Savings Bonds Beneficiary Question

For future purchases, your company's payroll dept. should be able to help. For bonds you own, are they in your possession? You should be able to send a form in to the treasury to update the info.

You know, I won't be the first to ask, if you are willing to buy an instrument with such a long maturity (14years?) why not consider putting this money in the stock market instead? But that opens up the list of questions, the things we don't know about you; does your company have a

401k? Does it have a matching feature? Are you saving for any short term purchases? Own a home? etc. JOE

You can cash in I bonds after 12 months, with a 3 month interest penalty if less than 5 years. The maturity date is 20 years with an automatic 10 year extension. What is significance of the 14 year period you mentioned?

John Cowart

Well, I recall, incorrectly it seems, that 'savings bonds' were purchased at 1/2 face value, and were then held to maturity. 5% would require 14 years to double. This is closer to what I was thinking; "Series EE Bonds earn market-based rates that change every 6 months. There is no way to predict when a Series EE bond will reach its face value. For example, a Series EE Bond earning an average of 5% would reach face value in 14 1/2 years while a bond earning an average of 6% would reach face value in 12 years."

Now that I am better educated, I ask, with the I bonds yielding 1.4% over inflation, which the government claims is 1% for 9/05 through 3/06 or a total yield of 2.4%, why not just save in a money market fund? or stock funds as I suggested earlier. JOE

Inflation has been running close to 4% since February:

average rate over the past six months, using this data, is ~3.9%). That means that after six months, these "bonds" will be paying around

5.3%, or similar to a MMF. So the up front cost of getting these instruments now is bounded.

The virtue of getting them in this cycle (and enduring the lower yield for six months) is that one locks in the highest fixed rate in four years. I don't expect the fixed rate to rise, since people have gotten better educated on inflation-adjusted instruments. To the contrary, the fixed rate may fall, because people seem to look at total yield which will rise (because of higher inflation) even as the fixed rate drops.

An additional benefit is that the income is tax-deferred and state tax exempt, unlike the higest yielding MMFs. Yet another benefit is that the earnings may be entirely tax free if used for higher education expenses. (though a 529 plan might be superior if this is the purpose). Why not a stock fund? Because there is a difference between saving (which I think of as an account where one's total balance is secure and nominally liquid, except for a small early withdrawal penalty), and investing. It depends on what one is trying to accomplish.

I know y'all here don't like the idea of Market Timing ... however it should be noted that if someone were to convert existing bonds to stocks right now, s/he'd be buying in at a "top of the market" time. The U.S. markets have been on a tear the last week and the DJIA has topped all-time highs.

Just some info. Not trying to swing you one way or the other for or against stocks.

.

"Sgt.Sausage" wrote

I think this depends on how one defines "market timing" and "top of the market." Academic Ben Graham decades ago advocated, among other things, waiting until a stock's P/E fell below 15. The market can hit new highs, including somewhat high P/E's, and continue rising for over a decade, with earnings continuing to rise so P/Es do not get too high. E.g. from Yale academic Robert Shiller's data:

Year P/E S&P 500

1990 15.9 340 1991 20.5 325 1992 21.8 416 1993 19.9 435 1994 15.5 473 1995 13.7 465 1996 15.9 614 1997 19.3 766 1998 25.6 963 1999 25.9 1248 2000 28.5 1425

In 1991, your counsel would seem to be to stay out of stocks. Mine, to passive investors and with regard to only P/E's and with the S&P 500 P/E at 18 right now, I'd say the market is a little high compared to the historical average right now, but not obscenely so. If an investor buys into the S&P 500 today, and then it "corrects" downward by 25% in the next six months, and s/he regrets the investment, then s/he should not be in stocks at all. S/he should have gone in knowing this was a long term investment; reinvested dividends are going to buy up great deals after the "correction"; perfectly timing when to buy and sell is strictly about luck; etc.

Thx for your reply. I already have plenty of $$$ in stock mutual funds and IRA's and my 401(k) is fully funded, as well. My thinking with the I-bonds was automatic "forced" savings in a secure investment that provides me some discipline. In other words, I have to make a somewhat extra effort to cash out a savings bond. A MM account with a debit card (which I already have) is much easier to tap into frivolously. I already own a home and am just saving (and investing) generally towards retirement.