Personal finance

Older couple meeting with a financial advisor
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Inflation is a top concern as investors fret about the rising cost of groceries, housing, gasoline and other living expenses.

The May Consumer Price Index, a key inflation gauge, will be revealed on Thursday and may be higher after an alarming spike in April.  

“Clients are asking about it,” said certified financial planner Leona Edwards, wealth advisor at Mariner Wealth Advisors in Nashville, Tennessee. “They’re all concerned about inflation going up.” 

As older investors and retirees scour for ways to maintain purchasing power, they may miss a nearly risk-free option they can purchase through the U.S. government: I bonds. 

While I bonds currently offer a 3.54% annual rate, it may not be right for every portfolio, financial experts say. Here’s what investors need to know.  

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The Treasury Department created 30-year I bonds in 1998 as a hedge against inflation for everyday long-term savers.

There are two parts to I bond returns: a fixed rate and a variable rate, which changes every six months based on the Consumer Price Index. The value of an I bond doesn’t decline, and rates won’t drop below zero. 

“In today’s environment, government bonds are paying little to no interest,” said Christopher Flis, CFP and founder of Resilient Asset Management in Memphis, Tennessee. “So the inflation protection component is relatively attractive compared to what it has been in the past.”

While the I bond’s annual rate is currently 3.54% through October 2021, the Treasury will announce a new yield in November, and it may be higher or lower. This chart shows the history of both rates. 

Although I bond interest doesn’t incur state and local taxes, investors still owe federal levies, unless they use the money for qualified education expenses.

I bonds may work for risk-averse investors to diversify the bonds in their portfolio, said Virag Shah, portfolio strategist at Van Leeuwen Company in Princeton, New Jersey.

These assets may also be good for those in a lower tax bracket with a large portfolio, perhaps from an inheritance. I bonds may be better for lower earners because there’s less of a tax bite, Flis said.

But I bonds are “not going to turn night into day for any investor,” he said.

The downsides of I bonds

One of the big drawbacks of I bonds is that investors can’t buy more than $10,000 per year. The bigger the portfolio, the less of an impact I bonds may have, Flis said.

“If you’re thinking that inflation is going to go up considerably, you need to be in an investment that allows you to purchase more than $10,000 of it,” he added.

Another downside is the lack of flexibility. Investors can’t access the funds for 12 months and if they redeem I bonds within the first five years they lose the last three months of interest. 

When the stock market dips, retirees may need access to cash, making I bonds less attractive, said Edwards.

If you’re thinking that inflation is going to go up considerably, you need to be in an investment that allows you to purchase more than $10,000 of it,”
Christopher Flis
Founder of Resilient Asset Management

Furthermore, advisors may prefer other investments to hedge against inflation, such as real estate, precious metals, and various types of bond funds, she said.

“[I bonds] are not what I would call remarkable, especially when compared to other investments,” Flis said.

Plus, investors can only buy and redeem I bonds through the Treasury Department’s website. When someone wants to cash in I bonds to invest elsewhere, it takes longer than swapping out investments in the same account, Flis said.

“You just need to know the whole story before you start to hit the buy button,” he said.

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