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Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Sun Nov 04, 2018 11:46 pm
by jhogue
ochotona wrote:
Sat Nov 03, 2018 4:27 pm
"Deep Cash" is that amount of cash above and beyond what is likely to be needed under the worst likely personal crisis situations. Where only 5% of scenarios would require more cash, for example. It's a guess, it's imprecise.

Because of my job in the crappy oil industry, I have an emergency fund equal to 12 months of expenses. That will always be in the bank and liquid T-Bills and some paper currency. Beyond that is deep cash space.

My oldest I-Bonds is 3.5 years old. At 5, I won't count it as deep any longer.
Ochotona’s post illustrates the importance of being intentional about your Cash quadrant strategy—and also understanding just how individualized that strategy ought to be:

If you work in a volatile industry where your job could suddenly vanish, you certainly want to keep a well-funded bank account and even a healthy stack of greenbacks on hand before you start buying STTs or I bonds, however attractive their current interest rates might seem.

If, on the other hand, you are in a very stable job situation, have achieved a high earning potential, and have already maxed out all of your other tax-deferred accounts (eg., 401k, 457b, IRAs plus catch up provisions), a multi-year ladder of I bonds (and, potentially, EE bonds too) could provide a whole new tax deferral space in which you might fund a self-annuity for early retirement; delay taking social security until 70 ½; or put off starting to draw down your portfolio indefinitely.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Tue Nov 06, 2018 7:50 am
by sophie
"Deep cash" is a bit of an odd concept...

I started out with the idea of I bonds as deep cash, but I think it makes more sense to think of them as tier 2 of an emergency fund. Tier 1 being whatever amount of liquid cash in your savings account or a money market account that makes sense to you. They're definitely not something you want to use for portfolio rebalancing. I would not want to be selling these babies while in a high tax bracket.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Tue Nov 06, 2018 9:26 am
by moda0306
sophie wrote:
Tue Nov 06, 2018 7:50 am
"Deep cash" is a bit of an odd concept...

I started out with the idea of I bonds as deep cash, but I think it makes more sense to think of them as tier 2 of an emergency fund. Tier 1 being whatever amount of liquid cash in your savings account or a money market account that makes sense to you. They're definitely not something you want to use for portfolio rebalancing. I would not want to be selling these babies while in a high tax bracket.
Does the "deep" part denote that you would rebalance with it? I definitely never thought of it that way.. I always thought of it as "this is the last stuff I will trade or spend unless I've gone through all my other cash."

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Tue Nov 06, 2018 10:59 am
by ochotona
moda0306 wrote:
Tue Nov 06, 2018 9:26 am
sophie wrote:
Tue Nov 06, 2018 7:50 am
"Deep cash" is a bit of an odd concept...

I started out with the idea of I bonds as deep cash, but I think it makes more sense to think of them as tier 2 of an emergency fund. Tier 1 being whatever amount of liquid cash in your savings account or a money market account that makes sense to you. They're definitely not something you want to use for portfolio rebalancing. I would not want to be selling these babies while in a high tax bracket.
Does the "deep" part denote that you would rebalance with it? I definitely never thought of it that way.. I always thought of it as "this is the last stuff I will trade or spend unless I've gone through all my other cash."
I would rebalance with deep cash. It's still a portfolio asset, even if I don't need as part of my emergency reserve.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Tue Nov 06, 2018 1:44 pm
by Kbg
Yah...I think we are conflating two different things.

Cash in a portfolio is ballast to smooth the ride and/or an opportunity cost to take advantages of future opportunities.

Readily available liquidity for living expense in an emergency is exactly that. Say you had a big ole portfolio you could be 100% in stocks and have access to all the liquidity for emergencies you may possibly need. That's why Warren Buffet's widow apparently is going to be in a 90/10 portfolio. If a 50-80% DD is going to kill your requirement for emergency expenses then 100% in stocks isn't a great idea. Another example...maybe your portfolio's dividend annual yield provides all the living cash you need. One could make a good argument that any cash was a waste of good return.

