A look at I-Bonds: Index Bonds can be a cool place to park your money before inflation heats up. (One For Your Money).
I-Bonds are inflation-indexed bonds, which means they are designed to keep pace with the cost of living by paying an interest rate that is guaranteed to be above the inflation rate. After commissions, fees, and taxes trim the gains off your investments, the last thing you want is inflation to whittle away at your retirement nest egg.
"Many investors are seeking inflation protection," explains Robin Francis, spokesperson for the U.S. Treasury Department, "particularly retirees living on a fixed income, or those approaching retirement who need a safe haven for their money."
The benefits of I-Bonds include:
* Safety: They are a secure investment backed by the U.S. government.
* Healthy interest rates: They are generally among the top-yielding bond investments because of their inflation-fighting component (see chart).
* Fairly liquid investment: They can be converted to cash in as little as six months after purchase, in case of emergencies.
* Tax savings: I-Bonds are exempt from state and local taxes, and if the bond is redeemed to pay for college tuition and fees, investors may exclude all or part of the income when calculating their taxed, says Kenneth Johnson, vice president and portfolio manager at Loomis Sayles & Co. L.P. in Chicago.
Johnson says I-Bonds should be used to maintain a well-diversified portfolio, which can minimize overall investment risk. Francis says a 30-year-old person could also use the bonds for intermediate goals like saving for a house or to finance a child's education. "With I-Bonds, they'll receive good rates, their investment will keep pace with inflation, and they will not pay state or local taxes on the interest earned," she says.
Francis explains that I-Bonds, which were introduced in 1998, are available in denominations ranging from $50 to $10,000. The buyer pays the full face value for each bond then earns interest on top of their investment. Bond rates are adjusted twice a year on May 1 and Nov. 1. They can be held for a minimum of six months to a maximum of 30 years. "There is a five-year recommended holding period because bonds cashed in prior to five years lose the last three months of interest," she cautions.
Investors can purchase I-Bonds online at Savings Bonds Direct (www.savings bonds.gov) or Treasury Direct (www .treasurydirect.gov). They are also available through your employer payroll savings plan or at your local bank or credit union. There is even an EasySaver program that will automatically deduct the cost of a bond from your banking account each month. "There are a number of options available to investors looking to purchase I-Bonds. However, probably the best option would be through a mutual fund, which offers the added benefits of convenience, diversification, and professional management," says Johnson.
I-Bond vs. Inflation (Since 1998) * 9/1998 4.66% 1.49% 11/1998 5.05 1.55 5/1999 5.05 2.09 11/1999 6.98 2.62 5/2000 7.49 3.19 11/2000 6.49 3.45 5/2001 5.92 3.62 11/2001 4.40 1.90 5/2002 2.57 1.18 * I-BONDS WERE FIRST CREATED IN 1998. INFLATION RATES ARE CALCULATED ON AN ANNUALIZED BASIS. SOURCE: BUREAU OF LABOR STATISTICS, DEPARTMENT OF THE TREASURY
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|Date:||Dec 1, 2002|
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