Day: January 20, 2022

Two Financial I’s You May be Overlooking

Tim Baker talks through two I’s that you might be overlooking as it relates to your financial plan: inflation and I-Bonds. 

Episode Summary

Today, Tim Ulbrich and Tim Baker sit down to talk about the two ‘i’s that you may be overlooking in your financial planning – inflation and I-Bonds, more formally known as series I savings bonds. While these words may not scream excitement, understanding these two aspects can be valuable in helping you to get the most purchasing power out of your money in the future. During the interview, Tim and Tim discuss why inflation can sneak up on you and why it is an important yet often underestimated consideration for the financial plan. Tim Baker discusses the basics of inflation and some potential ways to combat its impact on your financial plan. Tim Baker also shares basic information on I bonds and who they might be a good fit for, considering the personal financial plan and situation. Listeners will hear about how to acquire I-Bonds, some interesting and quirky rules to take into account regarding this type of investment, and a detailed explanation of why these bonds (not to be confused with E-Bonds) can be used as one strategy to hedge against inflation. This episode has all the percentages that you’re looking for to figure out if I-Bonds are the right vehicle for you.

Key Points From This Episode

• Kicking off with inflation; what the term actually means and why it’s the current hot topic.
• Breaking down the inflation statistics and how it’s affecting your buying power over time. 
• Encouraging the listener to start by listening to Ask a YFP CFP® episode 93
• Introducing I-Bonds, not to be confused with E-Bonds.
• Who the I-Bond is suitable for, and the big potential drawback: the holding period.
• Some of the interesting and quirky rules of I-Bonds.
• Why methods to protect you against inflation are important.
• How folks often underestimate their nest egg needs because of not considering inflation.
• Talking about inflation in the context of an emergency fund.
• Tim offers some different ways you can slice the apple, depending on the scenario.

Highlights

“Inflation is a thing that it’s kind of like death and taxes, right? Typically, it follows economic progress.” — Tim Baker, CFP® [0:05:44]

“The average value of houses has risen by 58% just over – Since 2011, in the last 10 years. The Dow Jones has been up 147%, Nacre Farmland up 37%. But I think it doesn’t really hit us in the face until we’re at the grocery store.” — Tim Baker, CFP® [0:09:16]

“For people who are on fixed incomes, retirees, or are looking for something safe, [I bonds] are definitely something that you can look at.” — Tim Baker, CFP® [0:11:47]

“Methods to protect you against inflation are really important because you really want to protect your purchasing power on your dollars, which means not standing on the sidelines. It means invest it. It means thinking of things like I bonds .” — Tim Baker, CFP® [0:17:53]

Links Mentioned in Today’s Episode

• Join the YFP Tax Waitlist
• Investopedia: What is inflation?
• Your Financial Pharmacist Webinars
• Ask a YFP CFP® #93: Is it ok to have a portion of my emergency fund in electronic U.S. Treasury Savings Bonds?
• TreasuryDirect
• Series I Savings Bonds: End-Of-Year Strategies To Take Advantage Of The Current High Interest Rate
• YFP Planning: Financial Planning for Pharmacists
• Schedule a free Discovery Call with YFP Planning
• Your Financial Pharmacist Disclaimer and Disclosures

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here and thank you for listening to the YFP podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week, I had a chance to sit down with YFP Co-founder, Co-owner, and Director of Financial Planning, Tim Baker, to talk through two ‘i’s that you might be overlooking as it relates to your financial plan, that being inflation and I bonds, more formally known as series I savings bonds. During the interview, Tim and I discuss why inflation can sneak up on you and is an important yet often underestimated consideration for the financial plan, some strategies to combat inflation, and what I bonds are and how they are one tool to consider hedging against inflation. 