Obviously (practically) for most people cash in a portfolio may serve both requirements and prudence would suggest the latter is the more important consideration. But they are separate...let's say you were double dipping the two and had a major cash outlay for emergency expense that took your cash percentage way down...well now you have much higher risk profile and if the investing and job gods are against you and this problem continues then you have two serious problems (paying the bills and a high risk portfolio)

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Tue Nov 06, 2018 7:21 pm
by jhogue
moda0306 wrote:
Tue Nov 06, 2018 9:26 am
sophie wrote:
Tue Nov 06, 2018 7:50 am
"Deep cash" is a bit of an odd concept...

I started out with the idea of I bonds as deep cash, but I think it makes more sense to think of them as tier 2 of an emergency fund. Tier 1 being whatever amount of liquid cash in your savings account or a money market account that makes sense to you. They're definitely not something you want to use for portfolio rebalancing. I would not want to be selling these babies while in a high tax bracket.
Does the "deep" part denote that you would rebalance with it? I definitely never thought of it that way.. I always thought of it as "this is the last stuff I will trade or spend unless I've gone through all my other cash."

Moda,

Thanks for chiming in on this conversation. Your 2011 discussion with Medium Tex and Lone Wolf inspired my interest in the uses of US savings bonds for HBPP Cash portfolios.

I agree with you that savings bonds held as “Deep Cash” are the last assets in the Cash quadrant that I would want to liquidate. Ideally, you would never use them to rebalance.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Wed Nov 07, 2018 7:35 am
by sophie
Kbg wrote:
Tue Nov 06, 2018 1:44 pm
Obviously (practically) for most people cash in a portfolio may serve both requirements and prudence would suggest the latter is the more important consideration. But they are separate...let's say you were double dipping the two and had a major cash outlay for emergency expense that took your cash percentage way down...well now you have much higher risk profile and if the investing and job gods are against you and this problem continues then you have two serious problems (paying the bills and a high risk portfolio)
Ah, and therein lies another factor. I figured that you can only use the cash portion of the PP as your emergency fund if the PP is, in total, at least 8 times the desired EF size (10x if you're using Golden Butterfly).

I'd say that if you have that big a cash outlay, you either 1) have too small a PP, or 2) should be thanking your lucky stars you're not a typical cashless portfolio holder, since you'd likely be selling volatile assets to meet that expense.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Wed Nov 07, 2018 10:38 am
by barrett
Because of how many savings bonds I have (relative to other assets, that is) I have come to think of my EE and I-Bonds as sort of separate from my core PP-inspired holdings... almost a different asset class.

At age 60 and pretty much retired, I am planning to hold off until age 70 to take SS benefits and will of course have RMDs kicking in a few months after the SS spigot opens. I have a bunch of EE-Bonds that mature 2021-2023 (ages 63-65 roughly) and then a bunch of I-Bonds that mature 2029-2032. Despite their sassy fixed yields, I'll likely cash those in 2026-2028 just to avoid pushing me and my wife way up the tax ladder after I turn 70.

I guess I am just saying that there are cases where savings bonds are owned in such concentrations that they can't really be thought of as cash or even "deep cash". At a certain point the potential tax consequences just completely outweigh other factors (and this is without even considering the taxable interest impact on ACA subsidies).

Mine is a good problem to have but I've long been uncertain just how to fold these bonds into my overall AA.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Wed Nov 07, 2018 9:30 pm
by Kbg
barrett wrote:
Wed Nov 07, 2018 10:38 am
Mine is a good problem to have but I've long been uncertain just how to fold these bonds into my overall AA.
Well, they're bonds in terms of your asset allocation. What you are talking about is matching an asset to a required income stream at a certain point in time. This is the point I was making above.

As humans we all bin or bucket things for convenience and there is absolutely nothing wrong with that. If thinking this way is useful for you, think that way. It's perfectly sound. However, if one considers the sum total of all assets owned then this bond allocation is imputing bond characteristics and their impact into your expected overall returns and risk and that has nothing to do with when you need cash.

An example for me...I don't consider my house or land I own as part of my "asset allocation." They are where I live and what I drive a tractor over from time to time. But technically, I could convert all of it to cash or some other more liquid asset.

