All America Bank 1.5%

Discussion of the Cash portion of the Permanent Portfolio

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pugchief
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Re: All America Bank 1.5%

Post by pugchief » Thu Jul 27, 2017 8:07 am

jhogue wrote:
pugchief wrote:Sophie & jhogue,
Sorry if my last post came off as snarky or snotty; that was not my intention. I love and respect most everyone here! Was just looking for an answer / trying to make my point.
Pugchief,

No offense taken.

In fact, I welcome your sharp questioning of my argument. If I can convince you to buy I bonds, I think I could convince anybody. If I can't, there is probably some weakness in my argument.
Glad to hear that.

And so another issue is that pesky $10k limit. Not married. Then what?
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Re: All America Bank 1.5%

Post by Jeffreyalan » Thu Jul 27, 2017 8:19 am

when comparing cds vs treasury bills, should we put any emphasis on cds giving you the ability for compounding interest? When opening a cd I can just let the interest stay in the cd and compound whereas with a treasury bill I buy it at a discount and then have leftover interest that I have to then figure out something to do with. Over time the compounding interest could really add up.
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sophie
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Re: All America Bank 1.5%

Post by sophie » Fri Jul 28, 2017 7:34 am

There's also the issue of different tax treatments. A 100 basis point difference between, say, CDs and Treasuries means I would pick the Treasury every time. That's because Treasuries and savings bonds are exempt from state/local taxes. There's also my little tax trick of buying secondary Treasuries nearing maturity at very high interest rates, which increases the benefit still more. Of course, this doesn't apply if you don't have city/state taxes to contend with.

Also see my recent comment on tax deferral of savings bonds - imho the biggest reason to buy them.

Good point on compounding though. Savings bonds and CDs have compounded interest, but Treasuries don't. You're on your own to reinvest interest.
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Re: All America Bank 1.5%

Post by jhogue » Fri Jul 28, 2017 10:27 am

Beyond their underlying suitability for PP Cash, the appeal of I bonds to me is their unbeatable combination of 30 year tax deferral PLUS 30 year inflation protection PLUS 30 year compounding.

OVER TIME—and that is always what investment is about-- the CD investor will turn into the hare sprinting after short term yield and the I bond investor will turn into the plodding but persistent tortoise that started slower out of the gate but won the race anyway.

To put it another way, ask yourself which you would rather buy:

A 30 year ladder of I bonds?
or,
A 30 year ladder of 5 year CDs?

I challenge Pugchief or Desert (or anyone else) to provide a concrete example of why they prefer the latter over the former.


PS:
Sophie, as for your previously expressed concern about the problem of what happens to your taxes when your 30 year I bonds reach maturity, I hope you realize that this is most definitely a First World Problem!

I hope I have this problem 30 years from now. I hope you have this problem 30 years from now. I hope Pugchief has this problem 30 years from now when he is drowning under a great big pile I bonds.
Last edited by jhogue on Sat Jul 29, 2017 1:13 am, edited 2 times in total.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: All America Bank 1.5%

Post by Desert » Fri Jul 28, 2017 11:38 am

Yes, tax treatment could change the decision. The majority of my CD funds are in tax-deferred accounts. I hold some in taxable also, but I don't have state or local taxes on the interest.

I bonds are very attractive also. For someone who has a maximum of $10K per year to invest, I think that's a great path.
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Re: All America Bank 1.5%

Post by jhogue » Sat Jul 29, 2017 11:20 am

pugchief wrote:
jhogue wrote:
pugchief wrote:Sophie & jhogue,
Sorry if my last post came off as snarky or snotty; that was not my intention. I love and respect most everyone here! Was just looking for an answer / trying to make my point.
Pugchief,

No offense taken.

In fact, I welcome your sharp questioning of my argument. If I can convince you to buy I bonds, I think I could convince anybody. If I can't, there is probably some weakness in my argument.
Glad to hear that.