Now, before we jump into today’s episode, now that we have put the calendar on 2022, it’s time to think about tax season. I’m excited to share that YFP Tax can file taxes for an additional 125 pharmacist households this year. The team at YFP Tax isn’t focused on just completing your tax return. Instead, they provide value, care, and attention to you and your taxes. Because YFP Tax worked specifically with pharmacists, they’re familiar with aspects of your financial plan that have an impact on your taxes. The YFP Tax finally waitlist is now opened. If you’re interested in working with a team of highly trained tax professionals, I invite you to add your name to the waitlist by visiting yourfinancialpharmacist.com/tax. Again, that’s yourfinancialpharmacist.com/tax.

[EPISODE]

[00:01:31] TU: Tim Baker, Happy New Year. 

[00:01:33] TB: Yeah. Happy New Year, Tim. Hopefully, you had some good time off with the fam over the holiday. 

[00:01:37] TU: We did and really excited for 2022. We’ve got a lot of exciting content plan for the YFP community. Today, we’re going to be talking about inflation and I bonds. I know that the words inflation and bonds don’t really scream exciting topics, but we’re going to have some fun with this episode, and I’m confident our listeners are going to take away something valuable that hopefully they can apply to their financial plan. Our approach for today’s show is we’re going to talk about inflation first, and then I bonds as one strategy to hedge against inflation. 

Now, inflation, Tim Baker, something we haven’t really talked about in detail on the show, which I think is fitting because we’re a few hundred episodes in. If we think about inflation warnings, I think about is that we often hear that term. We think about it. We know it’s somewhere in the background. But it might not be front and center or something that’s top of mind as it relates to our financial plan. So we know it’s real, but it can be hard to put our finger on it, exactly what is inflation, what is the impact that it might be having to my financial plan. That’s something that I think hopefully folks will be thinking about, especially over the long run when we think about the impact that inflation can have. 

So, Tim, kick us off. What is it, inflation, and why is that term getting so much attention right now? 

[00:02:49] TB: Yeah. I’m going to steal Investopedia’s definition, and they define it as the inflation as the decline of purchasing power of a given currency over time. I think like for a lot of people, myself included, before kind of getting into financial services, I’m like, “What? What is this?” I kind of knew very high level what it means but I didn’t really connect the dots. I just thought, “Okay, like prices go up.” To date myself, I think when I started driving, gas was at like under a dollar, whenever that was, so 89 cents. I think that’s when my brother started driving, my older brother. 

[00:03:22] TU: That’s when we were in high school, Tim. 

[00:03:24] TB: Yeah. Then you think about where it’s at now. I think gas is very tightly controlled in a lot of ways because of one of those numbers that kind of hits us in the face every day when we’re going to work. So it really is reflected in the increase of the average price level of a basket of selected goods and services in the economy over like a period of time. We typically represent inflation as a percentage. So like when we do planning, we look at historical rates year over year, and most planners I think use a 3% inflation mark. Or right now, where inflation is, which is it’s been reported 6.8% there towards the end of the year, that’s not necessarily good enough. 

But over time, typically 3% is what we use as planners. What it means is that our currency, the dollar, effectively buys less than it did in prior periods. I’ll talk about inflation when we typically talk about investments because I’ll say for a lot of people that are more conservative in nature or just don’t really understand investments, they’ll say like, “Tim, do I have to? Do I have to invest? I don’t like the swings in the market and like the news and all that kind of stuff. So I’d rather just not if I could.” Again, this is the extreme example, and I’m like, “Yeah, you kind of have to.” Because if you’ve heard one of my webinars, I’ll invoke my dad who’s in his 70s, and we talk about back in his day, a nickel would buy the whole candy store. Now, it doesn’t buy anything.

We also kind of illustrate the point of that, that Starbucks coffee that costs $4.20. In 30 years, using historical rates of inflation of 3%, that same Starbucks latte is going to cost you 10 bucks in 30 years. So what we can’t do is stuff our mattress full of dollars and hope that we’re going to have enough at the end of the rainbow there. We’re not, and it’s because of those little inflation termites are going to eat away at the purchasing power of your money. So that’s really what’s at stake here. Typically, the financial services world will say, “Invest, invest.” That’s typically what we want to do to kind of keep in front of inflation. 

