savings

Cashing in savings bonds now could be costly

Don TaylorQuestionDear Dr. Don,
My question concerns Series EE savings bonds purchased in August 1996, December 1996 and January 1997. Are these bonds slated to double in value after their initial maturity period of 17 years? If I cash them in now, will I lose the opportunity to earn a large bump in their value on their 17th anniversary?

What about EE bonds purchased from January 1998 to December 2000? Should I cash in these bonds first because of the longer wait until the bump in earnings?
-- Deborah Decides

AnswerDear Deborah,
Series EE savings bonds issued from May 1995 through April 1997 paid a short-term rate in the first five years and a long-term rate in subsequent years. They have an original maturity of 17 years and an extended maturity of 30 years.

The short-term rates were 85 percent of the three-month averages of six-month U.S. Treasury Security yields, while the long-term rates are 85 percent of the six-month average of five-year U.S. Treasury security yields.

These issues were guaranteed to double in value after 17 years. If the interest earnings are not high enough to make that happen, a one-time adjustment is made at year 17.

Roughly speaking, the average yield over the 17-year period has to be about 4.1 percent. The average yield to date is about 3.7 percent. Cashing these bonds in now would have you miss that adjustment up to 4.1 percent at the end of year 17.

Series EE savings bonds issued from May 1997 through April 2003 earn interest based on five-year U.S. Treasury security yields right from the start -- there's no change from short-term to long-term rates. They have an initial maturity of 17 years and an extended maturity of 30 years.

The rate for EE Bonds is 90 percent of the average yields on five-year securities for the preceding six months. These issues were also guaranteed to double in value after 17 years. If the interest earnings were not high enough to make that happen, a one-time adjustment is made at year 17.

The Series EE savings bonds purchased between May 1997 and April 2003 are earning 90 percent of the six-month average of the five-year U.S. Treasury note yield. The earlier issue (May 1995 to April 1997) only earns 85 percent of this yield. Cashing in these later maturities has you losing that yield differential.

I'm a big fan of the "Savings Bond Wizard" that will let you track a portfolio of savings bonds.

Unless you're redeeming the bonds to pay qualified education expenses, I'd try to choose a strategy where I held all the bonds at least until their 17-year adjustment. But if forced to choose between cashing in a May 1995-April 1997 bond and a May 1997-April 2003 bond, I'd hang on to the older bonds to realize the adjustment sooner, versus waiting it out in the newer issues.

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