Solid, Stable & Safe retirement vehicle - US Savings EE bonds

Popular tax deferral retirement saving options recommended by many experts are Traditional IRA accounts or 401(K) accounts. Both these accounts offer investing in stocks, bonds, precious metals, real estate etc. All these investing choices carry a risk of no guaranteed return. They may provide great returns during bull market and negative returns during bear market. US Savings EE Bonds are your best bet if you are looking for solid, stable and totally safe investment option with a guaranteed tax deferred return. Of course there are catches and limitations as well and I will explain below.

US Savings EE Bonds (electronic only) can be purchased by any individual with SSN or Tax identification number. They are totally safe because these bonds are backed by none other than US Government and sold by US Treasury Department. The maximum amount a person can purchase is $10000 per year. These bonds carry a 0.1% fixed interest rate (as of this writing) and they continue to earn interest for up to 30 years. 0.1% interest doesn't excite us much but read below statement from US Treasury Department:

Electronic bonds are sold at face value (not half of face value). They start to earn interest right away on the full face value. Treasury guarantees that for an electronic EE Bond with a June 2003 or later issue date, after 20 years, the redemption (cash-in) value will be at least twice the purchase price of the bond.  If the redemption (cash-in) value is not at least twice the purchase price of the electronic bond as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20 year anniversary of the bond's issue date to make up the difference.

Source: www.treasurydirect.gov (US Treasury Department)

This means $10000 purchased today will become $20000 in 20 years. If you calculate the rate of return it is little over 3.5% interest rate. But if you withdraw money before a 20 year period you will recieve only advertised 0.1% interest rate. Lets take an example for better understanding.

You and your spouse purchase $20000 EE bonds in year 2015 (remember the $10000 limit per year is per head) and decide not to withdraw for 20 years. After 20 years, in year 2035, you can withdraw $40000. Lets say you repeat $20000 purchase every year for next 20 years starting year 2015, you can withdraw $40000 every year from year 2035 till 2055. Like 401Ks the interest you receive is federal tax deferred (meaning taxes are due during withdrawal). Unlike 401Ks the interest on US EE bonds is not subject to state or local income taxes.

Consider following to compare EE bonds with 401K and decide if EE bonds are right choice for you?

- Do you have flexibility to lock your money for 20+ years (like you do in 401Ks)?

- Do you have at least 20 years of service left before you reach retirement age?

- Do you prefer solid, stable, safe and guaranteed return?

- Are you satisfied with relatively low rate of return (3.5%) without any risk?

If your answers to all the above are YES, US Savings EE bonds are for you. US Treasury Department offers another variety of bonds named I-bonds. The interest on these bonds is based on rate of inflation. Historically rate of inflation has averaged below 3%. If you believe that inflation rate will average over 3.5% in future, you should consider US Savings I bonds over EE bonds.

Disclosure: As of this writing I do not own any US Savings EE bonds. For more and detailed information on US Savings Bonds please visit www.treasurydirect.gov

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