With inflation ramping up, investors looking to profit off the high interest rates have been rapidly buying I bonds. This leads to a couple of questions, firstly what is an I bond? Secondly, how can average seniors profit off their own high interest rates? As always, the experts at Investopedia have the answer.
As reported by Samantha Fields of marketplace.com, investors are hurrying to purchase an I bond. An I bond is a certain type ofTreasury bond that earns a combined fixed-interest rate and a variable interest rate that fluctuates with the rate of inflation. This means that the higher the rate of inflation, the higher return investors can receive with these bonds.
These I bonds have an initial 20-year maturity rate and are considered a low-risk investment. That’s the case normally, when inflation ranges around 2 percent. Currently, the rate of inflation hovers around 9 to 9.6 percent, meaning that investors are jumping at the chance to invest. As of October 2022, the Treasury sold a number of bonds equal to an estimated $3.4 billion.
Can I Bonds Help?
These bonds can only be issued through the Treasury, and since they are considered low risk, their value redemption can’t decline. Investing in tough times, like when the economy resembles a bear market, can present opportunities to part- and full-time investors. As the economy recovers, those investments that were bought cheap grow in value and can be sold at a higher price. The only concern is not knowing how long the recovery will take.
An I bond is technically a zero-interest bond, meaning that all the interest will be paid to the bond after the bond is redeemed. It has two taxation methods, the cash and accrual methods. The cash method only taxes the bondholder when they sell the bond. The accrual method offers lower taxes on the accrued interest every year.
Seniors can capitalize on this type of bond like any investor, but they can only buy it through the Treasury. In times of inflation, the Fed stops buying Treasury bonds, which pause funding for the Social Security Trust. By buying an I bond (only if you have the disposable income to do so comfortably) you can potentially see a higher return thanks to inflation, and the Treasury can direct funding to the programs that need it, like Social Security.
For more retirement tips and tricks, follow the Council for Retirement Security.