Week 22 Day 4: I-Bonds: The Best Deal the Government Offers

I-Bonds combine a fixed rate (set when purchased, currently 1.2%) with a variable rate tied to CPI inflation (adjusted every 6 months). When inflation spiked to 9% in 2022, I-Bonds briefly paid 9.62% -- the highest yield available on a risk-free investment. They are bought directly from TreasuryDirect.gov and cannot be traded on the secondary market.

I-Bond details: Purchase limit: $10,000/year per Social Security number (additional $5,000 available via tax refund). Interest: accrues for 30 years. Composite rate = fixed rate + 2 * semiannual inflation rate. The fixed rate component is permanent for the life of the bond. Taxes: interest is tax-deferred until redemption. No state income tax ever. Can be used tax-free for qualified education expenses. Liquidity: must hold for at least 1 year. If redeemed before 5 years, you forfeit the last 3 months of interest. After 5 years, no penalty. Best uses: (1) Emergency fund supplement (after the 1-year lockup). (2) College savings. (3) Conservative portion of a portfolio for inflation protection. (4) Gift strategy (spouse and children can each buy $10,000). The limitation: $10,000/year cap prevents them from being a major portfolio component. But for the money they do hold, the risk-adjusted return is unbeatable.

I-Bonds have a unique structural advantage over TIPS: deflation protection. While TIPS guarantee you will receive at least the original principal at maturity (the deflation floor), intermediate TIPS fund values can fall below par if deflation occurs. I-Bonds never lose nominal value -- the composite rate cannot go below 0%, and your redemption value never decreases. This asymmetric payoff (full upside from inflation, zero downside from deflation) makes I-Bonds mathematically superior to TIPS for any amount within the purchase limit. The fixed rate component has varied significantly over time: 3.4% in 2000 (an extraordinary guaranteed real return), 0% from 2015-2022, and 1.2% in 2024. The NPV of the fixed rate over 30 years is substantial: a 1.2% fixed rate on a $10,000 I-Bond generates approximately $4,300 in real (above-inflation) interest over 30 years -- an attractive risk-free real return. Optimal I-Bond strategy for a couple: each spouse buys $10,000/year ($5,000 additional via tax refund if applicable). A trust can also buy $10,000. Maximum annual I-Bond purchases for a married couple with a trust: $35,000. Over 10 years, this builds a $350,000+ I-Bond ladder providing inflation-protected, tax-deferred income -- essentially a personal inflation-indexed annuity with no fees and government backing.