And so another issue is that pesky $10k limit. Not married. Then what?
If you have $10K or more per year to invest in fixed income or PP Cash, I think you should consider a long term strategy of building your own savings bond ladder.
(Cue up “Stairway to Heaven”, with cameo appearance by Sophie):

HOW DO I BOOST MY ANNUAL SAVINGS BOND ALLOCATION TO MY LADDER?
1. “Deep cash”:
$10K per SSN for electronic I bonds
$5 K with tax return (cool paper I-bonds)
$10K with trust

2. “Deeper cash”:
$10 K EE bonds (doubles in 20 years, or 3.53% guaranteed)

Total : $35K per year.

-$350K for a 10 year ladder.
-$700K for a 20 year ladder.
-$1.05 M. for a 30 year ladder.

UNIQUE AND AMAZING I BOND LADDER QUALITIES:
-Earned interest compounds for 30 years (no CD has that)
-Automatic tax deferral outside IRAs for 30 years (no CD has that)
-Inflation-protection for 30 years/ rate resets 60 times (no CD has that)

WHAT DO I DO WITH ALL MY CDs LOCKED UP IN IRAs (Desert might ask)?

Note that I am NOT saying you should run out and sell all your CDs tomorrow.

- A ladder of 5 year CDs (regardless of how many rungs you put in it) has a 20% turnover every year. As your CDs mature, start transferring these funds to your I bond annual allocation instead of rolling them over, in or out of an IRA.
-Yes, you may feel a pinch to pay the taxes on interest earned when you unwind a CD ladder inside of an IRA. This too shall pass. When you reach age 70 ½, the IRS will force you to take distributions from that IRA in the form of RMDs anyway. In fact, investing new money in US savings bonds after age 40 ½ is an excellent way to legally circumvent the RMD rule on traditional IRAs (for a while). CDs in traditional IRAs can’t do that. Lastly, remind yourself that taxes are a first world problem with first world solutions (i.e., retire and move to tax-friendlier Florida or open carry-friendly Texas/Arizona.)
-Don’t forget the long term effect of inflation on fixed income assets. If Janet Yellen and her ilk get their constant 2% inflation rate, your 5 year CD will lose nearly 10% of its original value by its maturity date. Compounded over 30 years, even a historically low average of 2% inflation rate could easily eat up 50-60% of your investment. I bonds lose 0% to inflation.
-If you still have money left over in Short Term Treasuries (“shallow cash”) after buying your full savings bond annual allocation, use Sophie’s “tax trickery” technique to boost your effective yield. For amounts over $250K, I would still practice institutional diversification as Craigr and Medium Tex described in their book.
-My simple rule is that if you have savings to set aside from ordinary income, you should fill up your savings bond annual quota first. It is kind of analogous to filling up your Roth IRA before your 401k, 457b, SEP-IRA, etc.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: All America Bank 1.5%

Post by pugchief » Sat Jul 29, 2017 12:20 pm

Look, the point of 'cash', as was pointed out earlier by Desert, is for dry powder and possibly emergencies. If you are in EE bonds, they only pay the guaranteed rate if you hold them the whole 20 years. Otherwise, they are a lousy investment, IMO. I don't want to lock up ANY cash that long.

I have a trust, but it has the same SSN as me, which is usually the case with these. So yes, I could intentionally over-withhold taxes all year so I could get an extra $5000 in paper I-bonds, but I don't like giving the govt interest-free loans, even at today's paltry rates. So I am limited to $10k/year.

You are correct that the interest rate resets every 6 months, but with a base rate of 0%, I just don't find these all that appealing.

To each his own. We can agree to disagree. :)
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Re: All America Bank 1.5%

Post by Jeffreyalan » Sat Jul 29, 2017 4:09 pm

-Inflation-protection for 30 years/ rate resets 60 times (no CD has that)


Why the assumption that a rate reset is always in your favor? Inflation has only ticked up .47% in the last 3 months. If that continues the the ibond rate reset coming up may be half of my cd rate. And if deflation hits you could be looking at a 0% rate for a period.
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Re: All America Bank 1.5%