But whether your binning or mine, the investing return gods don't care...we both have a defined risk level (and liquidity profile) for what we are holding. We don't know the future, but we have an idea of what we might expect given historical returns.

This may seem like a small nit picky point...but actually it is pretty important for ST and LT financial planning.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Thu Nov 08, 2018 8:53 am
by sophie
barrett wrote:
Wed Nov 07, 2018 10:38 am
Because of how many savings bonds I have (relative to other assets, that is) I have come to think of my EE and I-Bonds as sort of separate from my core PP-inspired holdings... almost a different asset class.

At age 60 and pretty much retired, I am planning to hold off until age 70 to take SS benefits and will of course have RMDs kicking in a few months after the SS spigot opens. I have a bunch of EE-Bonds that mature 2021-2023 (ages 63-65 roughly) and then a bunch of I-Bonds that mature 2029-2032. Despite their sassy fixed yields, I'll likely cash those in 2026-2028 just to avoid pushing me and my wife way up the tax ladder after I turn 70.

I guess I am just saying that there are cases where savings bonds are owned in such concentrations that they can't really be thought of as cash or even "deep cash". At a certain point the potential tax consequences just completely outweigh other factors (and this is without even considering the taxable interest impact on ACA subsidies).

Mine is a good problem to have but I've long been uncertain just how to fold these bonds into my overall AA.
Definitely a first world problem! Some thoughts...

I say focus on Roth converting to reduce those RMDs, and don't worry so much about the I bonds. 401K withdrawals are the real poison for you, since 100% of the withdrawal incurs ordinary income tax.

I kinda agree with Kbg and others who have said they expect both federal and state tax rates to go up in future - even beyond letting the current rate cuts expire. At the risk of getting a bit into a political topic - I see very little real chance of curbing low-skilled immigration (legal or otherwise), which means that the underclass will constitute an increasingly large share of the US population, and the taxpaying middle and upper classes will (relatively) shrink. This will provide great benefits when you want to hire a housecleaner or contractor, but their food stamps, medical care, education, subsidized housing, bilingual services, and other benefits will cause increasing pressure on local, state, and federal budgets.

Whatever you think of this situation, I think it means you want to pay taxes now in order to minimize taxable income later. In other words, consider Roth converting 401K money instead of selling I bonds early. Once you are out of the Obamacare woods, you might want to consider topping out the 22% bracket, especially if you think you'll be in that bracket after age 70 anyway. Then you can fit your I bond shedding plan into this framework.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Fri Nov 09, 2018 1:21 pm
by barrett
sophie wrote:
Thu Nov 08, 2018 8:53 am
I say focus on Roth converting to reduce those RMDs, and don't worry so much about the I bonds. 401K withdrawals are the real poison for you, since 100% of the withdrawal incurs ordinary income tax.

I kinda agree with Kbg and others who have said they expect both federal and state tax rates to go up in future - even beyond letting the current rate cuts expire. At the risk of getting a bit into a political topic - I see very little real chance of curbing low-skilled immigration (legal or otherwise), which means that the underclass will constitute an increasingly large share of the US population, and the taxpaying middle and upper classes will (relatively) shrink. This will provide great benefits when you want to hire a housecleaner or contractor, but their food stamps, medical care, education, subsidized housing, bilingual services, and other benefits will cause increasing pressure on local, state, and federal budgets.

Whatever you think of this situation, I think it means you want to pay taxes now in order to minimize taxable income later. In other words, consider Roth converting 401K money instead of selling I bonds early. Once you are out of the Obamacare woods, you might want to consider topping out the 22% bracket, especially if you think you'll be in that bracket after age 70 anyway. Then you can fit your I bond shedding plan into this framework.
Thanks Kbg and sophie for chiming in. Good food for thought.

Though I understand the reason for Roth conversions, sometimes the whole process feels a bit like chasing one's tail around in a circle. I wonder (TBD by actual math!) if I might not be almost just as well off by spending down my tIRA and solo 401(k) between the ages of 65 and 70.

