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Jonathan Clements

IT’S COME TO THIS: I’m writing an article discussing the virtues of EE savings bonds. To be sure, I’m not currently planning to buy them myself. But they could make a fine investment for more conservative investors who are happy to sit tight for the next two decades.

Yes, the current yield on EE savings bonds is a mere 0.1%. But if you hold EEs for 20 years, the Treasury Department guarantees that your savings bonds will double in value, equal to a 3.5% annual rate of return. By contrast, 20-year Treasury bonds are currently yielding just 1.4%—and 10-year Treasurys are offering a tiny 0.9%.

Why not back up the truck and buy EEs like crazy? For starters, it would have to be a very small truck. Each of us is limited to buying $10,000 in EE bonds per year.

On top of that, you would need to commit to owning the bonds for 20 years to get that 3.5% annual return. Otherwise, you’re stuck with the 0.1%. If you’re a conservative investor who is happy to buy and hold, that’s an attractive return.

But when I think about bonds, I view them not as a way to generate yield, but as a complement to stocks. Their role in a portfolio is to both post gains and provide spending money when stocks are suffering. Let’s say the stock market is down 11% from its all-time high—as it is right now. You might sell bonds to generate spending money, and then use that spending money to, say, pay retirement living expenses or purchase stocks and thereby rebalance your portfolio.

Have a similar view of bonds? Like me, you may not find EE bonds so appealing, because you aren’t confident you’ll hold them for 20 years. In fact, if you sell within the first five years, you’ll pay a penalty equal to the last three months of interest.

All that said, I’m still half-intrigued by EEs. The fact is, over the next 20 years, I can’t imagine there will be a time when I have less than $10,000 in bonds, so why not lock in that 3.5%? Maybe I should buy the annual maximum, double my money and plan on having a really great $20,000 party in 20 years.

How great will the party be? That depends on how sprightly I am at age 77—and what happens with inflation over the intervening 20 years. At the current 2.5% annual inflation rate, that $20,000 in 20 years would have the equivalent spending power today of some $12,200. That should pay for a few bottles of Moet. Oh wait, there will also be federal income taxes owed. Let’s make that prosecco.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Don’t Lose It, Stand Your GroundFour Questions and Rule the Roost.

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R Quinn
R Quinn
1 year ago

Like many people years ago I bought EE savings bonds through payroll deduction and they mailed them too me each month. I just stuck them in the safe and forgot about them. Now each year they are hitting the 30 year mark and I must cash them in like it or not or pay tax on the interest anyway. Another RMD😢

Rick Connor
Rick Connor
1 year ago

I recently found an envelope with a bunch of EE’s also. II had forgotten they were in the safe. For a period of time it was considered patriotic in my company to buy them. It would defintly pay for a few cases of
Trader Joe’s prosecco.

Diva_digital
Diva_digital
1 year ago

Let’s see: 20 year time horizon, hedge against stocks, attractive rate of return? Why not think about a whole life (cash value) insurance policy? If you choose a mutual insurance company known for paying dividends (Guardian, NY Life, Mass Mutual) you get all of the attributes you name PLUS you have the death benefit in case the worst happens. Not only that but, in most states, money in a life policy is shielded against legal claims. Oh, and the money is tax advantaged as well (much like a Roth IRA.).

james mcglynn
james mcglynn
1 year ago

If your goal is to buy expensive wine in 20 years why not buy the 2020 vintage wine today and drink it in 2040. You can drink a bottle every year since you will have a “liquid” investment and avoid any taxes. You will enjoy it more than having inflation and taxes eat away at the growth.

Roboticus Aquarius
Roboticus Aquarius
1 year ago

I was just reading about those EE’s, and their current yield. With the gap we have before taking SS, I should have started buying a decade ago! As it is, I’ll stick to my Stable Value fund, but these do look like a great deal for someone in the right situation.

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