Tompor: Savings bonds an investment that requires a lot of patience

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Posted: Thursday, November 28, 2013 12:00 am | Updated: 3:21 pm, Wed May 21, 2014.

Looking for a not-so-hot spot for your money? We found one. Buy a U.S. savings bond, Series EE, and you’re looking at a fixed rate of 0.1 percent for the next several years.

“So if you invest $1,000 today, at the end of one year, you will have earned — drum roll please — $1,” said Daniel Pederson, who has a Monroe, Mich.-based blog about savings bonds at BondHelper.com.

Yep, $1 for a year of investing $1,000.

So it’s OK to skip giving a Series EE savings bond as a holiday gift. It’s most likely even worse than one of those “Duck Dynasty” Chia Pets — especially if you want that money to quickly grow.

The 0.1 percent rate would apply for Series EE bonds bought through April 30.

It is possible to make even less than one dollar in interest. There’s a three-month penalty if the bonds are held less than five years. (You cannot cash a savings bonds short of the first 12 months of owning that bond, unless the government makes an exception because of a natural disaster in a given area.)

Yes, this is the lowest fixed rate ever set for Series EE bonds.

But there is an upside for truly long-term savers. Pretty good money can be had, if you’d wait until 2033 or longer to cash a Series EE savings bond bought now.

“Because the Series EE savings bond is doubled at 20 years, the effective interest rate is just over 3.5 percent compounded semi-annually,” said David Starck, a spokesman for the Department of the Treasury, Bureau of the Fiscal Service.

“The key is the bond must be held up to the original maturity of 20 years to get that yield,” Starck said.

“Otherwise, it will only get that 0.1 percent fixed rate in effect up until then.”

Pederson said bond holders need to realize that there is a huge bonus if you’d wait 20 years.

Also another rate would be set after 20 years and apply to the bond for the following 10 years until the Series EE bond reaches full maturity. No one knows what the final rate would be in the future.

But again, somebody who buys a Series EE bond now and cashes out, say, 15 years after the bond is purchased would be out of luck and stuck at 0.1 percent.

Sure, some certificates of deposit are holiday-sweater-ugly, too.

The average rate on a certificate of deposit is 0.23 percent on one-year CDs and 0.79 percent on five-year CDs, according to Bankrate.com. If you shop around, a saver could find yields of 1.05 percent on a one-year CD and 2.02 percent on a five-year CD, according to Bankrate.com.

A few people might appreciate the thought if you give them a Series EE bond now. But they’re not going to be jumping around the house, joyfully screaming, “I cannot believe you got me this.”

“Often, you get feedback from family members saying ‘Do you know that thing isn’t paying anything?’ ” Pederson said.

In fiscal year 2013, which ended Sept. 30, savers invested more than $719 million in Series EE and I savings bonds. The bulk of that money went to I Bonds. Series EE savings bonds sales represented nearly 9 percent of that total or $64.6million.

But should you just unload all the bonds you have stacked somewhere in a box? Absolutely not.

If you already have Series EE savings bonds bought years ago, pay careful attention to the rates you have on those bonds. Pederson notes that some older Series EE bonds can be earning 3 percent to 5 percent a year now.

Given the low-rate environment now, most people wouldn’t want to cash in a savings bond paying 4 percent or so if they did not need the money.

To calculate the rate on your bonds, you can run some numbers at the U.S. TreasuryDirect site and use a savings bond calculator.

Series EE bonds that are no longer earning interest were issued from January 1980 through November 1983.

What about Series I inflation-indexed savings bonds?

I Bonds are more attractive than newly issued Series EE bonds. The initial composite rate for I bonds issued Nov. 1 through April 30 is 1.38 percent. The fixed rate on the I Bonds is 0.2 percent, and there’s an inflation adjustment that is added on top of that fixed rate. The inflation adjustment could change every six months after buying the bond.

But again, don’t read 1.38 percent and think every I Bond out there is paying far less than 2 percent.

Odd as it sounds, I’ve had neighbors stop and tell me how happy they are with their I Bonds. One neighbor said he bought those bonds years ago after first reading about them in my column.

“I Bonds issued from September 1998 to October 2001 are getting some nice returns,” Pederson said.

I Bonds issued during those early years had fixed rates that ranged from 3 percent to 3.6 percent. So the bonds would be earning between 4.2 percent and 4.8 percent during their next accrual period, Pederson said.

So is Aunt Jane going to show up at Christmas with more savings bonds this year? Maybe I Bonds? It could depend on how much Aunt Jane likes going online.

Last year was the first holiday season that paper U.S. savings bonds weren’t being sold at banks. If you want to buy bonds, you’d go to www.treasurydirect.gov for digital bonds.

No doubt, it’s easier to buy that “Duck Dynasty” Chia Pet. But if you can persuade someone to hold onto that Series EE savings bond for 20 years or more, well, maybe they’ll thank you then.

Contact the writer: stompor@freepress.com

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