Series I Bonds Rates and Other Alternatives

Series I bond rates are set each May 1 and November 1. As of Nov. 1, 2019, Series I savings bonds rates equaled 2.22% with a portion indexed to inflation, according to TreasuryDirect. As an investment vehicle, bonds aren’t what they once were. However, Series I does carry with it some benefits for astute investors or the risk-averse looking to maximize returns. While some bonds provide a fixed coupon payment — or the interest paid annually on a bond — the interest payments for a Series I bond climb with inflation. This helps preserve the buyer’s buying power when the dollar’s value declines.

4 Best Bonds and Bond Alternatives of 2020

  • Series I bonds: best inflation-adjusted bond
  • Series EE bonds: best fixed-rate bond
  • T-bonds: best long-term investment
  • TIPS: best inflation-adjusted savings bond alternative
Bond typeInterest rateInterest rate formulaMinimum investment
Series I bonds2.22%0.20% Fixed 30-year rate of return plus semiannual inflation rate$25
Series EE bonds0.10%Fixed rate adjusted semiannually$25
T-bonds3.800%Interest rate set at auction$100
TIPS0.777%Interest rate set at auction$100

Rate data as of November 1, 2019

What is a Series I Savings Bond?

Savings bonds are a classic American investment with ties to the patriotic nostalgia of war bonds and were the preferred holiday gift of grandparents for multiple generations. Unlike the old-fashioned paper bond, most Series I bonds are now sold digitally through TreasuryDirect. A minimum bond purchase of $25 is required for an electronic order and $50 for a paper bond. Paper bonds are available in set denominations up to $1,000 while electronic bonds are available in any amount in penny increments.

I bond rates are comprised of a fixed rate and the inflation-adjusted rate. The inflation-adjusted rate is calculated two times per year. Interest is applied to the bond each month and paid out when the bond is cashed. The bond earns interest for up to 30 years.

An I bond must be held for one year before you can cash it in, limiting its appeal if you prefer easily liquidated investments. Cashouts before the bond reaches the age of five are subject to a forfeit of the previous three months of interest.

Series I Bond vs Series EE Bond

The primary difference between a Series I bond and a Series EE savings bond is the long-term rate of return. Because a Series I Bond’s interest rate features a built-in adjustment for inflation, it provides the buyer with more purchasing power when it is cashed in. How? The inflation adjustment is based on the Consumer Price Index. When the price of the classic “basket” of consumer goods goes up, the return is also adjusted. Both bonds will earn interest for up to 30 years. After 20 years, the EE bond is guaranteed to be worth at least twice its purchase price. The Series I bond does not have a guarantee.

Series I Bond vs High-Yield Savings Accounts

With the lower rate of return offered by a bond compared to other investments, a savings account may seem like a good alternative investment. This is particularly true if you may need access to your funds within one year of investing. If you opt for a savings account, explore a higher-yield option, such as the Ally savings account with a 1.70% APY as of November 2019. The Ally Savings account compounds interest daily, allowing you to maximize your deposits until they need to be withdrawn. Bond interest is earned monthly and compounded semiannually. Ultimately, the best investment for you will be based on cash-flow requirements and if you want to commit to a long-term conservative investment or opt for a short-term option until you develop a comprehensive investment plan.

Series I Bond vs Mutual Funds in a 401(k)

For younger investors, putting money in a mutual fund through a 401(k) can provide a much higher rate of return than a Series I Bond while you reduce taxable income and accrue tax-deferred earnings. You may be thinking the two are apples and oranges. Realistically, however, a Series I Bond is a long-term investment just like your 401(k). Yet, a top-performing mutual fund in your 401(k) is likely to provide much higher returns. For example, American Balanced Fund provides a 7.62% five-year annualized return. If access to cash-flow is a concern, 401(k) loans are always a possibility in a money crunch, and 401(k) funds can always be directed to a different type of investment. When is a Series I bond better? When you have maxed out your 401(k) contributions for the year.

The Best Bonds and Bond Alternatives

Best inflation-adjusted savings bond: Series I bonds

A Series I bond is a solid option if you are looking for a government-backed investment to park your money in. Your bond is always worth what you paid for it at a minimum. However, Series I are not a guaranteed option for earning money.