But here, what we’re going to talk about is more about what these I bonds are, and kind of follow that inflation and I bonds discussion. The idea here is that inflation is a thing that it’s kind of like death and taxes, right? Typically, it follows economic progress. Sometimes, it comes when there’s too much money in the system, which we’ve seen over the last couple of years of what the government is doing. So this can lead to an escalation of prices. This is – It’s important to understand, at least at a high level, and then that’s one of the reasons why we wanted to bring this up today. 

[00:06:08] TU: Yeah, and I think it’s something – The time is right, Tim, right? I’ve mentioned on the show before, I’m still that old guy that gets the Wall Street Journal in my house every day. Every day, it’s either front page –

[00:06:18] TB: Like the paper version?

[00:06:19] TU: The paper version. I like –

[00:06:20] TB: Wow, that is old school. Do you like shake your cane at the kids that run through your yard? I love it. 

[00:06:27] TU: I don’t know. There’s like – it might be from playing paperboy. Did you play that game growing up, Paperboy?

[00:06:31] TB: I did, yeah. That was cool. 

[00:06:32] TU: There’s like some feel good. It’s like when I hear the car go by in the morning, I hear the paper hit the driveway, so yeah. But inflation is front page, and it has been for several months now. I think we’re getting practical here, which is what we need to because I think inflation, and you mentioned kind of a concept of termites, is a really good example because you might go to the grocery store. Even in this time of period where we’re seeing six plus percent for those of us that aren’t that old yet, this is pretty big for us historically, right? We’ve heard our parents talk about double-digit inflation and so forth. But for us, this is significant and perhaps something new that we’re dealing with. 

But even on a $100, $200 purchase at the grocery store, you might not be like, “Oh, wow, that’s having a big impact.” But if we take a step back and extrapolate that across all of your expenses, it could be groceries, it could be households, it could be goods, it could be utilities, it can be cars that are being purchased, the list goes on and on, like and you’re spending X thousands of dollars per year, obviously that has a big impact that we need to be thinking about. If that continues to go on, we’ve got to have some strategies that can mitigate that over time. 

I think it’s really important as we think about some strategies. We’re going to talk about one of those today, which is the I bonds, more formally known as the series I savings bonds. Just a reminder, before we dig into this discussion, certainly this is not intended to be investment advice, right? We’re going to be talking about one vehicle. I think the strategy of inflation and mitigating inflation across the financial plan over several decades, of course, goes well beyond just considering series I savings bonds. So, again, not investment advice but I think one unique opportunity and tool. 

A shout out, this question actually came originally from an individual that attended a YFP investing webinar in 2021. We then addressed it briefly on Ask a YFP CFP, which we publish weekly, episode 93. The question at the time related to, “Is it okay to have a portion of my emergency fund in an electronic US Treasury savings bond, specifically in reference to the I bond?” What was interesting was at the time that question came in, the I bond combined rate, which we’ll talk about what that means, was 3.5%. Now, because of inflation and the discussion we just had, we’re seeing that rate now north of 7%. So, again, one vehicle, but something I think that’s worth considering might be something of interest to many that are listening. So, Tim, give us an overview of what I bonds are. Then we’ll talk about some of the pros, cons, and potential role that this may play in the financial plan.

[00:09:01] TB: Yeah, and just to address the point to piggyback on. Before I talk about the I bonds, there’s a piggyback on the idea of like why is inflation, outside of it going up a lot – I think that what’s happened over the decade is that – I think people have seen this, but then now we’re seeing it more tied to consumer goods. The average value of houses has risen by 58% just over – Since 2011, in the last 10 years. The Dow Jones has been up 147%, Nacre Farmland up 37%. But I think it doesn’t really hit us in the face until it’s like we’re at the grocery store or that type of thing. 

