Savings

Inflation eats away at savings? Buy an I-Bond | Company

This year, inflation has hit consumers hard in the pockets. Now it’s eating away at their nest eggs in the form of lower interest rates on bank savings accounts and lower returns on stock mutual funds in their 401k plans.

So what’s an investor to do?

Experts suggest investors buy Series I savings bonds, a low-risk federal government investment that yields 9.62% between May and October. According to the US Treasury, this is the highest rate since 1998.

By comparison, the national average for interest paid on bank savings accounts was 0.06% in 2021, down 33% from 2020, according to the latest figures from the Federal Deposit Insurance Corp.

The Standard & Poor’s 500 is down 21% as of June 30, and the Dow Jones Industrial Average (DJIA) fell 15% in the first half of 2022. About 40% of Americans are invested in mutual funds through their 401k plans, many of which invest in funds that mirror the S&P 500 or the DJIA.

“They (I-Bonds) are great when inflation is high,” said Ivanhoe Smith, managing partner of Coral Island Investments in Philadelphia. “They may not be good all the time, but this year they are great.”

An investor, Jay Henegan, who works at a major pharmaceutical company, agreed.

According to Henegan, the best rate he could get on a money market right now was 1.75%.

“I needed a safe place to put some money,” Henegan said. “I needed to diversify my portfolio more. I have enough stocks and too much cash.

Henegan is not alone. By mid-June, the US Treasury had sold $14.4 billion of I bonds, more than in 2021.

Investors are limited by the Treasury to buying $10,000 of I bonds per year. But an individual can purchase an additional $5,000 in paper bonds, using their federal income tax refund.

For its part, Henegan plans to maximize its investment in I bonds this year.

In May, the consumer price index, which measures inflation, rose 8.6% from the same month in 2021, according to the latest figures from the US Bureau of Labor Statistics.

Supply chain problems, prompted by labor shortages due to the pandemic and Russia’s attack on Ukraine, have pushed inflation rates to the highest level in 40 years , driving up food and gas prices. This has affected individuals, but also businesses.

For example, rising prices caused consumers to cut back on spending, which hurt business results, economists say.

Ivanhoe Smith, managing partner of Coral Island Investments, said some investors don’t pay enough attention to inflation, especially when it’s low, when looking for yield. At times like now, when inflation is higher, investors should be more careful, he said.

For example, Smith said, inflation affects what is known in finance as the “real rate of return,” which subtracts the rate of inflation from your return.

This year, some savings vehicles usually considered safe, such as money market accounts or certificates of deposit, are yielding around 1%. But Smith said when you take into account that inflation is 8.6%, you’re looking at a real rate of return of -7.6%.

I bond rates combine a fixed rate, currently zero, and a variable rate, calculated by the Treasury, and intended to protect savers from inflation. The minimum purchase is $25 and the maximum is $10,000 per year. I Bonds can be purchased from the TreasuryDirect.gov website, but they are electronic titles. Paper I bonds have a minimum of $50, but can only be purchased with a tax refund. You need a special form from the IRS to do this.

If you buy an I bond, you must hold it for a year or you will incur penalties. If you cash them in after five years, you’ll lose the previous three months’ interest before buying them. Experts say this is not the place to put your emergency fund.

To open an account on the TreasuryDirect.gov website, you must be at least 18 years old. Completing the online application should take no more than 10 minutes. Investors will need the following information: their social security number, driver’s license or state identification number and expiration date, bank routing number, bank account number for an account. savings or checks and an e-mail address.

For more information, call 844-284-2676 or visit TreasuryDirect.gov.