I find that not only am I tax averse, I am even more tax averse in the moment. In other words keeping myself in a lower bracket now seems like the intuitive thing to do. As a self-employed person for 40 years, I've just used every (legal) trick in the book to keep my yearly tax bill low. It's a tough habit to break.

Am I being charged for this therapy session?

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Sat Nov 10, 2018 9:52 am
by sophie
Nah, we're all tax averse! It's just a matter of your time frame for optimization.

You've tried running simulations with the iORP calculator, right? What did that program recommend?

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Thu Nov 15, 2018 10:12 am
by jhogue
barrett,

1. I think my situation is similar to yours: retired; holding off to 70 to claim social security; concerned about rising (and mandatory) RMDs after 70. After working through the options on a year-by-year spreadsheet, I am convinced converting my traditional IRA to a Roth IRA before I reach 70 is the most remunerative long term tax strategy. To put it in a nutshell, redeeming savings bonds is a one-time tax event, but paying taxes on RMDs will be forever.

2. One way of dealing with your big slug of EE and I bonds is to earmark them for specific years and purposes (eg., early retirement fund, new car) and then move them from your PP to your VP. This is not just bookkeeping. Doing so will show you if you need to rebalance Cash in your PP, both to minimize overall portfolio volatility and to size up what size safe withdrawal rate you can sustain.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Mon Nov 19, 2018 12:50 pm
by barrett
sophie wrote:
Sat Nov 10, 2018 9:52 am
You've tried running simulations with the iORP calculator, right? What did that program recommend?
Just re-ran everything with varying parameters and it seems that i-ORP is recommending to NOT do Roth conversions no matter when we take our gains on savings bonds. Hmm. I guess maybe our tax-deferred accounts are just not that high relative to taxable and Roth accounts. To be continued.

ETA: Uh, nix that. i-ORP only tells me not to do Roth conversions if that is one of my inputs! It actually has me doing them quite aggressively (and paying less in taxes over the years) whether I cash those I-Bonds in before or after RMDs start. Looks like it's kind of a wash. Time to go find something else to obsess about!

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Fri Dec 07, 2018 6:53 pm
by ochotona
I'm wondering whether to buy my 2019 I-Bonds before May 1, if inflation expectations are receding.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Sat Dec 08, 2018 7:04 am
by sophie
I bought my I bonds before the end of November. Not so sure about inflation receding.

So barrett, are you all good with your plans for your I bonds? They've turned out to be pretty darned good investments!

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Sat Dec 08, 2018 4:18 pm
by jhogue
ochotona wrote:
Fri Dec 07, 2018 6:53 pm
I'm wondering whether to buy my 2019 I-Bonds before May 1, if inflation expectations are receding.
ochotona,
Wait until mid-April 2019, when the latest figures on of the CPI-U are announced. That will give the new variable rate component for I bonds purchases for the next six months starting 5/1/19. It will probably also give the best indication of any change in the fixed rate component will be (if any).

Having said the above, I looked back up this thread where you expressed concern about a potentially shaky job situation in the oil business. If that is still the case in April 2019, I would forego “deep cash” in favor of a more liquid “shallow case” position.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Tue Dec 11, 2018 5:06 pm
by barrett
sophie wrote:
Sat Dec 08, 2018 7:04 am
So barrett, are you all good with your plans for your I bonds? They've turned out to be pretty darned good investments!
Hey sophie,

It seems that the best course of action based on current assumptions and multiple i-ORP runs is to keep income low for now to take advantage of ACA subsidies, and then go really aggressive on Roth conversions for five year after Medicare kicks in and before RMDs do. My best I-Bonds will in that scenario be held to maturity and cashed out in my early 70s. Some of them have 3.6% fixed yields but tax liabilities force us to think about doing things that aren't very intuitive. Too much information??

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Wed Dec 12, 2018 8:36 am
by Kbg
jhogue wrote:
Sat Dec 08, 2018 4:18 pm
ochotona wrote:
Fri Dec 07, 2018 6:53 pm
I'm wondering whether to buy my 2019 I-Bonds before May 1, if inflation expectations are receding.
ochotona,
Wait until mid-April 2019, when the latest figures on of the CPI-U are announced. That will give the new variable rate component for I bonds purchases for the next six months starting 5/1/19. It will probably also give the best indication of any change in the fixed rate component will be (if any).

