Dear Dr. Don,
In the past I have invested in Series I savings bonds. Recently, I have noted that Series EE bonds are favored. Last year I could only purchase $5,000 of Series I bonds. Has that changed, or perhaps it's because the Series EE savings bond is the better investment?
-- Joan Juncture
Dear Joan,
There are dollar limits for the Series I and the Series EE savings bonds. The new limits took effect in 2008. The Treasury makes a distinction between physical (paper) and electronic savings bond purchases, so you can purchase $5,000 in paper Series I savings bonds and $5,000 in electronic Series I savings bonds for a total annual investment of $10,000. The Series EE savings bonds have the same limits, so you can invest a total of $20,000 per year in the two series. The TreasuryDirect Web page, "Purchase Limits," explains the limits in greater depth.
I don't know where you got the tip that the Series EE savings bonds are currently favored as the better investment. It may be because the current fixed-rate component for Series I bonds purchased between Nov. 1 and April 30 is zero percent. Series I savings bonds get their interest earnings from two components: a fixed rate that is set at the time the bond is purchased, and a variable rate that is based on inflation as measured by the consumer price index, or CPI.
For a Series I saving bond purchased with a fixed component of zero percent to earn more than the Series EE savings bond, the inflation rate over time has to be higher than the fixed interest rate on the Series EE. That's a pretty low bar if the bonds are held for more than one year, but less than 20 years. That's because the current fixed rate on a newly purchased Series EE savings bond is 0.6 percent. Hold the Series EE for 20 years, however, and the government gives you a one-time payment to raise the yield to approximately 3.5 percent. The TreasuryDirect Web page, "EE/E Bonds Rates & Terms" explains the one-time payment, which is presented here.
At a minimum, the U.S. Treasury guarantees that an EE bond's value will double after 20 years, its original maturity, and it will continue to earn the fixed rate unless a new rate or rate structure is announced. If a bond does not double in value as the result of applying the fixed rate for 20 years, the U.S. Treasury will make a one-time adjustment at original maturity to make up the difference. Series EE bonds earn interest for 30 years.
I'll take the bet that inflation will average more than 0.6 percent over the next 19.5 years, but really hope that inflation doesn't average more than 3.5 percent per year over the next 20 years. So your holding period can influence the type of savings bond you want to buy.
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