Savings bonds I vs EE; how do I decide which is better for me? Sm

kim0201September 14, 2007

I have about $8000 (current value) in EE bonds dating back to the late 1970s (I cashed in about 10 yrs worth to get the tax benefits available when used for education expenses while daughters were in college) & I continue to buy two $100 bonds each month thru payroll plan.

Youngest daughter is a college senior this year so I won't be able to cash in too many more of the bonds as the educational expense will end in 2008. If I continue to buy bonds, they will either go towards money for future retirement or ??? Have no other specific use in mind at this time.

I'm wondering now whether or not I should continue to buy the EE bonds or if I should consider I bonds. I've checked the website for info on both and reviewed the Treasury's comparison chart & still am unsure. Can someone educate me when it's preferable to consider I over EE?

Was also wondering if anyone is using SmartExchange for bonds and going paperless? If so, do you like it?

Thank you so much.

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kim0201 -- I've been hoping someone with more insight would respond to your post. First, I must commend you for your disciplined investment strategy. The most important thing is to save regularly, and you've been doing that and investing safely -- you are very wise.

I purchased some I-bonds in October 2001. I've been very pleased with the return, but the fixed rate was 3%. Rates had dropped dramatically from May 2001 to October 2001, so I had the advantage of knowing that the fixed rate would likely not see those levels again for quite some time. Because the fixed rate is only adjusted semi-annually, you can lock in the rate that was in effect six months prior -- an advantage if rates have fallen.

The inflationary rate has been disappointing at times. They use core inflation, so food and energy aren't calculated into the equation. When I've gone in to check the new inflationary rate, I've been surprised that it wasn't higher.

My inclination is to not invest in I-bonds now because the fixed part of the rate is low. I believe rates will go up (not immediately, but within the 5 year holding period) and while I believe that inflation will rise, too, the fixed rate portion can really hold back your return.

Having said all of that, your strategy of dollar cost averaging is much more effective than trying to time the market like I'm doing. However, I don't invest regularly in Bonds -- just sometimes when the circumstances are appealing.

I hope someone else here will provide you with more useful information. Keep up the good work!

    Bookmark   September 16, 2007 at 10:44PM
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Quandary - thank you so much for your response. You have given me some good food for thought. I did use the bond calculator for a couple of hypothetical bonds. I ran two bonds (I & EE) w/ value of $100 purchased 1/1/01 to see what the current value is. The I bond would have made considerably more interest to date. After reading your comments, I realize there are many other things to consider. I don't know that I can convert them from EE to I w/o paying taxes on interest so I might just consider holding on to my EEs. But rather than continue to buy 2 $100 EE bonds/month, I might consider buying one EE & one I. It will cost another $50/mo cash, but it would be a little more diversification so to speak.

Thank you again for responding.

    Bookmark   September 19, 2007 at 1:00AM
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