Having said the above, I looked back up this thread where you expressed concern about a potentially shaky job situation in the oil business. If that is still the case in April 2019, I would forego “deep cash” in favor of a more liquid “shallow case” position.
Put this in the useless forecast bucket but...I have two macro economic tracking models I use and both of them have dropped significantly. One is even negative. Not a particularly good climate for expecting interest rate bumps.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Wed Dec 12, 2018 2:56 pm
by jhogue
The great thing about buying I bonds right now is that the composite yield is fixed at 2.83% until 5/1/2019. That easily beats a 5 year Treasury at 2.76% (yesterday’s close). But if Treasury rates should continue to rise over the next five years, the I bond variable interest rate will reset upwards ten times. However, should rates decline-- as kbg’s models indicate-- you will know that by mid-April and still be able to lock in the current fixed rate component (currently 0.5%, the highest in about ten years).

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Wed Dec 12, 2018 11:02 pm
by boglerdude
Who sets the fixed rate, and how. Why should they pay us anything...competing with foreign bonds? Private sector bonds?

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Thu Dec 13, 2018 7:30 am
by sophie
barrett wrote:
Tue Dec 11, 2018 5:06 pm
sophie wrote:
Sat Dec 08, 2018 7:04 am
So barrett, are you all good with your plans for your I bonds? They've turned out to be pretty darned good investments!
Hey sophie,

It seems that the best course of action based on current assumptions and multiple i-ORP runs is to keep income low for now to take advantage of ACA subsidies, and then go really aggressive on Roth conversions for five year after Medicare kicks in and before RMDs do. My best I-Bonds will in that scenario be held to maturity and cashed out in my early 70s. Some of them have 3.6% fixed yields but tax liabilities force us to think about doing things that aren't very intuitive. Too much information??
Sounds like a perfectly good plan! Maybe it would simplify things to just do this. List the ibonds that will mature before you hit age 65. Just hold onto the rest. Every year about this time, figure out how much income space you have before you hit the Obamacare cliff, and allocate that space toward cashing out I bonds from that before-65 pile, doing Roth conversions, and tax-gain harvesting. You could also cash them out earlier in the year for money to live on. Unlike a 401K withdrawal, only part of the proceeds will be taxable - so they will actually be a big help to you in staying under the ACA cap.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Thu Dec 13, 2018 2:16 pm
by Kbg
.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Thu Dec 13, 2018 2:23 pm
by jhogue
boglerdude wrote:
Wed Dec 12, 2018 11:02 pm
Who sets the fixed rate, and how. Why should they pay us anything...competing with foreign bonds? Private sector bonds?
Oddly enough, Treasury has never announced how it determines the I bond fixed rate. The I bond composite rate is composed of both a fixed rate and a variable rate (from the CPI-U estimate for inflation). Once an I bond is purchased, the fixed rate remains unchanged until final maturity of the bond (currently 30 years). The U.S. Treasury Department can adjust the I bond fixed rate for new purchases twice per year, on 1 May and 1 November.

I am not sure I understand your second question. Historically, the US Treasury has been borrowing money to fund the government in exchange for interest-bearing bonds ever since Alexander Hamilton became secretary of the Treasury. EE and I series savings bonds originated in the popular war bond drives directly marketed to the public for the first time during World War II. They are distinguished by the fact that they are redeemable, but cannot be bought or sold on the secondary market. As a consequence their price and yield never fluctuates.

Re: New I Bond Rate 11/1/18 to 4/30/18

Posted: Thu Dec 13, 2018 11:50 pm
by boglerdude
Was wondering whats wrong about MMT: "interest from issuance of govts is a corporate subsidy"

http://mikenormaneconomics.blogspot.com ... -rich.html

edit2 https://www.thenation.com/article/beyond-austerity/
edit1 http://bilbo.economicoutlook.net/blog/?p=41133