$tarrBuck Report for October 22, 2006: I-bonds: Beating Inflation One Dollar at a Time

                                                                                                        October 22, 2006

$tarrBuck Report for October 22, 2006:  I-bonds:  Beating Inflation One Dollar at a Time
by R. M. Starr

Your favorite uncle, Uncle Sam at the US Treasury, has a deal for you, inflation-indexed savings bonds, I-bonds.

What is an I-bond?
An I-bond is a kind of US Savings bond.  It’s a loan from you to the US government.  You can collect the money the government owes you anytime after 12 months from purchase (there is a 3-month interest penalty for cashing them in the first 5 years).    The bond earns interest regularly.  More important, the value of the bond is adjusted every six months for inflation.

How does inflation indexing work?
An I-bond pays you interest in two parts.  There’s an annual coupon rate (the guaranteed yield on the bond, currently at 1.4% annual rate paid semi-annually) and an inflation adjustment.   The inflation adjustment is currently at a 1% annual rate (falling gasoline prices don’t generate much inflation). Every six months the Treasury figures out how much inflation there has been over the last six months and increases the value of the bond by that percentage  (measured as the Consumer Price Index for urban consumers). The combined rate is now 2.41%, annual rate, paid in half portions and adjusted every six months.   Your I-bond’s purchasing power is always safe from inflation.

Where can I buy one?
Any bank can sell you an I-bond.   If you’d like a paperless I-bond you can buy it on the web from the Treasury, at http://www.treasurydirect.gov/

What about taxes on an I-bond?
I-bond earnings are state income tax-exempt.  You pay US income taxes on all of the yield on your I-bonds, both the coupon interest and inflation adjustment.  But you don’t have to pay your taxes right away.  You can defer income taxes on your I-bond earnings until you cash them in or they mature (30 years from purchase).  While the taxes are deferred, the value of the bonds grows as you earn interest on all of the accumulated interest from the past.  Financiers call this the miracle of compound interest.

What if inflation rates go up?
You’re covered.  Inflation-indexing means that you never lose purchasing power.   The dollar value of your I-bond goes up with inflation.

What if inflation rates go down, really down, deflation?
You’re covered.  Deflation is very rare — we haven’t seen it in the USA in 65 years.  But if it happens, big time, so that the combined coupon plus inflation rate on your I-bond is less than zero — the dollar value of your I-bonds stays fixed in place until the combined coupon plus inflation rate goes above zero again and your accumulation continues.

What if interest rates go down?
You’re covered!  Your coupon rate is locked in when you buy your I-bond.

What if interest rates go up?
Do the math.  The old coupon rate on your I-bonds was locked in when you bought them.   If interest rates have gone up a lot since then, maybe it makes sense to cash the old ones in, pay the taxes, and buy some new ones with their higher rate.

Where can I find out more?
One of the world’s great webpages, from the US Treasury: http://www.publicdebt.treas.gov/sav/sbiinvst.htm

(c) Copyright 2006 by R. M. Starr

$tarrBuck Report for October 15, 2006: Fund that Trust

October 15, 2006

$tarrBuck Report for October 15, 2006: Fund that Trust

Stacey: Hi Mom! Happy Weekend! How are you and Dad?

Marcia: We’re fine dear. Your father’s watching football on TV. He’s yelling himself hoarse. He seems to think if he yells loud enough at the TV, the players will hear him on the field. What have you and Richard been up to?

Stacey: That first year of med school is impossible. He’s never home except to sleep. He even studies in bed. No wonder doctors get divorced once they graduate; their wives haven’t seen them in years.

Marcia: Oh, darling! Does that mean you two really are getting married?

Stacey: No, it doesn’t mean that. But yes, definitely, we’re getting married. Didn’t I tell you? Before the end of the year. To qualify for filing income tax jointly. The tax savings are impressive!

Marcia: Dear, I don’t think taxes are really a good reason for getting married. I may be old-fashioned. I think of love, companionship, stability, family, children.

Stacey: Of course you’re right, Mom. It may not show, but Richard and I really are devoted to each other. Or we were before we each started putting in fifteen-hour days. And we would be again we had any time for each other. Junior associates at Dewey, Cheatham and Howe, LLP, have to haul a lot of water.

Marcia: So how are things in the law? Will you be appearing at the Supreme Court?

Stacey: Not soon, Mom. They’ve got me working on estates and trusts right now. Not usually Supreme Court material —- except for Anna Nicole Smith! Even if she lost, it took really good lawyers to get her case all the way to the Supremes. But the partners have promised to slot me in to mergers and acquisitions in January. That’s where the real money and big egos are.

Marcia: So what have you learned in estates and trusts?

Stacey: There’s a lot of clean-up to do on property and who gets what when somebody dies. Everyone knows that the right thing to do is to set up a living trust. You’d be surprised how many people set it up — signing the papers in our office and paying a big fee — and then never actually fund the trust. Once they die, it’s too late. The whole mess has to go through probate. It takes time, money; it’s annoying. You and Dad did the right thing, setting up your living trust almost ten years ago.

Marcia: Yes indeed. And we funded it too. Right away, we set up a bank account for the trust and deposited $1000.

Stacey: $1000! Mom, you didn’t just say “$1000,” did you?

Marcia: Yes, dear. It was the right thing to do.

Stacey: Mom. What about the house, and your investments at Charles Shaw Brokerage?

Marcia: They’re fine dear. The house is always going up in value. Maybe not so much right now. And your father does love to buy and sell at Shaw. It’s a discount broker you know.

Stacey: Don’t change the subject. Yes I know Shaw is a discount broker. But you’ve got the house and the brokerage account in your own names.

Marcia: Well yes, dear. They’re ours after all. Someday of course they’ll be yours and Junior’s.

Stacey: Mom, please, let’s go over that once again. The whole point of the living trust is that you’re supposed to put the house and your investments in the trust’s name. You and Dad are the trustees and beneficiaries. But the living trust has to be the owner. That’s what simplifies things and saves money when one of you dies.

Marcia: But that seems so morbid. Your father doesn’t really like to think about things like that. And the paperwork — it really is discouraging.

Stacey: Mom. Trust me. It’s worth it. Phone up your broker at Charles Shaw. They’ll just send you a form to sign. Who drew up the trust? It was Norman Weiss, wasn’t it, your old family lawyer? Ask his office to put the house in the trust’s name. They should have done that to start with. I can’t imagine why they left that to you.

Marcia: I’m sure you’re right dear. OK. I’ll remind your father. No, on second thought I’ll phone Charles Shaw and Norman. I’ll just let Daddy sign when the paperwork comes in.

Stacey: Bye Mom. Say ‘hi’ to Daddy for me when the game is done.

A living trust is a good idea. It saves time. Probate fees. Maintains continuous control of the family assets. But it only works if you fund it. It’s a very common mistake. Setting up the trust, but forgetting to put the family assets into the trust, by changing the title. There are a lot of different pieces of property and there’s a mess of routine paperwork. Don’t make that mistake. By the time you die, it’s too late to correct it. Then your heirs have to go through the expense and delay of probating your assets.

(c) Copyright 2006 by R. M. Starr