One is to build wealth. Building wealth allows a person to spend more in the future than they spend today. Most people under the age of 60 build wealth to ensure a post-work lifestyle without needing to “cut back.”
Historically, the best ways to build wealth are to be long-term owners of stocks, investment property, or your privately held business.
The second reason to be an investor is to preserve wealth. Preserving wealth allows a person to spend an equivalent amount in the future, after adjusting for inflation, as they spend today. Most people over the age of 60 are primarily interested in preserving wealth.
Historically, the best ways to preserve wealth are to be long-term owners of dividend-paying stocks, rental property, bonds and CDs.
Investors in 2021, regardless of their age or reasons to invest, face a daunting challenge. Historically, the best ways to build wealth are to be long-term owners of stocks, investment property, or your privately held business.
The second reason to be an investor is to preserve wealth. Preserving wealth allows a person to spend an equivalent amount in the future, after adjusting for inflation, as they spend today. Most people over the age of 60 are primarily interested in preserving wealth.
Historically, the best ways to preserve wealth are to be long-term owners of dividend-paying stocks, rental property, bonds and CDs.
Rarely have stocks been so richly priced. In similar prior cases, forward 10-year returns have often been disappointing. Over on the bond side, yields are negative after inflation is accounted for. Wealth is not being preserved.
So, what can we do?
The short, simple, realistic answer is to adapt. Save more, spend carefully, and just “live with it.” Ignore the heavy-breathing hawkers of endless schemes to protect your nest egg from the coming whatever. They don’t know any more than you. Just grab the remote and watch baseball or something.
So, what can we do?
The short, simple, realistic answer is to adapt. Save more, spend carefully, and just “live with it.” Ignore the heavy-breathing hawkers of endless schemes to protect your nest egg from the coming whatever. They don’t know any more than you. Just grab the remote and watch baseball or something.
Jason Zweig, noted financial writer at The Wall Street Journal, puts it this way:
The only incontrovertible evidence that the past offers about the financial markets is that they will surprise us in the future. The corollary to this historical law is that the future will most brutally surprise those who are the most certain they understand it.
That said, there is one corner of the bond market that offers great protection against inflation: Series I Savings Bonds. Those of us who use them just call them I-bonds.
I-bonds are issued by the Treasury Department directly to investors like us on the Treasury Direct website. Everything there is digital. No paper forms, no reports, no confirmations, no statements.
Think of an I-bond as a floating rate CD with a 30-year maturity. Except you don’t have to hold them for 30 years.
The floating rate changes every six months, in May and November, to reflect current inflation. The rate posted last May was an annualized 3.54%. The new rate in November will reflect inflation since May.
I-bonds are issued by the Treasury Department directly to investors like us on the Treasury Direct website. Everything there is digital. No paper forms, no reports, no confirmations, no statements.
Think of an I-bond as a floating rate CD with a 30-year maturity. Except you don’t have to hold them for 30 years.
The floating rate changes every six months, in May and November, to reflect current inflation. The rate posted last May was an annualized 3.54%. The new rate in November will reflect inflation since May.
Other important things to know:
- The maximum annual purchase amount is $10,000 per Social Security number. A Trust can purchase up to $10,000 annually. And up to $5,000 of a tax refund can be used to make purchases. The minimum purchase is $25.
- I-bonds must be held for at least one year.
- A 3-month forfeit of interest is levied for I-bonds cashed out within five years.
- I-bonds can’t be held in an IRA, 529 plan, HSA, or other tax-advantaged account.
- An I-bond will never be worth less than what you paid for it.
- Taxes on interest earned is payable at redemption and is exempt from state taxes.
You don’t hear about these because there’s no way for traditional financial planners and brokers to make money recommending them. As strict fiduciaries, we’re not traditional.
If you’d like to talk about how to use I-bonds in your financial plan, just get in touch.
Jim Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315
Disclosure: We own I-bonds as a core component of our bond asset allocation. I-bonds bought as far back as 2006 have earned an average of 3.2% annually since then. In the same time, CPI has been 2%.
