Investment StrategyPersonal Finance

Need Retirement Income? Consider Inflation-Indexed Savings Bonds

As interest rates continue to remain low individual investors looking to maximize yields should consider Treasury Inflation-Indexed Savings Bonds, known as “I bonds.”

These instruments are only available to individuals and present an opportunity to enhance fixed-income returns.

In a low-rate environment that offers few choices available for those seeking high yields, Treasury inflation-indexed savings bonds are worthy of consideration.

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Real yield

Indexed savings bonds currently yield 0.5% plus the inflation-protection feature equal to the change in the CPI, which is adjusted every six month. That equates currently to 1.9% — a rate that exceeds all but the longest Treasury bonds.

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Inflation is slowly rising

Inflation is creeping upwards. Based on the consumer price index (CPI), prices jumped at an annual rate of 3.6% in July. Even using the Fed’s  preferred “core” measure, which excludes food and energy prices, the annual inflation increase was 2.2%, higher than the current yield on any Treasury security.

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Tax-deferred savings

For those who have maxed-out their 401(k) contribution ceilings at $19,000, plus an additional $6,000 catch-up for those over 50, I bonds can provide a suitable complement to a tax-deferred retirement savings plan. The benefits of adding an I bond component applies to those with Roth and traditional IRA plans.

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A cushion when stocks decline

Even bull markets experience periods of decline. A fixed-income vehicle such as I bonds helps provide a buffer against market turmoil and the higher-risk assets in an investor’s portfolio. Having an investment component whose value remains fixed helps investors ride out bear markets.

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Limitations and benefits

Although inflation-indexed savings bonds have surpassed the current yield on most Treasury securities, regardless of maturity individuals are limited to purchasing $10,000 annually. There is a benefit, however: I bonds are taxable only at maturity and are free from state and local taxes.

This article originally appeared in Real Daily 

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