| Double your money -- in 20 years
-- with EE bonds |
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"The 3.2 percent gives the buyer some certainty.
There is no certainty of that sort with the I bond," says Steve
Meyerhardt, spokesman for the Treasury Department's Bureau of the
Public Debt. "You don't know whether the I bond will double
because the rate depends on inflation. But whether having that certainty
at 3.2 percent is better than having no certainty, I don't know."
The I bond has two components: a fixed rate that stays
with you and an adjustable rate that's tweaked based on inflation
every six months. The current I bond's combined rate is 6.73 percent,
but only 1 percent of that is fixed.
That means the government's best guess is that inflation
is running at an annualized rate of about 5.7 percent. The adjustable
component is the inflation fighter -- protecting your purchasing
power as the years roll by. If the inflation estimates are accurate,
then the 1-percent fixed rate is your real rate of return. Awful
as that is, it beats the EE's 3.2 percent, which isn't keeping up
with inflation. But what happens if inflation nosedives?
Historically, inflation ranges between 2 percent and
2.5 percent. In November 2003 the I bond's adjustable rate was 1.08
percent. Tack a 1-percent fixed rate on to that and today's fixed
EE rate looks generous.
As with just about any investment a "buy and
hold" policy is fine, but that doesn't mean "buy and forget."
You'll help yourself by keeping tabs on the Treasury's semiannual
changes made to the EE bond.
"If a newer fixed rate comes out at a half point
or higher than when you bought, it makes sense under most scenarios
to cash the 3.2 percent and buy the 3.7 percent," Pederson
says. "I don't know how ironclad this is because people would
have to crunch the numbers depending on their tax bracket. But as
a general rule, you may be better off cashing in lower-performing
bonds and buying higher ones. Even after the penalty you'll be ahead
after holding for six years."
You can learn more about savings bonds by reading
"Five
common questions about savings bonds."
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