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

[jhogue]

Treasury Direct announced the new I Bond rate this morning. The new fixed rate, which will apply from 1 November 2018 to 30 April 2019, is 0.50%. Added to the previously announced variable rate of 2.33%, the new composite rate will be 2.83%, tax deferred for 30 years and free from state and local taxes.

With 1 year Treasuries currently priced at 2.72%, I bonds look like an attractive addition to “Deep Cash” in the HBPP.

[Xan]

Treasury Direct announced the new I Bond rate this morning. The new fixed rate, which will apply from 1 November 2018 to 30 April 2019, is 0.50%. Added to the previously announced variable rate of 2.33%, the new composite rate will be 2.83%, tax deferred for 30 years and free from state and local taxes.

With 1 year Treasuries currently priced at 2.72%, I bonds look like an attractive addition to “Deep Cash” in the HBPP.

How is that attractive? 2.83% on a 30 year bond is awful, even if tax deferred, IMHO.

You can cash it out at (just about) any time you like.

[boglerdude]

Whats that term, where you can "pay off" a mortgage by holding bonds of the same amount?

[ochotona]

It's tax deferred, no interest rate risk. Zero duration. It's more like an inflation protected CD.

[Kriegsspiel]

Or a 30 year bond with a pseudo-put option?

[jhogue]

Pugchief,

Do you have a better alternative for deep cash than I bonds?

I can readily imagine that Warren Buffett doesn't bother investing any of his petty cash in I bonds (or bank CDs for that matter). For those of us in more down-to-earth tax brackets, however, I bonds have all the attractions of Treasuries (safety, liquidity, guaranteed yield) with a bunch of other handy features thrown in for free.

[sophie]

Even assuming the Fed increases interest rates again in December, the tax deferral and future inflation protection are very attractive. Unless you figure that a) your future tax bracket will be similar to your current one, and b) you expect that T bills or bank CDs will do as well as I bonds in keeping up with inflation. That's not always the case though, and certainly was not until just this past year.

T-bills are still beating the pants off 5 year bank CDs, for those of us with state/local taxes to contend with.

[jhogue]

1. Liquidity preference is, by definition, subjective and personal. There is no second guessing your personal choice for your portfolio, Pug. If ya gotta have it, ya gotta have it.

2. That said, consider this: At some point (hopefully), the HBPP investor’s portfolio grows so large that likely rebalance and emergency fund scenarios are covered. A hypothetical HBPP in the $1 million to $2 million range calls for a Cash position of $250,000 to $500,000. To me, that is a lot of cash! Devoting just one third of that position to “deep cash” in I bonds could raise the annual yield from Cash with very little chance of ever having to redeem an I Bond in order to rebalance a sudden drop in one of the volatile assets.

3. In other words, it is not that your VMMXX @ 2.21% is “wrong” and my I bonds @ 2.83% are “right.” I do think, however, that avoiding I bonds is like leaving free money on the table. I like free money.

[ochotona]

"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.

[Kbg]

Jh makes a very good point. Whether it is a bucket approach from Morningstar or something else. After whatever gotta have is (1 year's expenses??) the rest needs to go into something else. So let's say you got a 2M PP and are withdrawing 4%, 80K in ST cash equivalents and the rest/420K gotta go into something better or you are going to get slayed by inflation. If you don't want the admin hassle at least put them into BIL and then all you gotta do is sell some BIL off for your cash needs.

Break: Completely new topic...when did the Treasury come out with 8 week T-Bills? I won't go into details but I line up T-Bills with various expenses I have so on a monthly basis I am purchasing 52, 26, 13 and 4 week T-Bills and rotating them as required to pop back out into my checking when I need the cash. The 8 weekers are awesome and made the process much easier/fewer things to manage.

Anyway, I like em and have never noticed them before.

[ochotona]

8 week Bills just came out a few days ago.

[Xan]

I don't even think I-bonds are all that deep. The 3 months' worth of interest penalty is... not much. I wouldn't have any problem having my emergency fund in I-bonds. In the unlikely event I need it quickly, I could withdraw it and pay the small penalty. In the very likely event I don't need it quickly, it earns more.

[jhogue]

"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.

[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.

[moda0306]

"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."

[ochotona]

"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.

[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)

[jhogue]

"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.

[sophie]

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.

[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.

[Kbg]

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.

[sophie]

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.

[barrett]

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?

[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?

[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.