Many investors today are worried that inflation is about to make a comeback, and such a resurgence could spell real trouble for all kinds of investments. From stocks and bonds to mutual funds and IRAs, inflation can be a real danger. What’s more, inflation can steadily eat away at purchasing power, leaving those who thought they were on track for a comfortable retirement at risk.
One of the best ways for investors to protect themselves against the ravages of inflation is to invest in inflation indexed savings bonds. Also known as I-bonds, these unique savings and investment vehicles are indexed to inflation, providing a rate of return over and above the inflation rate as presented in the consumer price index.
The Series I savings bond also carries a fixed interest rate, with the inflation rate added to that base rate. The rate of inflation is recalculated twice a year and payments are adjusted accordingly. The earnings on Series I savings bonds are added each month, with the interest compounded semiannually.
Tax sensitive investors will be happy to know that Series I savings bonds are exempt from state and local taxes. The federal tax due on the interest can be deferred either until the bonds have been cashed in or until they stop earning interest after their 30 year maturity period.
Those interested in purchasing Series I savings bonds will need to be aware of a few things, however. One of the most important considerations is the holding period. I-bonds must be held for a minimum of five years – bonds cashed in before their five year anniversary are subject to a three month earnings penalty.
Would be Series I savings bonds investors will also need to choose the right denomination for their bonds. Savings bonds are available in a wide variety of denominations, from as little as $50 to as much as $10,000. Investors can choose I-bond denominations of $50, $75, $100, $200, $500, $1000, $5000 and $10000, making it easy for those investors to find a bond that suits their needs. When choosing a denomination investors will need to keep the required five year holding period in mind and be sure they can do without the funds for that length of time.
No matter how one’s money is invested, inflation will always be a danger. . Inflation adjusted investments like the Series I bonds provide investors with a hedge against the corrosive effects of high inflation. Investors who choose these types of bonds can rest assured knowing that their money is safe, secure and protected against the ravages of inflation.
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