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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35345  
Subject: Re: I vs E Date: 3/19/2006 9:25 AM
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"Can any one hazzard a guess what a $1000 I bond bought today would be worth in say 30 years? How 'bout an E bond? I know the I is variable but given averages....any thoughts?"

Well, for an EE-bond at 3.2%, al you have to do is run it through a compounding calculator for 30 years to get your before-tax return. The after-tax return is going to involve some guesswork, since not only is hard hard to predict your personal tax situation (federal tax bracket, state and local taxes, what state and municipality you will live in), predicting tax law is less accurate than water witching.

At least comparing I-bonds and EE-bonds, you are controlling the tax variable. The only variable will be the CPI-U adjustments. I think there are three useful ways of looking at this:

1) You can rely on the CPI-U adjustment being factored in by the professional bond traders (collective guesswork), which has averaged around 2.5-2.6% since we got over the deflation scare a couple of years ago (you can check the weekly or monthly data for comparing fixed yields on TIPS versus Treasuries of the same maturity).

http://www.federalreserve.gov/releases/h15/data.htm

2) You can rely on your own educated guess about CPI-U adjustments, using historical inflation data as a guide (to be a good guide, you need to look at more than just the average).

3) You can decide, based on your personal financial projections, how much a return above inflation (as measured by CPI-U) you need from this part of your portfolio, and if the I-bond fixed-rate is good enough, you may want to choose that even if the EE-bond rate is higher than CPI-U adjustment predictions. A hypothetical example: if in May, I-bonds offer 2% fixed and EE-bonds offer 5% (fat chance), you might choose the 2% even if CPI-U projections are 2.5%, if 2% above inflation fits your needs. Or, if you are dealing with a Emergency Fund, where your number one concern is the keep buying power even with inflation, you might settle for an I-bond even with a 1% fixed rate.

Of course, once we get into comparing with Treasures, TIPS, and the after state and local taxes yields on CDs, thing get more complicated. When EE-bonds were pegged to 90% of 5-year Treasuries, at least we could make direct calculations. And, currently, it's pretty easy: you get up to .8%-.1% (I-bonds versus TIPS) and 1.3%-1.7% (EE-bonds verus Treasuries and after-tax yields on CDs) yield differentials, and the US Savings Bonds just aren't going to catch up under any realistic tax scenarios. If the differential gets back into the .5% range, then you need to analyze your personal situation (e.g., are you talking 30 years until cash in or 15, are you going to drop to a 15% tax bracket when you retire).
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