Guaranteed 3.6% Compounded Interest? Where!?
[Note that as of January 1, 2012 banks and other financial institutions terminated their sales of bonds, in case you were only familiar with the old way of buying them at a Bank. Go to Treasury Direct instead.]
Look to EE Bonds
Seriously, consider EE Savings Bonds!Yes, savings bonds... those "old fashioned" instruments for putting money away for the future. Why is it you never hear "investment advisers" or "financial advisers" talking about how USA Government Savings Bonds are still a damn-good option for long-term saving, especially for people that are not otherwise financially savvy or blessed with "extra" time to manage their investments? Simply put: there is no money in it for the advisers!
I argue that savings bonds should make up a portion of almost every investor's financial portfolio. You should never have to worry about them... just put your money in and wait. For anyone that wants to argue about hypothetical situations like "what if the US Government goes under",... well, if it does, do you really think ANY investment is going to be worth squat? (and that includes gold; chaos will make that useless too... you would be better off having stockpiles of food and oil)
So, read on, and give EEs some consideration...
3.6% Annual Interest Rate? That sure beats the bank!Not only does the 3.6% EE yield potential beat anything (of recent) you could get in the bank — and that includes long-term products like 5-year CDs — it nearly matches the current 30-year US Treasury Bills rate (3.86% as quoted currently on Bloomberg US Government Bonds rates). So, what is the catch?
Patience is required to obtain this yield!If you visit the Treasury Direct website page on EE Bond Rates, you may first be scared by the currently posted quoted rate of 0.2% (as stated in the paragraph titled "What interest will I get if I buy an EE Bond now?"). But, have no fear and keep reading... you can get the 3.6% rate I am referring to if you are patient and buy these EE-bonds with a 20-year investment horizon in mind.
Now, look further down the page for the section / paragraphs with a heading of "When will my paper bond be worth its full value?". This is where the IMPORTANT INFORMATION is contained that leads to the 3.6% minimum guaranteed annual compounded interest rate if you hold the bonds for 20 years. Quoted from that section:
"Electronic bonds are sold at face value (not half of face value). They start to earn interest right away on the full face value. Treasury guarantees that for an electronic EE Bond with a June 2003 or later issue date, after 20 years, the redemption (cash-in) value will be at least twice the purchase price of the bond. If the redemption (cash-in) value is not at least twice the purchase price of the electronic bond as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20 year anniversary of the bond's issue date to make up the difference."So, if you HOLD the EE Bonds for full 20yrs, you can forget that "0.2%" stated current rate, as you are guaranteed a minimum of 3.6%-annual-compounded-interest (using rule of 72), since your money has been guaranteed to double in that 20yrs.
Briefly, the "rule of 72" helps us compute the approximate annual interest-rate over a period of time by dividing the interest-rate into 72 in order to obtain the term (length in years) in which that interest rate will cause an investment to double. So, in this case: 72 / 3.6 (rate) = 20 (year term). I.e., basically 3.6% annual interest has been guaranteed in one of the most historically safe investment options ever, so long as you can think long-term!
You think you can do better elsewhere?Sure, you may obtain higher (historical) yields elsewhere — perhaps in the stock markets, commodities, or corporate bonds. But, you had best know what you are doing and have 1) the time to actively manage such investments, and/or 2) the nerve to ride out massive downturns like what we saw occur during the Financial Crisis that really shredded most investments in 2008 (to the point it took years to get back to pre-crash levels).
And, if you consider putting money in "the bank" as a savings strategy, consider the fact that for over 5 years now, interest rates in the bank have been terrible! And, think about it,... 5 years is a full quarter of the duration you would have have to leave your money in the EE Bonds (toward that 20-year term to get the doubling of EE funds). In the current preceding 5 years, banks have paid essentially ZERO interest while you could have been getting 3.6% in your EEs.
Bank rates may ultimately rise, but I would not count on it changing quickly or holding higher rates for any length of time. And, keep in mind: interest on savings accounts and CDs is taxed every year whereas savings-bond interest compounds pre-tax (i.e., you are only taxed on the interest when you redeem the bonds). This can make a substantial difference in compounded returns.
The bottom line is this: If you think you can maintain a higher-average-annual-return elsewhere, go for it. I simply look at EE's as just a very simple "no brainer" hands-off way to save some money for retirement in about as safe of way as possible. And, you do not need to hold paper bonds anymore: use the TreasuryDirect electronic bond-buying system (in fact, paper bonds have nearly gone extinct and I have no idea why anyone would want paper to have to place in a safe deposit box or whatever). Signing up at TreasuryDirect is super-simple and can be done in just a few minutes.
There is perhaps the issue of what happens if you die within the 20-year term (I'd rather not think about that), but even that is covered by way of beneficiary-designations and survivorship terms. A survivor beneficiary does not have to cash in the bond right away, so they can continue to hold the bond until that 20-year term is met if they choose (and, income taxes on the interest remain deferred until redemption just like they would have been for the original holder).
Give those EE bonds a look. You never know, it may turn out to be a very wise long-term investment to hold. FYI: also note that the government currently limits annual savings bonds purchases to $10,000 per individual, so it is not like you are going to be able to take the proceeds from selling a house and put them into savings bonds all at once. Feel free to consult with your "adviser" or accountant on any of this, as I am NOT acting in either capacity here... I am just putting forth an opinion for you to consider.
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