If I buy a $100 EE Savings bond today which takes 20 years to mature…how does that compare to a today’s CDs or IRA accounts? If it matters, let’s say this is savings for a newborn’s college fund.
Which is the better deal? My wife and I suspect EE bonds take too long to mature and are a waste. Is our suspicion valid?
In a rising interest rate environment, you want an investment that is going to keep pace with interest rates, otherwise inflation will eat all your returns over time.
EE bonds issue Nov 1 2005 will earn a fixed interest rate of 3.61% for a term of 30 years (new rates coming out soon), compounded semiannually, exempt from state and local (but not federal) income taxes.
A 12-month CD at ING direct will get you 4.6% APY, and after 12 months you have a shot at re-investing that money at next year’s interest rate, which is all but guaranteed to be higher.
You didn’t ask about I bonds but you may want to check into these. They offer a certain amount of interest rate variability with protection of the principal. The things to keep in mind with I-bonds is there is no guarantee that they will reach maturity in 20 years, as there is with EE-bonds, and your interest rate accrual could drop to zero in a deflationary environment.
I personally don’t mind a bit of risk, so I tend to keep most of my cash reserves in CD’s and some in I-bonds. I don’t go for EE’s at all because right now I don’t think interest rates and inflation are going to do anything but increase for the next 20 years.
Bus Wizard
WAG Ooops, wrong BUS.
Seriously a CD is more flexible and you can take advantage of change of rates depending on time to maturity.
A EE bond is locked up for 20 years which is too long to suit me.
The rate is fixed for 20 years, but you may cash out your bond at any time after the first year. If you do so within the first 5 years, you will lose the last 3 months of interest.
(See http://www.treasurydirect.gov/indiv/products/eebonds_glance.htm)
So you can cash out a bond for a higher rate investment at some point in the future if it makes sense.
It’s also important to note that interest earned on savings bonds is usually tax exempt if used for education purposes, and taxes on other investments probably will not be. In addition, any taxes due on savings bonds will be due when you cash the bond in, as opposed to CDs, etc, where the interest will be taxable each year.
The tax implications, in addition to your appetite for risk in changing interest rates, will determine which choice is best for you. You may also consider looking into state 529 and pre-paid tuition plans if you are considering an education fund.