I think that’s why outside of the huge increase, and I think it’s leading to discussions about double-digit inflation and kind of returning. I looked up some numbers back in the early ‘80s, again to kind of when I was born. The interest or the inflation percentage was like 13.5%, and that was leading mortgages to go up as high as 17%. I think even higher than that. So think about that. Like I was kind of complaining when I bought my house in Baltimore. That was like 4.5%. I’m like, “Oh, man. This is so high.” Especially now it’s like 3%. So a lot of this is relative, and we’ve seen this has been cyclical. It was really high in the ‘70s and ‘80s. It was high, I think, in the ‘40s at one point. It was high like right before the Great Depression. That was kind of one of the causes there, so yeah. 

I think to talk about like how to mitigate this, which is, we talked about the I bonds, the tried and true is always talking about equities, stocks, like investment in stocks. Investment in real estate’s another thing. So to kind of preface that, and I would encourage everyone to kind of listen to the Ask a YFP episode because we kind of talked about even just setting it up and how that experience was, it’s really about going to the treasurydirect.gov, and you can buy them directly from the government that way. What we’re talking about here, the series I bond, not to be confused with the double E bonds. It’s really, again, I think what I said in the episode is kind of eye-popping where those were when I bought mine, which I think was like 3.5%. Now, the inflation component is like 7.12%.

The way it works is you buy the I bond. I think it’s every six months, the Treasury looks at the inflation rates, and they basically adjust that inflation component. So when you buy an I bond, there’s really two components. There’s the fixed component, which is at 0% and then the inflation component, which is at 7.12%, which I think holds until April of this year. Then those two things combined are your composite rate, and that’s basically compounded semi-annually. Right now, for these first six months, it’s going to be locked in at that 7.12%, and they’ll reassess, and it could go up, go down. It sounds like it could go up based on the news and things like that. It’s really a – in the episode, I kind of talk about tips, like where it basically follows inflation. It’s kind of the same thing. 

For people who are on fixed incomes, retirees, or are looking for something safe, these are definitely something that you can look at. We talked about it in the context of emergency fund. There’s tax advantages here. The big drawback to the I bond is the holding period. So basically, the reason that we were kind of not an advocate for using it for an emergency fund, especially as you’re building it, is that you cannot touch the dollars that you put in there for a year. So obviously, that’s not ideal for an emergency fund. But once you get beyond the year, you can touch it, but you’re penalized. So I think there’s like a three-month penalty of the interest that’s been accrued, and then you can get to it. Then after five years, you can essentially do what you want with it. But the rates are interesting because it’s really been the highest that they’ve been since I think May of 2000. 

Again, if you’re thinking like, “Man, I’m looking at my high-yield savings account, which is paying half a percent,” or a five-year CD is paying less than 1% or 1%, whatever they’re at today, this is an interesting way. I talked about it again, so I’m going to keep it simple like investments, high-yield savings account, not a lot of variation from that. But I think where everything is in terms of the state of rates and things like that, I think it’s a viable way or viable way to go. 

Some of the things that are interesting about I bonds, there’s just kind of some quirky rules. So like as an example, if Shane and I want to buy these bonds, we’re really limited to $10,000 each per year. Then you might say like, “Well, that’s quite a bit of money,” and I would agree. But if you’re looking at this as a major component of, say, your retirement portfolio, retirement paycheck, that might not necessarily be enough. 

But if you have children, you can also buy I bonds at the same rate per year for the kids that you have. Then the other thing that you can do, and, Tim, this might be something that we just often talk about, is you can buy them for entities. So we might be able to buy them for, say, the business entity, even though that we own the business entity and we have our own portfolio. That’s something that I think allows you to be a little bit flexible. Then the other thing is that the levels of which you can buy are basically set but outside of like if you were to use like a tax refund. So right now, we’re hitting tax season. If you’re thinking, “This sounds really interesting. Maybe I want to do this to kind of eke out a little bit more yield from what I’m doing and kind of my cash components of my wealth building,” you can actually use the refunds that you get from the IRS to purchase additional amounts of I bond. 