For example, the November 2019 Series I rate is a 0.20% fixed rate plus a 2.02% annualized rate of inflation. For the six months after November 1, bondholders will earn money. But what if there is a period of deflation? The bond does not earn any interest for that period. A negative annual yield is never possible, but a lack of interest income over multiple six-month periods could hinder the lifetime earnings of the bond.

It’s also important to remember the higher rates on a Series I bond are tied to inflation. Therefore, the purchasing power of your initial investment is largely tracking the rising costs of consumer goods. This means you are earning more money to buy the same things at a future date that you could buy with your initial investment now. As part of your investment portfolio, Series I bond are a great way to diversify, but you need to look at outpacing inflation with a portion of your investments to maximize your money.

Best fixed-rate savings bond: Series EE bonds

Unlike Series I bonds, Series EE bonds are guaranteed to double your initial investment in 20 years. If you spend $500 on a bond, it will be worth $1,000 or more after two decades. It also continues earning interest for another 10 years. As of November 2019, Series EE bonds are sold with a 0.10% rate of return. Interest is earned monthly and compounded two times per year.

In the days of paper bonds being available at the local bank, the Series EE bond was the offering grandparents provided as holiday gifts and schools awarded as contest prizes. For gifts or awards, they are still a nice idea but harder to obtain in electronic-only form.

Are they worth the bother? For the risk-averse, Series EE bonds are still a good investment if you can wait out 20 years to double your money. Without the guaranteed doubling effect, it is possible your investment returns will be absorbed by inflation, so avoid early cash-outs.

Best long-term investment: T-bonds

As of October 2019, the average rate of T-bonds, or U.S. Treasury bonds, was 3.800%, according to TreasuryDirect. With a 2.02% annualized rate of inflation, the bonds are set to provide a minor return to investors over and above inflation. However, the price and yield of T-bonds vary based on the issue. They are sold at auction, and price and yield are determined at the time of sale. To buy a T-bond, you need to set up a TreasuryDirect account to bid or use the services of a bank or broker.

Treasury bonds are considered a reliable investment because they pay interest every six months throughout their 30-year terms, and the interest is exempt from state and local taxes. Treasury bonds are also backed by the U.S. government, making your money more secure.

For people approaching retirement, T-bonds or related funds become a more important part of the investment mix as more money is directed to conservative investing versus higher-return options with more risk. Young investors may also choose T-bonds as one of several cash or bond investments in a diversified portfolio largely comprised of stocks and mutual funds. Because T-bonds can be sold before reaching full maturity, they are sometimes used to finance education expenses, particularly when savings options with tax incentives, such as the 529 plan, are maxed out.

Best-inflation-adjusted savings bond alternative: TIPS

TIPS are Treasury Inflation-Protected Securities issued by the United States Treasury. In short, they are bonds tied to the inflation index. As of October 2019, the average rate for TIPS was 0.777%, and like T-bonds, interest rates are set at auction.

Unlike Series I savings bond, the principal of TIPS is tied to the inflation index instead of interest. The principal of the bond adjusts up and down based on the inflation and deflation rate. Interest payments are based on the adjusted principal. Also unlike Series I bonds, interest payments and principal adjustments are federally taxed in the years they are earned and cannot be deferred. Both Series I bonds and TIPS are exempt from state and local taxes.

Because TIPS are issued in 5-, 10- and 30-year terms, they provide greater flexibility for investors looking for a low-risk option without a long-term commitment. The U.S. government backs the initial investment in TIPS to ensure an investment doesn’t lose money. However, a period of long-term deflation could depress earnings and create a break-even scenario.

The Final Word

Series I bonds are a good way to avoid losing buying power to inflation when you want to invest in savings bonds. With built-in protection against the loss of principal or negative returns in periods of deflation, your initial investment is always safe as well as any previously accrued interest. However, Series I bonds should only be a small part of a diversified investment portfolio, particularly if you have a long way to go before reaching any key savings goals for higher education costs or retirement.