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Subject:  Re: Advise for RothIRA & 401k, please Date:  9/29/2003  5:17 PM
Author:  ImCalvin Number:  37336 of 88758

If let's say tomorrow I buy an I Bond for $1,000 that pays 4.66% annually(with a base fixed rate), what will I get if I cash it out in 20 years? Will the interest accumulate at 4.66% per annum, or with the interest rate fluctuate due to the unstable economy?

In the case of I Bonds there are two different pieces that make up the total return that you get when you cash in your bonds. The first part is a fixed rate that will last for the entire life of your bond (or 30 years, whichever comes first). The second part is tied inflation (that is how much milk costs this year versus what milk costed last year). Every 6 months the treasury looks at inflation and adjusts the inflation part of your bond.

It's tough to give an example in the future, so let's say you bought $1k of I Bonds on May 1st of 2001. The fixed rate part of your bond would return 3%, and the inflation rate at the time was 1.44% and so for the next 6 months you would accrue interest at 4.44% annually (or $22.20 for that 6 months).

3% (fixed rate) + 1.44% (inflation rate) = 4.44% annual interest
4.44% / 2 = 2.22% total interest for the period (6 months)
$1000 * .0222 = $22.20 total dollar interest accrued

In November the Treasury adjusted the inflation part of your bond to 1.19% bringing the total annual return down to 4.19% (you would accrue $21.42 for that 6 months)

3% (fixed rate) + 1.19% (inflation rate) = 4.19% annual interest
4.19% / 2 = 2.095% total interest for the period (6 months)
$1022.20 * .02095 = $21.42 total dollar interest accrued

This process would continue until you cashed in your bonds, (note: you won't actually receive that $22.20 or $21.42 until you cash in your bonds).

The only way you can get 0% annual return is if the economy has less than 0% inflation (called deflation -- that is milk costs less this year than it did last year). In the above example, because you bought in May of 2001 inflation would have to be -3% before you would actually have to worry about getting no interest.

Overall it's generally a good deal, you are guaranteed to not lose any principle (you will always have at least that original $1000 even if inflation falls to -4.5%), and on the other end you are going to keep up inflation and can pay for milk just as it would have cost you a year ago.

It is a bit confusing, but keep asking questions and reading all you can, you'll figure out what's right for you.

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