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Building a perpetuity - Series EE Savings Bonds


aryadhana
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TreasuryDirect.  Nominally, they are 30-year Treasuries with abysmal coupons: 10bps for bonds issued since at least 2015, and even that only because they probably run into floating point errors if they paid any less.  They also can't be sold, and incur a penalty if redeemed within 5 years.  But!

 

Treasury guarantees that for an electronic EE Bond with a June 2003 or later issue date, after 20 years, the redemption (cash-in) value will be at least twice the purchase price of the bond.  If the redemption (cash-in) value is not at least twice the purchase price of the electronic bond as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20-year anniversary of the bond's issue date to make up the difference.

 

Individuals are limited to a maximum purchase of $10,000 every calendar year.  That's a government-guaranteed yield of 3.5 percent over 20 years, sold at a 40 percent discount to fair value, and yielding a 2.5 percent premium to the equivalent duration Treasury bond.  (i) Purchase $10,000 of Series EE Savings Bonds for 20 years;  (ii) thereafter, recycle half of each maturing bond to satisfy that year's purchase limit; (iii) use the remaining proceeds to fund your Roth contributions for the rest of time (which contributions will be capped at $10,000 by then).  Start buying these for kids when they are born and they will be vested into their own $10,000 universal basic income by the time they grow up. 

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Just have to hope inflation doesn't run hot.

 

Sure.  At the same time a genuinely risk-free premium of 2.5 percent to market rates is an exceptional deal.  That $10,000 every year -- $20,000 if you're married -- is a sizable chunk of aftertax savings for a lot of people, and knowing what you put in will double by the time you retire lets you put much more of everything else in investments a heck of a lot more attractive than IG bonds without undertaking any additional risk.  It's also especially attractive as a call option on current yields, useful when the secular decline in long-term rates has lasted 40 years unperturbed by the various crises in between. 

 

 

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Guest eatliftinvestgolf

I personally think this is a only a good,, not great idea, for a few reasons:

 

(1) I expect inflation to be significant - the level of spending promises that are going to come shooting out of the Government is increasing exponentially right now. I don’t see the tax increases coming to pay for it. Even if things like televisions get cheaper, the things that really matter (home, auto, health, education, etc.) keep getting more expensive. 

 

(2) If you’re going to lock up the capital that long, why bother with bonds ? I personally think anyone buying a bond  without a regulatory reason to hold fixed income is an idiot.  You’re giving up the optionality of cash and the return potential of equities (broadly defined).

 

(3) The dollar is at a relatively  strong point vs to other currencies and I don’t think this is justified. The US will probably lose International  reserve currency status In our life time !

 

All that being said, I keep my emergency savings in I-bonds because I’m in a high tax state in the US and prefer to perpetually defer the tax on interest income for my cash buffer.  So I agree that taking advantage of these treasury programs with benefits for individuals  be a good idea for your personal situation.

 

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I have invested in i-bonds before and looked into EE bonds.

 

The payoff structure is such that I’d rather just buy a whole life policy (which are also very low returning, tax efficient, and take a super long time to break even). Probably similar IRR at year 20 and you get a death benny

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