A Unique Bond Idea Nobody’s Talking About
December 9, 2020

In speaking with a client recently about how low interest rates have gotten, he wistfully said that while he had scoffed at CDs returning two or three percent years ago, he would gladly invest in one now if given the chance.  Unfortunately, even long term CDs are now only paying around 1% interest.  

A 20-year Treasury bond will barely pay 1.5% in interest today – down from over 3% just two years ago.  Stocks are likely to do much better over the next 20 years, but what if you wanted to invest some small part of your portfolio into an ultra-safe investment for the long run?  Maybe you want to put away a modest amount into something that will act as an anchor to the rest of your portfolio for the next couple of decades and earn a decent return.  Does anything like that still exist?  Believe it or not, it does.

There is an ultra-safe investment that will pay you 3.5% – federal tax deferred and state tax free.  It can even be federal tax free if used for educational expenses (subject to income and other limits).  Of course, there are some caveats to this incredible deal.  And one of them is that no broker or advisor can sell it to you, which is why you may not have heard a lot about it (don’t worry – we have step-by-step instructions you can follow – just ask us.) Other limitations are also significant:

  • You can only invest $10,000 per person, per year
  • The investment actually pays 0.1% right now – but is guaranteed to double if you hold it for 20 years (which equals the 3.5% per year return). This is true even if it is passed on to a beneficiary.

What is this incredible investment?  Is it some kind of highly sophisticated and complex security?  No – it’s actually the same EE savings bond your aunt might have given you for your 10th birthday with a $25 face value.  It wasn’t too exciting then, when rates were high, but it’s become much more exciting now. Why? Because that same guarantee of doubling in 20 years is still on the books, despite the sharp decline in interest rates.

What’s more, because it’s fully liquid (after one year) you’re protected if rates go up. There’s only a nominal penalty, or in some cases no penalty, if you withdraw your funds and reinvest them elsewhere. You can have your cake (above-market long-term returns if held to maturity) and eat it too (flexibility if rates jump up later and it makes sense to move your investment).

In these times of ultra-low rates, investors have to get more creative to earn reasonable returns on their bond investments.  The limits on EE bonds mean they won’t be the whole solution for the bond allocation for many investors.  But they can be a piece that, year after year, in concert with other smart strategies, helps to improve overall returns in this low yield environment.

Contact us for a step-by-step guide to EE bonds before year-end and, for a family of four, you could put away as much as $80,000 by January ($10,000 per social security number per calendar year).