years or longer, there’s no penalty on redemption.
- If you keep them for more than 1 year (the minimum term of ownership) but less than 5 years, you’ll forfeit the interest from the previous 3 months.
- You’ll have to pay federal income tax on earnings but they’re exempt from state and local income taxes.
- The maximum amount of electronic Series I Savings Bonds you can buy is $10,000/year per person. However, you can also buy up to $5,000 with your refund on your tax return.
In other words, a 7.12% return with Series I Savings Bonds is great, but you’re not going to get rich off of them. You’re also very unlikely to get that rate for the entire year either. The 7.12% interest rate is being labeled as “transitory” so chances are the rate will drop significantly with the announcement in April 2022.
And with the cap on how much you can purchase, the total return isn’t going to be spectacular. Let’s go with the crazy assumption that the interest rate stayed at 7.12% for the whole year. Plugging the info into an investment calculator shows that you’d earn $724.67 on your $10k for the year.
But if you then redeemed them after that first year and took the penalty of losing the last 3 months of interest, you’d lose $185.94. That means you’d walk away with $10,538.73. That’s a return of 5.39%… before taxes are taken into consideration. So it’s not mind-boggling, but earning a little extra money on some of your idle cash doesn’t hurt either!
We could have gone with $20,000 ($10k per person), but we talked about it and decided to purchase $10,000 worth. This was based on some additional funds we have sitting in cash that we weren’t concerned with locking up for a year or more.
We’ll determine if we’ll buy more in 2022, but I have a feeling that won’t happen since the odds are in favor of a much lower rate being announced.
But as my gift to you, I’m going to walk you through how to buy these since I just went through the process.
As a reminder, I’m not a financial advisor, so please talk to a professional before buying/investing in something you don’t fully understand.
Creating an account at TreasuryDirect
If you already have an account at TreasuryDirect, you can skip this section and jump ahead to buying the Series I Savings Bonds. Otherwise, head on over to the TreasuryDirect website and choose “Open an account”.
Then at the bottom of the page that you’re taken to, click the “Apply Now” button.
On the next page, you’re going to be asked for the type of account you’re creating. Most folks will choose “Individual” here but select whichever makes sense in your situation.
Assuming you chose “Individual”, you’ll now fill out your information. The bank account information is what will be used to purchase your Series I Savings Bonds.
Over the next couple of screens, you’ll create a security image/caption and password for logging in. Then voila, you’re done!
Be sure to keep that email you’re sent. That has your account number and you need that (along with the password you created) to log into your account.
Buying your Series I Savings Bonds
Once you have an account, you’ll head back to the TreasuryDirect website. This time, however, you’ll choose “Log In Now”.
Remember that account number that got emailed to you? Yeah, you need that now.
Now you’ll get an email with a one-time passcode (OTP) for security to enter here. You can check the box to register your computer if you’re not on a public computer and don’t want to be prompted for this again the next time you log in.
Time to enter your password. This was weird to me. I use a password manager (so should you!) and I clicked it to autofill and nothing happened. Maybe I should have read the instructions first! Lo and behold, you need to use their virtual keyboard to enter your password. What a pain considering my passwords are long and complex. The only good thing is that it’s not case sensitive, which was also odd to me.
You did it – you’re logged into your account! Click on the “BuyDirect” menu item to buy yourself some of those scrumptious Series I Savings Bonds.
On the next screen, guess what you’ll be selecting to purchase – that’s right, Series I Savings Bonds…
Time to make the magic happen! This is where you’ll select the amount of the Series I Savings Bonds you wish to purchase. You’ll also select the source of funds as well as the purchase frequency.
Review your purchase…
And just like that, you’re the proud owner of some shiny Series I Savings Bonds!
You’ll get an email confirmation on the purchase. You can also click on “My Account” where you’ll be able to see your transaction. Note that it will show as “Purchase Requested” until the transaction officially takes place during business hours.
Hopefully, that gives you a little insight on one way to possibly earn a little more interest on your idle cash.
One downside to this is that you’ll have to manually track your savings bonds if you use financial aggregate software such as Empower (formerly Personal Capital) or Mint. The way I set it up in Empower is as a manual investment because I wanted it to show up under investments…
Since the value isn’t going to change much, this isn’t a big deal to have it this way.
Empower is a great free tool to track all your accounts. It has some great planners and tools to help you with retirement planning, see if you’re getting clobbered with retirement fees, easily view your investment allocation, and more. I saved over $50,000 with Empower in just a matter of hours so I’m sworn to it. And at a price of free, it’s well worth checking out!
We’ll keep these savings bonds for the required year but we might also hang onto them for the full five years if it makes sense to do so down the line. That would mean no penalty at all. But would be losing out instead of moving the money elsewhere?
Time will tell and we’ll decide what to do down the line. For now, though, it’s a nice little way to earn a little more interest on some of our cash.
Do you own any Series I Savings Bonds and has this interest rate enticed you to jump on them as well?
Plan well, take action, and live your best life!
Thanks for reading!!