It’s something that, again, it’s tied to the consumer price index, which is very much related to inflation, that the US Treasury Department basically reviews and then adjusts the inflation component of the rate accordingly. So if you’re out there and you’re like, “Man, I do not like the rates that I’m currently getting in kind of my cash and cash-like investments,” this is definitely something to potentially look at, given what you’re looking at it for, your financial situation. Again, I wouldn’t necessarily do this if you have no cash component, but I look at it as a very viable way to kind of hedge against the inflation. Because just to talk in broader concepts, Tim, if you have a savings vehicle and you’re earning 1% on that savings vehicle, which is very generous right now, and inflation grows by 7%, which is kind of what it’s been trending to last couple months, you’re essentially 6% poorer. 

You might feel richer because you’re putting those dollars aside. That’s why a lot of people call inflation the worst tax because it kind of goes back to that idea of like it’s the termites that eat away your purchasing power. It’s that hidden ninja, that hidden assassin, that’s just really beating you down in the background. So these are things that, especially because of where it’s trending, just to be cognizant of. So you kind of talked about how powerful this can be. One of the things we do with clients, Tim, is go through the nest egg calculation of like, “Hey, you need $4 million to retire,” and that’s where a lot of people look at us, like we have 4 million heads, right? Because it’s a number that’s in the future that’s very large that tangibly I can’t really wrap my head around. 

What we say is, and I’m going off just an example here, if you make $125,000 as a pharmacist and say you’re 35 years old and you want to retire at age 65, that gives you 30 years left to work for the man, right? So you have 30 years of earning potential and you’re going to retire at 65. We’re going to assume that your wage is going to increase over time as well. We’ll say that for the purposes of this, we kind of do a wage replacement ratio of what you need to live off from 65 until basically the end of life. That allows us to get to that number of three, four million in that range. But that wage replacement ratio of, say, $125,000, if we discount that sum, we’d usually discount it by about 30%, and we’re planning for that 70% is what we need to live in retirement. That’s 80 cents. So 70% of $125,000 is $87,500. 

But in 30 years, when you are 65, no longer 35, use in historical rates of inflation 3%, that paycheck is not at $87,500. It’s grown because of inflation. So now it’s $212,000. So think about that. Right now, I’m saying if I were to retire right now at 35, I would need $87,000, and I’m making $125,000. I would need – If we discounted a little bit because typically we don’t plan for like saving for retirement while we’re in retirement, right now I would need $87,500. So that’s where I kind of talked through, Tim, you would come to me and you would say, “Tim, I need $87,500 for 2022 and then basically the next year, $87,500 for 2023, given some inflation.” But if we don’t retire and we wait until we’re 65, that $87,500, you’re going to basically hand out and say, “Where’s my retirement paycheck for $212,400, essentially?” 

If you think about it in those terms, you’re like, “Holy geez. $87,000 in 30 years is going to be $212,000.” That is why methods to protect you against inflation are really important because you really want to protect your purchasing power on your dollars, which means not standing on the sidelines. It means invest it. It means thinking of things like I bonds, etc. So I know very much tangential here, Tim, in terms of stream of thought in terms of this. But that’s what we’re essentially talking about when we talk about inflation and then kind of how I bonds can keep pace with that.

[00:18:19] TU: Yeah. I’m glad you went there, Tim, because I think this is something I’m sure you and the planning team see with clients. I’ve seen it over and over again when we do sessions with pharmacists on investing, right? We have them dust off that nest egg calculator. We punch in the numbers. They spit out a number, and like you can see that overwhelm look. 

[00:18:37] TB: Or crickets like, “What does that mean?”

[00:18:39] TU: Yeah. I think one of the things that the planning team does an awesome job of is when you’re thinking 30 to 40 years out, like it can feel like fake fuzzy math. I think it really has to be discounted back to what does this mean today. What does this mean today in terms of, here we’re talking about commodity inflation? But also, what does this mean today in terms of my savings plan, and really trusting the math, and trusting the process in terms of where we’re trying to go for long term? But that’s why when I say, “Hey, audience. How much do you think you’re going to need to have to save for retirement,” inevitably folks are underestimating what is the true need, right? Because they’re not thinking about it in terms of inflation and the impact of what future dollars are going to be needed. They’re thinking about it of, “Okay, I make $100,000 today. I’m going to retire in 30 years.” They’re not thinking about what might be the impact of what they’re going to need, if that income continues to rise. Obviously, the expenses rise with it accordingly. 

