As with any prediction, new data changes everything! That’s the case with the current I bond craze. Everyone wants to know whether to buy in October at the current initial interest rate of 9.62%, or wait for the new initial rate in November. The problem is not knowing the rate due to changes in the Consumer Price Index for All Urban Consumers (CPI-U). Now, before we go any further, I am not advocating either way that you purchase I bonds, or that you shouldn’t purchase I bonds. The additional purchase of I bonds should be considered only if you have discussed it with your advisor, have already met your other financial planning targets such as emergency savings, debt reduction, and are on track with retirement savings. The I bond purchase should be considered as extra, and only if it fits within your personal plan. Let’s look at what’s changed.
We all know that inflation is the topic du jour. Are we at maximum inflation? Have we peaked? Will it go higher? Well, we have some clues. We also know how Treasury Direct calculates the I bond rate (more on that below). What we don’t know is the final September CPI-U number. However, we can estimate that number to reach an I bond initial rate prediction. Let’s start with the meaning of CPI-U. It’s simply the Consumer Price Index for All Urban Consumers, which is a monthly measure of the average change over time in the prices paid by consumers for a market basket of consumer goods and services. This number is the missing component in our formula.
We do know that this number slightly decreased for July and August due to much lower energy prices. What we don’t know is if this will continue into September, or whether rising prices in other categories will offset the lower energy prices and lead to a positive CPI-U number. Remember, it was negative for July (-0.01%) down from 296.311 in June to 296.276 for July, and August (-0.04%) down from 296.276 in July to 296.171 for August. Just taking the two months in a vacuum, it appears that CPI-U is falling. Caution must be used in making this assumption in case housing, food, and health care have all cumulatively outpaced the decline in energy. But if inflation is abating, the September CPI-U should be lower, and thus, the I bond initial interest rate lower as well.
Treasury uses a bit of a convoluted formula to calculate the I bond initial interest rate, or composite rate as it’s known. They start with a fixed rate (currently 0% and hasn’t changed for years), they then take the semiannual inflation rate, currently 4.81%, multiplied by 2 and added to the fixed rate. Next, the fixed rate is multiplied by the semiannual inflation rate. Say what??? It looks like this:
Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
So, with our example, [0.0000 + (2 x 0.0481) + (0.0000 x 0.0481)] = 0.0962000 which is multiplied by 100 to convert to a percentage equaling 9.62%. Easy-peasy!
What’s the predicted initial interest rate for November 2022? Well, it could be as low as 6% or around 7.5%. These predictions are lower than originally predicted. Again, these are range predictions. If housing, food, health care or even energy (unlikely) come in higher than anticipated, it could possibly be slightly higher. The truth is, we just don’t know yet. What we do know is that the semiannual inflation rate is currently 4.81% and this will be added to the November rate, so in reality, your I bond could still initially be paying in the 7+% to 8+% range.
When will we know? That date should be October 13. That’s the date we anticipate the September CPI-U number. Once we have that number, we can calculate the I bond initial rate. You won’t need to do the calculation because it should be all over the financial news that day. Either way, the I bond is still a mostly risk-free return that is likely higher than any high-yield savings, CDs, and money market accounts.
If you want the current 9.62% initial rate through December, and you are going to buy, start now. First of all, you need an account at Treasury Direct. This can take time. Opening an account with Treasury Direct is not always as easy as opening, say, a brokerage account. Treasury Direct is slammed right now and phone wait times are being reported as high as 4 hours on some busy days. To further complicate your decision, if Treasury Direct decides to further authenticate your identity and requires you to complete FS Form 5444, they say it is currently taking them 8 weeks to process this form, once you have it notarized and returned to Treasury Direct by snail mail.
Don’t wait until the last business day of October to purchase if you are going to buy in October and secure the initial interest rate of 9.62%. Treasury Direct generally processes your order the next business day. Depending on demand, even buying October 28 could be dicey given that orders are not filled on weekends.
Here are a few additional reminders:
* I bonds are a 30-year term savings bond.
* The rate changes every 6 months.
* You have to hold the I bond at minimum, 12 months. Sell within 5 years and you surrender 3 months of interest as a withdrawal penalty.
* I bond interest is subject to federal tax, but not state and local tax.
* Generally limited to $10,000 per person per year. You can buy up to an additional $5,000 using your tax refund. Your trust, even with the same Social Security number, can buy an additional $10,000.
* Only available from Treasury Direct.
As an independent CERTIFIED FINANCIAL PLANNER™, I can help you with your personal financial plan. Contact me and let’s get started on a savings, investing, or retirement plan. #talktometuesday #education #Hireaplanner #stressfree #savings #bonds #ibond #retirement #CFPPro #treasury #DJIA #MarketDownturn #inflation #CPI-U