What To Do With Savings Bonds
Both my in-laws and my wife’s grandmother have a propensity to give our children savings bonds a couple times a year, usually around their birthdays and Christmas. I thought I was doing a good thing when I talked my in-laws into giving I bonds rather than EE bonds, but we could never dissuade Grandma from giving EE bonds. I preferred I bonds because the interest rate is sensitive to inflation and should provide better returns than EE bonds.
Last week I entered every bond serial number into TreasuryDirect to find out how much interest the bonds are earning. The result was very disappointing. My son has 15 bonds earning an average of 3.90% while my daughter has seven bonds earning an average of 3.52%. Bonds earn interest for 30 years, though at these rates it doesn’t take 30 years for the EE bonds to reach their face value (paper EE bonds are sold at half their face value, so a $100 bond is purchased for $50). Needless to say we can beat these rates with a number of online savings accounts. The I bonds actually have a lower current interest rate than many of the EE bonds.
Next I did an analysis of the S&P 500 for the past 17 years and the past 4 years. I did the past 4 years since my son is 4 and he got his first savings bond when he was born. I did the past 17 years because he’ll be 21 in 17 years. Over the past four years the S&P 500 has had an average annual growth rate over 13%. Over the past 17 years that growth rate falls to over 10%. In either case, it blows away the piddly interest rates the savings bonds are earning.
Since I can’t stand to have money laying around doing essentially nothing, I’ve decided to cash in these bonds and put the money in an S&P 500 ETF, specifically SPY. To do this I’ll open a UGMA (Uniform Gifts to Minors Act) custodial account at Charles Schwab for each child (I chose Schwab because they have a $100 minimum initial deposit). I’ll cash in what bonds we can and put the money in those accounts. Since you can’t cash in a bond within a year of purchase I’ll kick in whatever cash is needed to “buy” the recently purchased bonds from my kids so they can get the benefit of all the money working for them right away. The only major drawback to this is that I’ll lose the last 3 months worth of interest on all the bonds, since they’re less than five years old.
The next step is to stop the bonds from coming. I’ll make deposits into the custodial account available to anyone that wants to give the kids money outside their 529 college accounts. Hopefully I can find a way to do this without hurting any feelings.
By taking this move I should provide my kids with far more money when they hit 21 than the bonds alone would provide. By that age the bonds should about be at their face value if we leave them alone. If the S&P 500 continues to have a 10% annual growth rate, the account value of the custodial accounts will be four times the face value of the bonds.