A separate conversation for a separate day, but I think one of the concerns that we need to be thinking about talking about pharmacy is, when I then go down that path in a presentation and have that discussion, people are like, “Man, is a pharmacist really going to be making $200,000 in 30 years,” whatever that would be. Obviously, that gets to supply and demand and rules and all those types of things. But certainly, we need to be thinking about what is the impact of this over many, many, many years over time. 

Tim, talk me off the ledge. Okay, so I’m looking at my Ally account. A couple years ago, we would have been better off storing some cash in a high-yield savings account when they were – Remind me. I think we were almost at 2% a couple years ago, weren’t we?

[00:20:14] TB: I remember Ally. I think it was like 2.35%. 

[00:20:18] TU: Yeah. So I’m looking at .5. 

[00:20:19] TB: I would twist my mustache every time, Tim. I would get the email saying, “Hey, your Ally interest rate has gone up.” Then when we just get those emails,” that like, “Your rate’s going down because rates have gone down.” But they’re kind of back on the rise, yeah. 

[00:20:31] TU: So I’m looking at 0.5%. At the time, obviously, we’re looking at the composite rate reminder. I bonds includes both a fixed component currently 0% and inflation component currently 7.12%. So that combined rate of 7.12% clearly beats 0.5%. But that was a very different scenario a couple years ago. If you look at what those rates were then, you would have been mathematically better off stashing your money in an Ally account. 

In this period of time where folks might be feeling that pressure of inflation, I want to talk about this in the context of an emergency fund specifically. So let’s say that, Tim, you personally, so this is not advice for anyone else. You personally, maybe you have a need of, I don’t know, $40,000 in emergency fund, %30,000, whatever the number is. As you’re kind of evaluating that, especially where you’re seeing this discrepancy of 6.5% or so, like how are you thinking through or questions you’re asking yourself about, “Hey, what might I keep right here? It’s liquid. It’s accessible. I can easily get to it when I need it.” Versus something I might put in an I bond, try to beat some of this inflation or keep pace of what is going, knowing that there’s these limitations? You talked about them in terms of within a year, no bueno. Within five years, we got to pay a few months penalty on the interest. So obviously, we lose some liquidity and accessibility. Tell me more about how you’d be thinking through that.

[00:21:49] TB: I value simplicity a lot. I think, for me, the numbers would have to really be I think telling for me to like kind of change up my, I guess, pattern of how I do things. So if you take an example, say we shave off $10,000 of that $30,000 or $40,000 dollar emergency fund, or say you have something that’s going to come up because the hard part about – investing long term I think is fairly easy. It’s when you start investing in the medium term or even the short term where it kind of gets funky because, again, the market. If you look at the S&P 500, I think like the worst year-over-year return in the market, it’s like down 37%. But then it’s been up 40% year over year. 

So when people say like, “Tim, what should I do with this money,” I’m like, “Just put it in a high yield. Don’t even mess with it.” If it’s like three or four years, that’s when you’re like, “Okay, is there a portfolio you can build out where you’re going to take some risk?” That’s a stock and bond portfolio that you’re taking some risk, but you’re kind of hedging in some bonds that can eke out more return than like what a high-yield or a CD can do. So if we take this example and we say, “Okay, there’s $10,000 there, whether it’s for an emergency fund or something that’s in the future,” if it’s a half of a percent that you’re getting from a high-yield, at the end of that year, you’re going to have not $10,000. You’re going to have $10,050. $51. Because of some of the compounding period, $52. 

But if you were to do the same thing right now with the I bond, the I bond would be worth $10,360 bucks. Now, I’m thinking. I’m like, “All right, do I want to do it for an extra $300?” For me, I don’t know. The answer might not be great enough. Maybe if it’s $100,000, which, again, I’m not putting $100,000 myself into an I bond, maybe that’s a different. So the thing is like, okay, so then if you say a year out, I need this money, but then you take the haircut on the interest penalty, it’s probably not worth it, right? But the further you go out, and that’s the case with any investment is typically the longer that you own it, the better it is. 