Post by Desert » Sun Jul 30, 2017 8:40 am

jhogue, you're on the right track promoting I-bonds, but the bulk of your post is wrong. I have soundly beaten the I bond return with my IRA CD's for many years now. If the 2 percent inflation holds, I'll be beating it by 1 percent per year, not losing to it. I'd never buy EE bonds for the reason pugchief describes. I pretty much disagree with your entire post, other than building up an I bond allocation with after tax dollars. That's a good move. Do that.
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Re: All America Bank 1.5%

Post by Desert » Sun Jul 30, 2017 8:43 am

Jeffreyalan wrote:-Inflation-protection for 30 years/ rate resets 60 times (no CD has that)


Why the assumption that a rate reset is always in your favor? Inflation has only ticked up .47% in the last 3 months. If that continues the the ibond rate reset coming up may be half of my cd rate. And if deflation hits you could be looking at a 0% rate for a period.
Exactly. I bonds are a decent diversified in a cash allocation, but nobody knows how their future return will compare with CD's. I do know that their recent returns have not kept pace with good CD's. Both are good investments. And so are treasuries! And heck, even a total bond fund has performed similarly to the treasury barbell over the past 40 years. There are many options for the fixed income side, and it depends very much on one's personal situation and available investments.
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Re: All America Bank 1.5%

Post by jhogue » Sun Jul 30, 2017 8:15 pm

Desert wrote:
Jeffreyalan wrote:-Inflation-protection for 30 years/ rate resets 60 times (no CD has that)


Why the assumption that a rate reset is always in your favor? Inflation has only ticked up .47% in the last 3 months. If that continues the the ibond rate reset coming up may be half of my cd rate. And if deflation hits you could be looking at a 0% rate for a period.
Exactly. I bonds are a decent diversified in a cash allocation, but nobody knows how their future return will compare with CD's. I do know that their recent returns have not kept pace with good CD's. Both are good investments. And so are treasuries! And heck, even a total bond fund has performed similarly to the treasury barbell over the past 40 years. There are many options for the fixed income side, and it depends very much on one's personal situation and available investments.
Desert:
We agree that we do not know for certain how future I bond yields will compare with “good CDs.” We do not know for certain what future inflation will be. We also do not know if the superior credit quality of Treasury-backed versus FDIC-backed securities will be tested again. After watching the FDIC in action as recently as the 2008 WaMu bank failure I hope that we will not have to find out. Risk is everywhere and certainty is elusive. After Grandpa lost his first farm because of the so-called Iowa “bank holiday” of 1933, he didn’t trust banks anymore and —no kidding— his “cash portfolio” consisted primarily of greenbacks rolled up and clipped to the inside pocket of his overalls. My memories are a little hazy but I believe he diversified between federal reserve notes and silver certificates. In the end, decisions about risk assessment are personal and made under conditions of uncertainty.

Can we be more certain about death and taxes? Everyone’s personal situation is different, but IIRC, you are in your mid-fifties. Under the current tax code if you buy a 5 year CD in your IRA today, 15 years from now, when you reach age 70 ½, you must begin taking required minimum distributions from the investments in your IRA—including your CD. You will also be required to start paying ordinary income taxes to the IRS on any gains you have at that time.

On the other hand, if you buy an I bond today, that I bond could continue to grow for an additional 15 years after you reach age 70 1/2, with its interest compounded, tax deferred, and inflation protected. You could redeem the I bond without any penalty after you reach about age 60, if you wanted or needed more income. But you don’t have to sell it if you don’t want to or don’t need the money until it matures when you are about 85. Can’t do that with a CD in an IRA.

I am not saying that CDs in IRAs are a bad investment for cash or fixed income. But when uncertainty over inflation is added to the certainties of compounding and tax deferral over the next 30 years, an I bond ladder is much more appealing to me than a CD ladder for fixed income, whether it is in PP Cash or the Desert Portfolio. So, go ahead and buy more high yield FDIC-insured CDs if you want—just make sure your Treasury-backed savings bond ladder is filled up first.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: All America Bank 1.5%

Post by Desert » Mon Jul 31, 2017 10:33 am

jhogue, thanks for your thoughts on I bonds.
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