My oldest daughter turned 30 years old last month. So did the first of her United States Savings Bonds.
Since my children often turn to me for financial counsel, it prompted me to take a fresh look at a stale investment. And right now, there’s a lot more reason to consider the lowly savings bond than there has been in years.
First, however, some history.
The US Savings Bond program was created in 1935, and the bonds helped to finance World War II, among other things. Long before there were retirement-savings programs, countless employers offered savings bonds through a payroll-savings plan and they became the risk-free savings option for average Americans.
They also were the boring-but-practical gift that generations of parents and grandparents gave newborns and youngsters.
One of my earliest money lessons involved wanting something I couldn’t afford, with my father suggesting I could earn some money working and then “cash a savings bond.” Until that moment, I didn’t know I had bonds, let alone what they were or how they worked.
That practice has gotten the “OK Boomer” treatment by younger generations, mostly fading out as the internet evolved and presented a bevy of more lucrative/exciting/attractive options while the humble savings bond was saddled with prolonged near-zero interest rates. As a gift, savings bonds also lost some appeal when the U.S. Treasury eliminated almost entirely the issuance of paper bonds. (The only paper bonds still being issued are I bonds — with returns tied to inflation, more on them in a moment — purchased directly with your federal tax refund.)
Indeed, since the mid-1990s when the structure of EE Savings Bonds was changed, my suggestions on financial gifts for newborns and babies has been shares of brand-name companies. As much as I love and respect the history of the savings bond and what still represents, it’s hard to teach financial lessons earning next to nothing.
But my daughters were born in the early 1990s, when savings bonds were still attractive, promising a guaranteed 4% per year, maturing in 18 years but continuing to earn at that rate until reaching final maturity after 30 years. It wasn’t bad for something so safe at the time; given where interest rates went, it turned out to be a great deal.
Thus, for the last decade-plus — with rates near zero — any bonds purchased before May of 1995 were earning way more than bank and money-market accounts, and short- or intermediate-term bonds, all while deferring taxes.
So my daughters, over the years, occasionally sold some of their newer bonds — the ones with variable rates that aren’t particularly attractive — but planned to keep the old “4-percenters” all the way to final maturity.
Upon reaching that point, however, those old savings bonds go from being a good investment to a piggy bank.
They don’t even earn the 0.1% interest rate on brand new EE bonds, so my girls are now planning their exit strategy as their old bonds reach final maturity.
All told, there are $29 billion in fully matured savings bonds that have never been redeemed. Some of those bonds might be sentimental wall-hangers, countless bonds have undoubtedly been lost or misplaced, but those are just excuses; no consumer should hang onto an investment that has stopped earning interest forever.
The Unclaimed Savings Bond Act is a bipartisan effort in Congress that was reintroduced this year that would require the Treasury to provide states with information about matured and unclaimed bonds that fully matured before 2018, allowing the states to use their unclaimed property programs to help find original owners or their heirs.
Lacking that act, anyone trying to locate lost bonds, to redeem matured issues or simply looking for help with savings bonds should turn to savingsbonds.gov.
But even investors with no old bonds might want to check out savings bonds again now.
Not the classic EE bonds, like what my kids own. Those carry a 0.1% fixed interest rate that is a buzzkill, though there is the promise that the investment will double to reach its face value in 20 years. Thus, if you buy a $100 bond today, you pay $50, and that’s pretty much all the bond will be worth for the next 19 years, 364 days.
Then it gets the one-time adjustment and doubles (and then earns virtually nothing more until reaching final maturity). That means the return over two decades is slightly north of 3.5%. That’s more than three times higher than the best five-year certificates of deposit, though nothing to get excited about.
What should have investors fired up, however, is the Series I bond.
I bonds offer the government guarantee that you can recover your original capital plus any increases in the official cost of living along the way.
As of the start of November, the current yield is 7.12%.
That’s no typo.
This is about as close to a free lunch as you can get (for up to $10,000 per year per account holder; the only way to take more is to take your tax refund in the form of a paper bond).
I bonds aren’t as liquid as a bank account, money fund or Treasury bill. You must stick around for at least 12 months, and the rate is reset every six months. If inflation slows, the rate could drop dramatically; it was at 3.54 annualized until the November bump-up.
Redeem within the first five years and you forfeit the last three months of interest.
But that’s a small price to pay if you consider that money market funds, savings accounts and short-term Treasuries are all yielding something like 0.2% or less.
Even if inflation settles back down and the yield follows it down — and you then forfeit some interest for redeeming early — you’re still way ahead of most savings vehicles right now.
That’s why when my daughter asked me where she should park the money she was getting from selling her 30-year-old EE savings bonds, my advice was I bonds.
“More savings bonds,” she said. “Really?”