Even though the stock markets largely recovered from the significant declines of 2008 and 2009, many of the investors and savers who lost money are anxious to avoid similar drastic ups and downs in the future. Those investors are more likely to seek out investments that offer a greater degree of stability and security.
In recent years it seems like there are fewer investment options that are reasonably secure for investors who are concerned about preservation of capital. One of these options is the series EE bond issued by the U.S. government – also known as a “savings bond.”
Here’s some investing advice about whether series EE savings bonds are a good investment choice for you.
Security. Despite the warnings of some investment professionals, U.S. savings bonds are generally considered to be among the absolute safest investment options. While a U.S. government default is theoretically possible, it remains a highly unlikely occurrence. Many improbable and unexpected events have happened in various investment markets over the years, but the U.S. government has never defaulted on its savings bond obligations.
Series EE Bond Interest Rates. Series EE savings bonds pay a fixed interest rate. The rate of interest for a newly issued bond will be calculated with reference to the 10-year U.S. Treasury Note, and will be fixed for 30 years. The rates for each newly issued series EE bond are calculated twice per year. Interest is credited monthly, and compounded semiannually. Because of the high degree of safety and security that’s associated with savings bonds, the interest rate will generally be low compared to other investments. An investor won’t get rich buying savings bonds, but they won’t have to worry about losing their money either.
Tax Advantages. Series EE bonds provide certain tax advantages that may be desirable to some investors. While interest paid on series EE bonds is generally subject to tax on the federal level, such interest is exempt from state taxes. For investors in high tax states, this can provide a significant boost to their effective rate of return. Furthermore, such interest may also be exempt from federal tax when the bond proceeds are used to finance higher education costs.
Longer Time-Frame. Series EE bonds are intended as a long-term savings vehicle. Any bondholder who seeks to redeem their bond less than five years after they purchase it will have to forfeit three months of interest gains. On a relatively low-paying investment this can be a significant hit. Therefore, savers who choose series EE bonds should be prepared to keep their money in bonds for a significant period of time.
Convenience. If you’re interested in buying Series EE Bonds, note that banks and credit unions no longer sell paper bonds. Instead, you’ll need to sign up for an online account at TreasuryDirect and buy new bonds within your account. The online account is highly convenient because you can link it directly to your traditional banking or checking account, which provides for easy transfers in and out of TreasuryDirect.
In short, series EE bonds are most suitable for an investor seeking close to absolute security and willing to trade potential investment gains to get that security.
Even though the stock markets largely recovered from the significant declines of 2008 and 2009, many of the investors and savers who lost money are anxious to avoid similar drastic ups and downs in the future. Those investors are more likely to seek out investments that offer a greater degree of stability and security.
