What is a Savings Bond?

If the volatility in the stock market makes you anxious, you need to look for other investment options. With several assets in the market, it isn’t easy to pick an investment asset that offers the right balance of risk and reward for your financial journey. If you are a low-risk investor, you might have heard about the safety of savings bonds. 

They can be a secure place to store money, especially during inflationary periods. However, the low risk will also come with low returns. So, how do you decide whether it is the right choice for you? 

Whether you are building your retirement portfolio or just looking for a way to invest with minimal risk, use this guide if you want to know more about savings bonds. 

How Do Savings Bonds Work?

The U.S. government backs U.S. savings bonds. Whenever you buy a bond, you lend the government money. It works like a loan where you earn interest and there’s a fixed maturity period between 20 to 30 years. Bonds are available in denominations as small as $25, making it easier for people to invest. They are non-transferable and cannot be resold in the secondary market or purchased from third-party brokers. 

You have two options: You can invest in a bond that doubles your money after 20 years or one with an interest rate that will protect you against inflation. At the time of redemption, you receive the full bond value plus any earned interest.

Types of Savings Bonds

Savings bonds are one of the most secure and low-risk investment options. They can be used to grow your savings over time while you earn interest. This is what makes them an ideal choice for new investors who seek low-risk and reliable long-term savings. There are two types of savings bonds available, each catering to different financial goals. Understanding these categories will help you consider the right bond based on your financial strategy. We highlight their benefits and purposes below. 

Series EE Savings Bond

A Series EE savings bond or EE bond has a term of 30 years and accrues a fixed rate of interest each month. Twice a year, the interest earned is added to the bond’s principal value. These bonds are guaranteed to double in value if you hold them for 20 years. Irrespective of the interest earned, EE bonds will get a bump in value once it has hit the 20-year mark. After 20 years, the interest rate might change for the remainder of the term. 

Series I Savings Bond

Series I savings bonds (I bond) are the best way to protect your investment against inflation. The interest rate on this bond is a fixed rate plus a rate that will change with inflation. It is adjusted for inflation every six months and the interest earned will be added to the principal value of the bond. 

The primary difference between both the bonds is that an EE bond guarantees to double your investment after 20 years while the I bond protects your money from inflation.

Benefits of Investing in Savings Bonds

Since the government backs savings bonds, they are a secure way to grow your money. Unlike equities or other volatile investments, savings bonds carry a predictable rate of return which offers financial stability. That said, they come with tax advantages, appealing to all investors. 

Safety and Security

Savings bonds are a highly secure investment option. They are backed by the government and have a government guarantee on the principal and interest. This will protect your money from market fluctuations. They are an ideal choice for beginners, conservative investors and those who are nearing retirement and want to secure their capital. Your investment remains secure from the risks of high-yield, market-based assets. 

Steady, Tax-Deferred Growth

Savings bonds offer a financial benefit through tax-deferred growth. Your interest earned on the bonds will not be reported or taxed until the bond is redeemed. This will allow the investment to compound over time without any tax consequences. You can use savings bonds to fund your child’s education or to prepare for retirement. The interest will continue to grow undistributed and your overall return will be higher. 

Low Entry Cost and Accessibility

Since savings bonds have a low minimum investment requirement, they are accessible to many income levels. It will allow all investors, from beginners to professionals, to easily access the bonds. They can be bought and managed online through government websites. It is a straightforward investment for those who prefer a “set-it-and-forget-it" strategy. Savings bonds do not need constant monitoring, technical knowledge or specialized skills.

Limitations and Considerations

Before making any investment, it is important to acknowledge the limitations and considerations. Here, we look at the limitations of savings bonds.

Lower Returns

Savings bonds are known for their safety, they will keep your money secure for a predetermined period of time. However, this safety results in lower returns. They offer lower interest rates as compared to other volatile investment assets like real estate, stocks or mutual funds. They might struggle to keep up with inflation over a long period. If you are focused on wealth accumulation, the returns on savings bonds could seem limited and might not appeal to you. If you have a higher risk tolerance, you might not be satisfied with the interest offered by savings bonds. 

Limited Liquidity and Holding Period Requirements

Savings bonds offer limited liquidity and come with a fixed holding period. For example, the U.S. Series I bonds must be held for a minimum of one year. And if you cash out before five years, you will have to pay a penalty. This could mean losing a few months’ worth of interest. Such restrictions work as a disadvantage for investors who seek liquidity. If you prefer flexibility and want access to your money at any time, savings bonds aren’t for you. It is only suitable for those with a long investment horizon. 

Interest Rate and Inflation Risk

Inflation and interest rates affect the returns from savings bonds. While Series I bonds adjust for inflation, others have fixed or semi-fixed rates. These fixed rates may not keep pace during high inflation periods. When inflation rises, the purchasing power of savings bond returns can drop. This reduces their real value over time. In high-inflation environments, the conservative nature of savings bonds may be a disadvantage. Investors may find that their returns do not keep up with the cost of living. 

How to Purchase Savings Bonds

Saving bonds can be purchased directly from the U.S. government. You can also buy paper bonds. Here’s a step-by-step guide to purchasing electronic bonds. 

1. Visit TreasuryDirect.gov.
2. Click the log-in button if you already have an account. If not, choose the option to open a new account.
3. Select the type of account you would like to open.
4. Enter your personal information, including your Social Security number, e-mail address and banking information. 
5. Set your password and security questions.
6. After you have logged in and verified your account, select the Buy Direct option.
7. Choose between EE or I bonds and the amount you want to buy.
8. Select “Buy” to complete your purchase.

How to Redeem Savings Bonds

If you redeem the savings bond held until maturity, you will receive the face value plus any interest earned. But if you cash in the bond before maturity, you’ll receive the principal amount and the earnings. You can redeem Series EE or Series I bonds once you have held them for one year. However, you will be penalized three months of interest when the redemption is done in less than five years. 

There are different steps you need to take for redemption of the bond depending on whether it is electronic or paper.

Electronic bonds: To redeem a bond purchased online, log in to your TreasuryDirect account and use the Manage Direct link to cash your securities. Here are a few things to keep in mind when redeeming savings bonds online:

• You can cash any amount of $25 or more.
• When cashing only part of what the bond is worth, you must leave at least $25 in your account. Plus, you only receive interest on the portion you cashed. 

Paper bonds: You may only redeem a paper savings bond for its entire value, so you cannot cash out just part of a paper bond. You can redeem a paper EE or I savings bond at your local bank or credit union.

You may also mail in a request to the Department of Treasury to cash a paper savings bond. Complete Form 1522 and mail this along with the bonds to Treasury Retail Securities Services.

Best Brokers for Purchasing Savings Bonds

Savings bonds can be a valuable addition to your investment portfolio. Find the best broker for purchasing savings bonds below. 

• Fidelity: Ideal for low-cost bond investing, Fidelity is easy to use and offers access to more than 75,000 fixed-income securities. No matter where you are in your investment journey, Fidelity will make the process easier for you.
• Charles Schwab: A popular name in the investing space, Charles Schwab has zero commission and offers access to over 60,000 bonds. It also offers in-person assistance, a rare but valuable service in today’s times.
• E*Trade: A user-friendly platform, E*Trade has access to over 50,000 bonds. It is ideal for investors who want to build a bond ladder and are looking for low-fee options.
• Interactive Brokers: When it comes to bond options, nothing can beat Interactive Brokers. It offers access to global fixed-income access with more than 1 million bonds. Interactive Brokers offer real-time pricing and the commission is as low as $1 per trade. 

Frequently Asked Questions