Suze Orman has long been a fan of I bonds.
Financial guru Suze Orman has been singing the praises of I bonds for years. Although she says they may not be as attractive as they used to be and there are other alternatives, she believes they are still a great investment. But what exactly are I bonds? And why should you consider investing in them? Let's take a look at the ins and outs of these unique savings bonds to see if they're right for you.
What is an I bond?
I bonds are a type of savings bond issued by the U.S. government. I bonds protect you from inflation and are intended to provide a safe, low-risk investment option for individuals. I bonds earn interest for up to 30 years, and the interest is exempt from state and local taxes. The interest is also tax-deferred until you take a withdrawal. The interest rate on I bonds has two components: a fixed rate of return and a variable rate of return that is adjusted for inflation every six months.
The current rate for an I bond issued from November 2022 through April 2023 is 6.89%, which is a step down from the 9.62% offered from May 1 and Nov. 1 of 2022. The fixed rate applies to all I bonds sold during the six-month period. Currently, the fixed rate is 0.40%. The semi-annual (half year) inflation rate is based on the Consumer Price Index and is currently 3.24%. The combined rate is called the "composite rate" or "earnings rate." The only place to buy I bonds is through TreasuryDirect.gov. You cannot purchase them through a typical brokerage firm.
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The benefits of investing in I bonds
Suze Orman has long been a fan of these unique savings bonds because they offer so many benefits over other types of investments. For starters, they offer a guaranteed return on your investment, unlike stocks or mutual funds, which may go up or down over time. They have a low minimum purchase amount ($25) which makes them accessible to almost everyone who wants to invest their money wisely.
In addition, because the interest earned from them is tax-deferred until you cash them in (or until 30 years have passed), they can be a great way to save for retirement without having to worry about taxes eating away at your returns each year. Finally, since they are backed by the U.S. government, there's virtually no risk involved. So even if the stock market takes a dive or another economic crisis hits our shores, your money will still be safe with an I bond.
The downsides of I bonds
While I bonds are currently returning close to 7%, the money is locked up for the very first year and can't be touched. In years two through five, the penalty to liquidate is three months' worth of interest. And after five years, you can take your money out any time you want. In a recent podcast episode, Orman stated that I bonds are still a great investment, but rates can go down just as fast as they went up. Since inflation can go up or down, deflation can bring the combined rate down below the fixed rate (as long as the fixed rate is not zero).
Because interest rates have skyrocketed, Orman says a CD or Treasury Bills can offer rates just as high without having to lock in your money for a year. For example, a 6-month CD at Quontic Bank is currently at 5.05% and a 26-week T-Bill is close to 5%. Orman doesn't believe the renewal rate in May will be 6.89% or higher. As inflation goes down, the rate of I bonds will also be going down, since the rate resets every six months. When you take into account the penalty and lower interest rates, Treasury Bills and CDs will likely be better for investors in the long run.
I bonds are an excellent option for those who want to invest their money safely but still reap some rewards along the way. With their low minimum purchase amount, guaranteed return on investment, inflation protection, and tax-deferment features, it's no wonder Suze Orman continues to recommend them. But since she believes I bond rates will most likely go down, CDs and Treasury Bills may be better alternatives for the long run.
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FAQs
The annual rate for Series I bonds could fall below 5% in May based on inflation and other factors, financial experts say. That would be lower than the current 5.27% interest on I bond purchases made before May 1, but higher than the 4.3% interest offered on new I bonds bought between May 1, 2023, and Oct. 31, 2023.
What kind of bond does Suze Orman recommend? ›
I bonds are backed by the government and protect you from inflation because when inflation increases, the combined rate increases. While I bonds are still a great investment, Orman says CDs and Treasury Bills may be better for the long run.
Should older people buy I bonds? ›
I bonds have earned their reputation as an inflation-fighting tool for retirees. As of May 2024, I bonds are returning 4.28%, which is lower than the same period in 2023 but still well ahead of the inflation rate of 3.5%. The previous I bond rate stood at 5.27%, set in November 2023.
Why shouldn't you invest all your money in bonds? ›
One-year lockup. You can't get your money back at all the first year, so you shouldn't invest any funds you'll absolutely need anytime soon. Early withdrawal penalty. If you withdraw after one year but before five years, you sacrifice the last three months of interest.
Can you ever lose money on an I bond? ›
You can count on a Series I bond to hold its value; that is, the bond's redemption value will not decline.
Are I bonds still a good investment in 2024? ›
At an initial rate of 4.28%, buying an I bond today gets roughly 1% less compared to the 5.25% 12-month Treasury Bill rate (May 1, 2024). You could say that buying an I Bond right now is a 'fair deal' historically compared to 2021 & 2022 when I Bond rates were much higher than comparable interest rate products.
Does Warren Buffett recommend bonds? ›
Berkshire takes a “barbell” approach of using stocks and cash because Buffett isn't enamored of bonds—and hasn't been for a decade or more—even with the rise in yields since 2022.
What does Suze Orman recommend? ›
Live Within Your Needs but Below Your Means
Living within your needs but below your means is the golden rule of the Suze Orman budget.
Is there a better investment than bonds? ›
Why Do Stocks Generally Outperform Bonds Over Time? Stocks generally outperform bonds over time due to the equity risk premium that investors enjoy over bonds. This is an amount that investors of stocks demand in return for taking on the additional risk associated with stocks.
What is the downside of an I bond? ›
The cons of investing in I-bonds
There's actually a limit on how much you can invest in I-bonds per year. The annual maximum in purchases is $10,000 worth of electronic I-bonds, although in some cases, you may be able to purchase an additional $5,000 worth of paper I-bonds using your tax refund.
Conventional wisdom holds that when you hit your 70s, you should adjust your investment portfolio so it leans heavily toward low-risk bonds and cash accounts and away from higher-risk stocks and mutual funds. That strategy still has merit, according to many financial advisors.
Should retirees own bonds? ›
Balance income and growth
Ideally, you'll choose a mix of stocks, bonds, and cash investments that will work together to generate a steady stream of retirement income and future growth—all while helping to preserve your money.
Can I lose money on a fixed rate bond? ›
You're unlikely to lose money on a fixed rate bond, but if savings rates rise while your money is locked away at a lower rate, you could end up feeling you've lost out on interest in better paying savings accounts. You can also face a penalty should you need to withdraw your money early.
Can you lose money on bonds if held to maturity? ›
After bonds are initially issued, their worth will fluctuate like a stock's would. If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.
How much is a $100 savings bond worth after 30 years? ›
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
May 7, 2024
TIPS offer greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds. If you're saving for education, I-bonds may be the way to go.
What will the next I bond rate be? ›
Treasury Department announces new Series I bond rate of 4.28% for the next six months. Series I bonds, an inflation-protected and nearly risk-free asset, will pay 4.28% through October 2024, the U.S. Department of the Treasury announced Tuesday. The latest I bond rate is down from the 5.27% yield offered since November ...
How long should you keep money in an I bond? ›
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest. See Cash in (redeem) an EE or I savings bond.