So I’m going to go back to my age-old saying, which it just depends. Again, if your emergency fund is not built, then I would say probably not. Get that level of cash, and then you can start looking at a deeper reserve or for something like if you know that you have something out, that’s two years out that you’re like, “Hey, we’re going to save for an investment property or for a wedding or something like that,” then this might be a good way to go. Because if you invest it, there’s a chance that you could have a negative return, which that is not here. This is backed by the full faith and credibility of the – even if we go into a deflationary period, where interest rates are negative, which that’s not the case, it’s still buoyed by the composite and even like past earnings that you’ve had at that 7.12%. 

It really depends, Tim. I think you have to figure out like the penalties, how long you’re going to hold it. For retirees, this might be a good component of even like a bond ladder or things like that. So people that know, “Hey, I’m 60 years old and I want to retire at 65,” this might be a component where you are building out the first couple years of your retirement paycheck that it makes sense. So there’s just a lot of different ways to kind of slice the apple here, and I think it just depends on your situation. But I think if you’re out there and you’re like, “I’d rather do this with my emergency fund than I’m building right now,” I would say pump your brakes because, again, I don’t want you to have to reach for the credit card, if something comes up, to kind of cover that emergency. 

Again, if we’re kind of trying to keep pace with inflation, this is something that kind of automatically does it for you that the Treasury sets. But it’s not going to get you – so the caveat to all these conversations, Tim, is that if you need three or four million when you retire, investing in I bonds is not going to do it, right? You have to have a stock portfolio that will get you there. Now, if you’re approaching retirement, a bond portfolio and a bond ladder or some type of SPIA or something like that that will kind of get you to where you have basic needs and can kind of also [inaudible 00:25:55] market and get some return is going to be important as well. So it just really depends on where you’re at, what you want to use it for, as is the case with everything. But if it’s something more near term or if you want to kind of – because I would even argue that a bond portfolio compared to an I bond, you’re probably going to be better in a bond portfolio even right now. So things ebb and flow as well. It just really depends on the situation, but there’s a lot of factors to consider.

[00:26:21] TU: I think there’s a lot of good stuff in there, Tim, though, and that was partly why I asked the question because I think sometimes I’m speaking here to my fellow hyper-analytical pharmacy nerds that are looking at the percentages. But it’s a good reminder. I think sometimes we see a savings account. We’re like, “Oh, .7 versus .2.” But do the math, right? I mean, if you’re looking at 10,000, I mean, even if inflation keeps at this rate, and we see the composite rate for two or three years, even if you max that out, like what is the true net difference, right? I’m not mitigating what a few hundred dollars 100 can mean. It’s important, but let’s not lose the big picture of what we’re trying to go or let’s also make sure we’re factoring in some of the downsides, considering the liquidity, the time periods, and things like that. 

Hopefully hitting home that there’s some value, there’s a role. But I think a tendency, when folks hear about something like this, myself included, is like, “I’m logging on to US TreasuryDirect. I’m buying right now,” right? Take a step back, pump the brakes, look at the math, look at the bigger picture, and I think that’s something obviously the planning team in the process can really help with as well. 

[00:27:24] TB: Yeah. I think it’s probably a good place for me to acknowledge because sometimes I beat up on people that will do things out of order a little bit where I’m like, “Well, we have a bunch of credit card debt but we have like $5,000 in like Robin Hood, kind of out of order.” I think sometimes that happens because of just curiosity, and this is kind of like what we did. We’re like, “Oh.” I’ve always kind of said, “Hey, keep it simple, high-yield, maybe CDs, that type of thing.” When this was brought forward, I obviously knew what I bonds were, but I was not necessarily paying attention to the rates because they’re typically very, very minimal because of where inflation has been. But we kind of went through that and experimented a little bit and like as we see kind of with people that do Robin Hood and don’t necessarily have the foundation set. 

