IRA vs EE Bond

April 22, 2022 8:42 AM

I am behind, but starting to get serious about retirement planning. I'm not mathematically inclined but online calculators seem to be saying that EE-bonds would pay out more than an IRA? Is this right?

I am a 39 year old single woman with no children, and will need to support myself through retirement.

I had been planning to start maxing out an IRA account ($500/month). Using retirement calculators, I think that will lead to $500-800/month payments back to me during retirement.

I learned about EE bonds in a recent ask comment. It looks like I could contribute $500/month to an EE-bond and get back $1,000/month in retirement.

It seems like EE-bonds would be a better investment than an IRA to me? Are my calculations off?

posted by anonymous to Work & Money (12 answers total)

An IRA is not a specific investment. Funds in an IRA can be invested in all kinds of different ways - you could buy 100% Tesla stock, or keep it all in cash (neither of these are a good idea!). A EE bond is a specific investment.

This is an apples-to-oranges calculation.
posted by mskyle at 9:05 AM on April 22, 2022 [5 favorites]

Sorry, but no. There's not really any free lunch when it comes to investments. A guaranteed annual return of 3.5% (which is what doubling in 20 years would imply) is pretty good, but it's probably not going to beat a typical target date fund which invests in a diversified array of stocks and bonds. I would guess the latter would return about twice the EE bonds, and that difference would be compounded over time, so probably closer to 4x depending on your time horizon. So yes, you could make the investment, but you're probably giving up 75% of the return. I believe there's a mistake in the math that's being used in the previous post. Set up auto-investment in the IRA, put it all the Vanguard Target Date fund that matches your retirement date, and don't ever check it. If you want a more conservative investment that won't be as volatile, you can shave some years off the date. So if you're planning on retiring in 2050, you could invest in the 2040 fund instead. But the key is automatic investment and not checking the portfolio. You've got a lot of time, the best way is to invest something and let the time do the work for you.
posted by wnissen at 9:09 AM on April 22, 2022 [8 favorites]

$6000 a year for 20 years (assuming you haven't started yet) = $120k invested. Rule of 72 tells how long it will take to double in value, given a percentage, so 7% will take 72/9 = 8 years to double. 72/3% = 24 years, etc.

Assuming you get 7% a year in your IRA invested in a stock market fund, you will have approximately 3X the amount you put in in total - $360k in 20 years. The 4% safe withdrawl rate (where your $360k remains or slightly decreases is what the safe withdrawl rate tries to accomplish) means you will get $360*.04 = $14k, or a bit more than $1000 a month.
That's at age 60.

You can adjust this all up if you are retiring in 25-30 years or longer.
32 years = $180k invested at 7% doubling 4 times = $720k. = $28k a year.
posted by The_Vegetables at 10:11 AM on April 22, 2022

Bonds are great for people who already have a lot of money (because that 3.5% is pretty close to being guaranteed, where as stock market growth is not), or who are extremely risk averse. For most others they are not great.
posted by The_Vegetables at 10:14 AM on April 22, 2022 [2 favorites]

Even if the bonds were to double in that timeframe, the monthly income is not double your purchases. Which is to say if were to invest $1000 in a bond paying 5% (which is very overstated) that doubles in value to $2000 and rates stay the same, you’d go from making $5 per year to $10 per year.

The $500 you invest is the corpus, not the income you’d receive.
posted by Admiral Haddock at 10:56 AM on April 22, 2022

The $500 you invest is the corpus, not the income you’d receive.

OP is talking specifically about federal government series EE bonds, which are guaranteed to double their face value over 20 years (like a 3.5% zero-coupon). In theory, if you bought a $500 bond every month for 20 years, then you could cash out a bond for $1000 a month for the next 20 years (and no more). The problem, of course, is that even if inflation is only 2.5% a year, that $1000 will at that point only be worth about $600 in actual value.

OP, you are missing some elementary principles here, and I would strongly recommend you not put any money anywhere besides a savings account until you have time to read up. Hopefully someone here has the time to assemble some links for you.
posted by praemunire at 1:20 PM on April 22, 2022 [2 favorites]

Reddit personal finance wiki is probably the best single link I know of on the topic. There's a shitload of information and it's all worth your time.

https://www.reddit.com/r/personalfinance/wiki/index/

Start here.

https://www.reddit.com/r/personalfinance/wiki/commontopics/
posted by disconnect at 2:22 PM on April 22, 2022

People in their 60s should perhaps include bonds as part of their portfolio. People approaching 40, in my view, should not.
posted by yclipse at 3:32 PM on April 22, 2022 [2 favorites]

I made the comment on ee bonds and am glad this discussion is happening because like OP I also need some education on elementary principles, as it sucks to be me and my IRA money in Vanguard funds has had an average growth over the past 10 years of 4%. But I admit to moving money around different funds and did not stick to the target date fund orthodoxy. All my 2020 growth is now gone.

So I'm halfway to 20 years. $500 invested 10 years ago in my Vanguard funds is now worth an additional 4%. Inflation adjusted it appears I've lost money.

I'm not advocating for putting it all in bonds. I just would like to have a guaranteed income in retirement and the past ten years has not given me much hope.
posted by jello at 7:19 PM on April 22, 2022

It's hard to go wrong maxing out tax advantaged accounts (like an IRA) and putting the money in those accounts into a low cost target-date fund like Vanguard's target funds. There's nothing wrong with EE bonds, but they are extremely conservative and therefore unlikely to return as much over time as compared to a target-date fund. In general, the safer the investment the lower the return. EE bonds are as safe as it gets.
posted by Mid at 4:46 PM on April 24, 2022 [2 favorites]

$500 invested 10 years ago in my Vanguard funds is now worth an additional 4%. Inflation adjusted it appears I've lost money.

Pick and investment and stick with it. That's why it's called buy and hold. VTSMX was up 20+% in 2020 and 2021. It's slightly down in 2022, all the way back to Oct 2021 prices. That's what Vanguard funds are for - to buy and hold for 30+ years. The target ones adjust your holdings with age so you don't even have to do that.
posted by The_Vegetables at 11:52 AM on April 25, 2022 [1 favorite]

Jello, 4% annual or 4% total? Let's look at $500 invested in the Vanguard Target 2045 fund, which is for people who plan to retire in about 25 years. It would have returned almost 11% per year, annually, over the last 10 years. So $500 would be about $1300, before inflation. Unfortunately, our human instincts to get into the stock market when things are going well and get out when they are going badly are exactly the opposite of what you need to buy low and sell high. As Warren Buffet says, be greedy when others are fearful, and fearful when others are greedy. Vanguard did a study and the investment "strategy" with the highest average return for individual investors was not to touch their investments. Zero changes was the best. Emotionally, it is very difficult to see one's hard-earned money evaporating on a bad day in the market, so I highly recommend not checking your accounts. This is the opposite of what some companies, like Fidelity, seem to encourage, with their manic account screen streaming stock prices and news at your from all directions. Set up automatic payments into the fund and then don't look at it.
posted by wnissen at 2:45 PM on April 25, 2022 [2 favorites]