Buying More I Bonds and Easing Out of the Market

Last week I purchased a $10,000 I Bond, which is the yearly maximum allowed by current law. (This is a “per Social Security number limit.) You can exceed this limit by using your federal income tax refund to buy even more I bonds, but this would require me to over-withhold during the year which I do not want to do. ¬†I will make another I-Bond purchase early next year as I ease out of the conventional stock and bond markets.

I turn 63 this month. I have enough assets to allow me to comfortably retire now but I am not emotionally or otherwise ready to retire. On the other hand, I am not willing to expose my investments to another dramatic downturn in the markets. Such an event could financially force me into making a different retirement decision. I do not want to make major life decisions (e.g., whether to retire or keep working) that are based primarily on money.

It is time to stop taking risks that are unnecessary. Today’s markets are not properly rewarding risk in my opinion, at least not for folks nearing retirement age.

I realize that I Bonds purchased now will earn a composite rate of only 1.38% through May 2014. However, this is a zero risk rate which will increase with inflation. As long as the value of my retirement portfolio can generally keep up with the inflation rate, I will be OK. If I can do that without risk using I Bonds and TIPS, I am willing to miss out on stock market gains.

As more TIPS become available for purchase inside my 401(k) account (I have most of my 401(k) funds inside a self-directed brokerage account), I will be moving more money from stock and bond mutual funds to TIPS. I am constantly on the lookout for reasonably priced TIPS sold at Treasury auctions and on the secondary market. I bought $20,000 in TIPS earlier this year at auction.

I have to be cognizant of the TIPS maturity dates for two reasons.  First, I never want to be forced to sell one of my TIPS before maturity because that could mean taking a loss. Second, I want the TIPS to mature at different years so I can use them to supplement my yearly income.

I Bonds are different because they accrue interest (tax deferred) for 30 years but can be redeemed at any time.

So what do you think I am overlooking in making these decisions?


Comments

  1. Rick Baum says

    Only question on TIPS is why are you buying individual bonds yourself as opposed to low cost fund such as Vanguard. That is my approach using professionals.

    • MJP says

      TIPS funds (which I also own but will phase out) are subject to market risk including interest rate risk. Therefore, you can lose money on a TIPS fund investment. Individual TIPS that are held to maturity do not carry these risks.

  2. Jerlocarb says

    If you are ok with I bonds and TIPS. I agree about mutual funds. I have come to realize that mutual funds are just an asset class, subject to the whims of pension funds, hedge funds, whales and to some extent the small investor. Today was a good example of that, most funds went down: equity funds, bond funds, precious metal funds, int’l funds, etc. I see this as a major flaw when using mutual funds for Asset allocation.

  3. Ron Manuel says

    I’ve been considering starting to purchase I-Bonds as well. I’m 60 and my wife is 61. But the annual purchase limits are so small that it hardly seems worth doing. Ten years from now we’ll have accumulated $200,000 of them. And while a risk-free real return of one or two percent isn’t bad today, I expect the low rate environment to not continue for 30 years. If five years from now rates have gone up dramatically, I can sell the $100,000 of I-Bonds, but then I have to start from scratch accumulating them again.

  4. Another Reader says

    Pentagon FCU is currently offering 3.04 APY on 5 and 7 year certificates. I bought a couple of those.

    I agree that the stock market is going to correct significantly as the stimulus is withdrawn and at your age the matching of assets to liabilities becomes more important. However I don’t think I-bonds will keep up with the real (as opposed to the reported) rate of inflation. Your buying power is going to erode over a couple of decades. Heck, it’s going to erode over the next 5 years. Having cash or low risk CD’s and I bonds to cover three to five years of expenses is a reasonable compromise in my book. However, my assets are tilted towards rental properties and I have pensions, so my allocations and views on stock market risk are different than yours.

  5. Bill Marshall says

    Its not necessary to “over-withhold” during the year to take advantage of the $5K IBonds from a tax refund. I regularly withhold only the minimum needed for the safe harbor. Then come March/April, calculate the true tax owed, and file a 4868 with that amount plus $5K. When the payment is taken from my bank, a few days later, I file the actual return. And then the IBonds show up in the mail. Biggest hassle, of course, is that the IBonds are on paper; so I fill in the TreasuryDirect manifest form and mail them to the USTreasury office somewhere in West Virginia. In all, it lets us purchase $25K/year.

    And, as for the investment returns needed in retirement, I much much prefer doing the analysis with arithmetic instead of statistics (specifically, investing in TIPS and IBonds guarantees future purchasing power, where Monte Carlo simulations of the market give only success probabilities). Granted it is somewhat more expensive, but it is a tradeoff I like.

    A TIPS ladder in a 401k makes perfect sense. I do mine with 10-yr TIPS (so there are 20 separate bond maturities). I’ll have one maturing every January and July through retirement; and then in the Jan/Jul auction I reinvest possibly less than what matures, leaving behind enough to cover living expenses.

    The only think you might be overlooking is RMDs. I’m moving funds twice a year from my 401k to a Roth IRA, and buying the TIPS in the Roth IRA. I don’t want to be forced to sell the TIPS before maturity to meet an RMD requirement.

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