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The www.FedPrimeRate.com Personal Finance Blog and Magazine

Saturday, September 24, 2016

U.S. Treasury Series EE Savings Bonds Will Double Your Money In 20 Years, Guaranteed

Series EE U.S. Treasury Savings Bonds
Series EE Treasury Savings Bonds
A great article by Jason Zweig of The Wall Street Journal:
If someone offered you a guaranteed 3.5% return for 20 years, you’d probably be tempted either to sign up right away or call the cops to arrest the guy for securities fraud.

But the guy offering this deal is Uncle Sam, and you should neither barge in nor run away screaming. You should look closer, because this offer from the U.S. Treasury is legitimate and highly attractive, although it isn’t right for everyone.

The government guarantees that if you hold Series EE savings bonds for 20 years, you will get back twice the amount of money you put in. That translates to a return averaging a whisker more than 3.5% annually. A 20-year U.S. Treasury bond, meanwhile, yields about 2.1%.

In today’s yield-starved world, a 3.5% return sounds almost like manna from heaven. Is there a catch? Of course there is — several, in fact.

First, and worst, that 3.5% return isn’t protected against inflation. And you will earn that rate only if you hold on for the full 20 years; until then, interest accrues only at the current rate of 0.1% annually.

So the savings bond is comparable to a zero-coupon bond, which pays no current income but distributes all its accrued interest in a lump sum when it matures.

You can redeem, or cash out, only through the U.S. Department of the Treasury’s TreasuryDirect.gov website. You generally can’t redeem savings bonds the first year you own them and, if you cash out within the first five years, you will forfeit the last three months of interest. (That’s not much of a penalty at this point, though, at 0.025%.)

Finally, interest rates could take off between now and 2036, making that 3.5% look a lot less appealing.

You can’t use savings bonds for all your fixed-income needs, because they aren’t liquid or inflation-protected. And you can invest only $10,000 in EE savings bonds per Social Security number each year; if you’re married, you and your spouse together can buy $20,000. For wealthy investors, that is chicken feed.

But savings bonds can still make a powerful addition to a portfolio.

“I think this is one place where a small investor has a big advantage over the institutions,” says Robert Axelrod, a 42-year-old psychiatrist in Longview, Wash., who has been investing in the bonds for the past three years.

To get a 3.5% yield, an institutional investor has to buy bonds that aren’t issued by the U.S. Treasury — and to incur the risk of not getting paid back, the risk of severe loss if interest rates go up, or both.

For an individual, says Dr. Axelrod, the rate on EE savings bonds is “so much better than anything else out there, pretty much risk-free, that it’s unbeatable.”

The savings bonds are “roll-your-own annuities,” says Mel Lindauer, a private investor in Daytona Beach Shores, Fla., who moderates Bogleheads.org, a non-profit website that provides investment education and analysis.

Better yet, they are annuities that come without any worry that the issuer could go bust or that your heirs won’t inherit the money. And after year five, you can redeem without penalty.

David Loeb, a nurse in St. Louis, puts $6,000 annually into EE savings bonds. He knows that will turn into $12,000 two decades later, supplementing his Social Security and the pension he will get from the hospital where he works.

“I like the idea of using it to cover a small portion of my future needs,” he says, “and it helps me stomach the fears elsewhere.”

An ideal use, says Mr. Lindauer, is to help you to defer taking Social Security. A rule of thumb is that each year you delay retirement and the onset of your Social Security payments will increase your benefits by 8%. If you buy a $10,000 savings bond each year starting at age 42, you assure yourself $20,000 in annual income beginning at age 62. That can help tide you over until you reach 70, when Social Security payments max out.

Furthermore, you may use EE savings bonds to pay for higher-education costs, tax-free, if you earn no more than the limits then in force, currently about $92,000 if you’re single and $145,000 if you’re married. Be sure the bond is registered in one or both of the parents’ names, not the child’s name. It can pay for college costs only in the same tax year in which it is redeemed.

You can elect to pay tax on the accrued income as you go, but many investors wait until it’s distributed at maturity 20 years after purchase.

The income is free of state and local income tax, although it is federally taxable at ordinary income rates.

“There ain’t no such thing as a free lunch,” the old saying goes. The 3.5% return on EE savings bonds “might not be a free lunch,” says Mr. Lindauer, “but it’s at least dessert.”

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Saturday, September 10, 2016

Mortgage Rates Continued Near Record Lows Last Month

The average yield on the benchmark, 10-Year, U.S. Treasury Note was 1.56% last month, which has contributed much to keeping mortgage rates near record lows.

For August 2016, the average rate on conforming, fixed-rate mortgage (FRM) loans were:

  • 15-year, fixed-rate: 2.75%
  • 30-year, fixed-rate: 3.44% 

Mortgage Rates History
Mortgage Rates History

The all-time, record-low average monthly FRM rates were set back in November and December of 2012:

  • 2.66% for a 15-year FRM
  • 3.35% for a 30-year FRM.

Chart: Prime Rate versus 15- and 30-Year Mortgage Rates versus U.S. 10-Year Treasury Yield
Chart: Prime Rate versus 15- and 30-Year Mortgage Rates versus U.S. 10-Year Treasury Yield

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Wednesday, August 31, 2016

Ronald Gerald Wayne Had A 10% Stake In Apple, And Gave It Up For $800

First Apple Computer Logo, 1976
First Apple Computer Logo, 1976
Ronald Gerald Wayne is the co-founder of Apple Computer nobody talks about.

He had a 10% stake in Apple Computer back in 1976, and relinquished this equity for $800.

Had he stayed in, his stake in Apple would be worth billions today.



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Sunday, August 28, 2016

12-Week Coding Boot Camps Yield 100K+ Starting Salaries

Why go to college, and take on serious debt which may burden you and your family for countless years, when you can participate in a 12-week, computer programming boot camp, and earn a starting salary of $100,000+?

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Saturday, August 20, 2016

Six Million American Homeowners are Still Underwater

Nightly Business Report: 6 million homeowners still owe more on their mortgage than their home is worth (negative equity.)

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Friday, June 17, 2016

Wells Fargo: Many Potential Buyers Are Misinformed About Mortgages

From this short, NBR video segment: three mortgage myths:

  1. Must have a 20% down payment
  2. Must have high income
  3. Must have perfect credit

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Sunday, June 12, 2016

Federal Reserve Report: Household Net Worth Sets New Record-High

According to the Federal Reserve's recent Financial Accounts report, in terms of both current and inflation-adjusted dollars, Americans households were at their wealthiest ever, during the first quarter of 2016.

Q1, 2016: $88.087 trillion


2015: $87.25 trillion

2014: $84.201 trillion

2013: $79.383 trillion

2012: $69.598 trillion

2011: $63.545 trillion

2010: $62.316 trillion

2009: $58.094 trillion

  • 2008:  $56.214 trillion

2007:  $66.577 trillion

2006:  $66.095 trillion


So, from the painful days of the 2008 banking crisis and start of the Great Recession, to the first quarter of 2016, household wealth has increased by $31.873 trillion (56.7%.)


Household Net Worth
Household Net Worth


The Fed' next Financial Accounts report will be released on September 16, 2016.  Stay tuned for the updated figures...

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