How to Calculate Your Real Return on Series I Savings Bonds

As many investors already know, purchasing Series I bonds is a great way to round out a portfolio with low risk, conservative investments. However, many become confused when they are trying to determine what I bonds are paying now. This is understandable, due to the complexity involved in the interest rate returned by I bonds. Fortunately, it's not as hard as it seems. By paying attention to these key concepts and calculating your true return on investment, you can pin point exactly what rate I bonds are paying at any time.

Understanding I Bond Interest Rates

Unlike other types of bonds available in the private and public sector, the US Treasury Department cautiously reviews the rates on I Bonds on a near quarterly basis. Their current rates may be picked up directly from their website. I Bonds carry both a fixed and inflation adjusted rate that ends up determining what they are paying now. Here's a breakdown of how each component works.

The Fixed Rate on I Bonds: A new fixed rate is announced by the US Treasury Secretary every November and May. Wherever it falls determines the fixed rate for bonds purchased during the prior six month period. Over the past few years, the fixed rate has been at all time record lows due to the high demand for I bonds driven by the global financial crisis.

Inflation Rate on I Bonds: The inflation rate is a powerful driver of growth, but not necessarily a beneficial one. The inflation rate is effectively doubled when the composite rate is calculated so that investors are assured some return on investment. Obviously, if the fixed rate was at 0.00% and the inflation rate only matched measurable inflation, then there would be no true return, and thus no incentive to invest at all.

The Composite Rate: The composite rate represents the finalized rates I bonds are paying currently. Here, the fixed rate is added onto the inflation rate after it's doubled. Composite rates will always fluctuate based on the movements of their two components, but they are a fairly predictable measurement of what your Series I bonds are actually worth.

Just to clarify how everything comes together, think about this practical example. At the time of this writing, the fixed rate is at 0.00%, and the inflation rate is at 2.30%. Since the fixed rate is out of the picture due to its non-existent return, the current composite rate is 4.60%, which is the inflation rate multiplied by two.

Calculating Your Real Return

A savvy investor should always strive to go beyond the interest rate chart provided by banks and the US Treasury department. It pays handsomely for planning and tracking purposes to calculate your real rate of return, rather than just going by the composite rate Series I bonds are paying. Luckily, figuring out what this rate is with I bonds is a good deal easier than with most other types of bonds.

Simply take the inflation rate as it is (without multiplying by two) and add on the fixed rate. If desired, you can plug this rate into a personal tax calculator to go one step further and see what you're allowed to keep after taxes. This is a powerful way to estimate where I bonds should fit into your portfolio, and when it's best to cash them in. Naturally, I bonds should occupy a position among many other diverse bonds from the public and private sector. If you're not sure where to start, books like Bond Investing for Dummies lay out a road map for buying and selling bonds clearly and concisely.

Overall, figuring out what rates I bonds are paying may allow you to hike your wealth expansion up to the next level. With up to $5,000 of bonds available per year, this safe and sturdy bond series is sure to remain popular, even in uncertain economic conditions.

Back Your Future With Series I Savings Bonds
Credit: US Library of Congress
US Savings Bonds: Past and Present Stores of Wealth(66648)
Credit: US Library of Congress