I don’t think that’s a bad thing. Again, I don’t necessarily have my I bonds on my balance sheet right now because it’s just kind of something that is in the background. But I do think it is, I think, a viable vehicle to consider, kind of depending on where you’re at. Again, at the end of the day, I’m always going to go back and say work with your advisor and see if this is something that fits with you or your spouse and kind of get a sense of what that particular vehicle has a place in your wealth building in your portfolio. 

[00:28:32] TU: Yeah. I think is we say often, Tim and I know we talk about student loans. We often say, “Hey, payment plan decision, it’s the math plus, right? It’s the math, plus all these other factors.” I think it’s a good example of that here as well. I’m thinking about folks that might be hearing about this thing, about their emergency fund, looking at inflation and like, “Yeah, I’d love to do that.” But does something like having your money liquid and accessible to you, does that provide some peace of mind? Like don’t undervalue that, if that’s important to you and that idea that something might be tied up for a period of time. Is that worth it? Maybe yes, maybe no. I think that’s, again, a reminder of take a step back and look at how this can be considered as a part of the broader financial plan. 

[00:29:11] TB: Yeah. I think to that end, Tim, like when I logged into my account again today, there’s no like get-my-money-out button because I’m still under the one year. Again, like if that – thankfully, I have a pretty robust cash reserve, emergency fund, that if something does hit the fan, I can always tap into that. But if that’s not the case, I’m like – that’s just a number on the screen right now. I’m assuming after a year that kind of unlocks, and then kind of probably we’ll talk about penalties and things like that, interest penalties. But there is something very satisfying about, okay, like if there is. 

Again, like I’ll harken back to the beginning of the pandemic when it was a very nice reminder, if I can say this without sounding like a jerk. The pandemic was a reminder that when the markets and – it seemed like everything was falling. It’s why we have the emergency fund, right? Because the emergency fund is never – it’s just not fun to – for me, it’s fun to like, when we dip into it, to like replenish it. I’m kind of a nerd there. So like if it’s below the level, I’m like, “All right, I want to make sure that we pay attention to this, so it’s back to its regular level.” But when you’re building it, especially from scratch, it kind of just stinks. Like it’s good to make progress. But you kind of want to get to steps five and six and seven. But it’s kind of following that, “Let’s do one, two, and three first.” 

So this is where I think you can get in trouble because you don’t keep it simple, you do a little bit too much than what you need to do, and you can be burned by it. But I think sometimes we need those reminders to say like, “Okay, the emergency fund at the end of the day is not really to make you money. It’s to be there in case something happens.” But we try to put it in places that we can maximize the value because, again, that $20,000, $30,000, $40,000, whatever it is, that money that’s sitting there is going to buy you less in the future. So that’s another thing to consider as you’re looking at your cash level. 

[00:31:01] TU: Great stuff, Tim. I’m going to make sure in the show notes we link to a few things. One, the Ask a YFP CFP episode where we talked about this as well. That was episode 93 of Ask a YFP CFP. We’ll link to the treasurydirect.gov website. Folks, lots of great information on there about the series I savings bonds, rates, terms, tax considerations, and so forth. 

Then another thing I’m going to link to is, Michael Kitces has a blog called Nerd’s Eye View, and he had a blog out in December 8, 2021, series I savings bonds, some of the end of year consideration strategies. I thought there’s a lot of good information in there as well. We’ll link to that in the show notes. 

For folks that are hearing this and wondering, “Hey, how might this fit into the financial plan?” As well as other things that you’re working through, whether that be debt management, whether that be saving and investing for the future, insurance considerations, estate planning tax, and so forth, the team at YFP planning would love to have an opportunity to talk with you further to determine if our services are a good fit for your financial planning needs. You can learn more at yfpplanning.com. 

Thanks again for joining. Have a great rest your day.

[END OF EPISODE]

[00:32:02] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding material should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. 

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacists, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist podcast. Have a great rest of your week.

[END]

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