Risk part of it in the stock market or other growth investment—the amount depending on your age. Otherwise, you’ll never get ahead of inflation and taxes.
But you might want to keep even some of your long-term money absolutely safe. For this purpose, two suggestions:
Five-year certificates of deposit or Treasury notes, continually rein¬vested. They should roughly preserve your purchasing power, provided that you reinvest all of the interest as well as the principal. You’re buying for only five years at a time, so you’ll probably be able to hold each note until maturity. That’s important, as you might lose money if you have to sell before the notes mature. You can ladder Treasury bills and notes just the way you do certificates of deposit.
U.S. Savings Bonds. Savings bonds, although issued by the U.S. Treasury, are not what investors know as Treasury securities. Treasuries pay competitive interest rates and can be bought and sold on the open market. Savings bonds don’t and can’t. They’re a special type of bond, sold principally to small inves¬tors. You pay no fees to buy or sell. You cannot lose money on savings bonds regardless of general market conditions.
Savings bonds come in two types: (1) The traditional Series EE bonds, which pay a fixed rate for the life of the bond, and (2) Series I bonds, whose yields adjust for inflation. They pay a low fixed rate, good for the life of the bond, plus a floating rate linked to the consumer price index. The floating rate changes every May 1 and November 1. Interest on both types of bonds is compounded semiannually and credited monthly. I bonds usually yield more than EE bonds, but not always.
You can earn these rates on a very small amount of money. The cheapest bond costs $25 ($50 if you buy through payroll deduction).
You can tax-defer the interest until the bonds are finally cashed in or until they reach their final maturity.
You receive no money until redemption, so you can’t go out and spend the inter-est. Savings bonds (as well as zero-coupon bonds and TIPS) force you to save.
If you bought savings bonds after December 31, 1989, and use the proceeds to cover tuition for qualified higher education, you might pay no income tax on the interest you earn.
There are four ways of buying savings bonds, with different rules.
1. You can buy online through TreasuryDirect. You won’t get a paper bond. Instead your purchase will be held in your electronic account. With investments over $25, you can buy to the penny; for example, you could get a bond worth $70.45. Interest is paid on the purchased amount.
2. You can buy paper bonds through most banks and some credit unions. You’ll receive the bond in about three weeks. Paper bonds are sold in denomina¬tions of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000, at a 50 percent discount from face value. The $100 bond costs $50; the $500 bond costs $250. Each month’s interest is added to the bond’s redemption value. Since December 11, 2001, paper EE bonds bought through banks have been stamped “Patriot bonds.” That’s just a name. They’re the same as any other EE bond.
3. You can buy through a payroll savings plan if your company offers one. There are plans for both paper and electronic bonds through TreasuryDirect.
4. You can check a box on your tax return, asking that your refund be paid in savings bonds instead of in cash.
No matter how you buy, the interest rate will be the same. You must hold the bond for at least 12 months. After that, you may cash it in whenever it suits you. As with other Treasury securities, you owe only federal income taxes on the interest you earn, no state and local income taxes.
Plan to hold for at least five years. There’s a three-month interest penalty on bonds redeemed within that period. If you sell after the first five years, you’ll get whatever the bonds have earned since the month you bought. If you hold for 20 years or more, the government offers a guarantee: your EE-bond invest¬ment will—at minimum—double in value. That gives super-long-term holders a base rate of 3.5 percent, and higher if long-term interest rates stay above that level. For a recorded announcement of current savings bond interest rates, call toll-free 800-US-BONDS. Or visit the Web site TreasuryDirect.
Savings Bond Maturities
Here’s a subject that’s widely misunderstood. Unlike certificates of deposit, savings bonds do not have to be held until a particular maturity date. You redeem them at your convenience, receiving whatever they’re worth at the time.
This misunderstanding arises because of the way that paper EE bonds are sold. You buy at a 50 percent discount, paying $50 for a $100 bond. So you natu¬rally might think that you have to hold until your bond is worth $100. Not so. You have no idea when it will be worth $100 because that depends on what happens to interest rates. At the very worst, you’d get $100 after 20 years because that’s your government guarantee. But the bond might reach $100 in value sooner than that. In any event, none of this matters. You just cash in the bond when you need the money and get all your principal back plus any interest due. You do not have to hold for 20 years.
Here are the maturities for savings bonds and what they mean:
1. Original maturity. This is the maximum time it will take for a paper bond to reach its face value. For newly issued bonds, that’s 20 years, even though they may actually reach face value sooner.
2. First extended maturity. This lasts for 10 years after the original matu¬rity date.
3. Additional extended maturities. Older bonds with original maturities shorter than 10 years get an additional extension, allowing them to pay interest for 30 or 40 years.
4. Final maturity. This is the date after which the bond will no longer earn interest. On newly issued bonds, the final maturity—printed on the face of the bond—is 30 years away. Here are the final maturity dates for all other bonds (note that the oldest of these are no longer earning interest):
Series E bonds issued earlier than December 1965—40 years after their issue date Series E and EE bonds and Freedom Shares issued after November 1965— 30 years after their issue date Series H bonds issued between 1959 and 1979—30 years after their issue date Series HH bonds issued since 1980—20 years after their issue date (new Series HH bonds are no longer being issued)
5. Maturities on bonds bought through TreasuryDirect. They’re a flat 30 years, with no complications.
Don’t hang on to old savings bonds that aren’t paying interest anymore! Cash them in and get the money. Ask older family members whether they have any E bonds stashed away and check the dates. When an E or EE bond reaches its final maturity, all the unreported interest becomes taxable even if you don’t turn it in. Here are the dates for the bonds no longer earning interest: those issued between May 1941 and May 1963 and those issued between December 1965 and May 1973. Americans now hold more than $12 billion in bonds that are no longer earning interest! Savings Notes, also called Freedom Shares, are also no longer earning interest.
From MAKING THE MOST OF YOUR MONEY NOW by Jane Bryant Quinn. Copyright © 1991, 1997, 2009 by Berrybrook Publishing, Inc. Reprinted by permission of Simon & Schuster, Inc.