Series I Savings Bonds guaranteed by the U.S. government (aka I bonds) are currently earning 7.12% annual interest. This is great news for middle-income retirees who may have recently watched the interest income from their CDs and savings accounts dwindle to just a few pennies.


For pre-retirees and retirees building their retirement income portfolio, the high interest rates, the guarantees of principal and interest, and the liquidity of I bonds present strategic planning opportunities. I bonds can be particularly effective for funding expenses in the next five to ten years, when it can be problematic to use volatile investments like stocks. This post explores three ideas for using I bonds in retirement to fund expenses in the next several years.

Idea #1: Build a Social Security bridge fund

For most people, a very beneficial retirement strategy is to delay the start of their Social Security benefits for as long as possible (although there are no advantages to delaying beyond age 70). If you retire before the most advantageous time to start your Social Security benefits, then one of the best ways to use your retirement savings is to build your own Social Security bridge fund. From this fund, you’ll pay yourself a monthly amount equal to the Social Security benefit that you’re delaying.

For example, suppose you retire at age 65 but decide to delay starting your Social Security benefits until age 70. Further suppose that at age 65, your Social Security benefit would have been $20,000 per year and that you had also accumulated $100,000 by the beginning of your retirement that you had invested in I bonds. You could then withdraw $20,000 per year from those bonds for five years; this will enable you to delay drawing Social Security benefits until age 70.

I bonds would be a particularly good investment vehicle to use for a Social Security bridge fund, since you don’t have the long investing horizon that’s typically preferable for stock investments.

Idea #2: Responsibly plan for travel or other large expenditures

Suppose you want to spend money on travel in the early years of your retirement when you’re still active. Or maybe you foresee some large expenditures in the next few several years, such as a new car, or repairs to or remodeling of your home to help you age in place.

How can you plan to spend these amounts without jeopardizing your long-term financial security? One smart way is to set aside money in a special bucket that you plan to spend in the next several years on these “extra” activities. Then use your regular retirement savings, not counting the special bucket, to generate a paycheck that covers your ongoing living expenses for the rest of your life. Make sure that all your regular retirement paychecks, when combined with Social Security, are sufficient to cover your expected living expenses.

Idea #3: Build an emergency fund

Instead of keeping your emergency fund in bank CDs or passbook savings accounts, you can let that money grow in I bonds until you need it for an emergency. Over time, you’ll earn a lot more interest income, which puts extra change in your pocket.

Features to plan for

The following caveats apply to all the ideas describe above; you’ll want to consider these features carefully when developing your plans.

Caveat #1: It takes some advance planning to build substantial holdings in I bonds. Each year, you can only purchase up to $10,000 of I bonds per person, $20,000 per married couple, via an online source. You can buy another $5,000 of paper bonds each year, using your federal income tax return. Therefore, in the years leading up to retirement, you may want to initiate a program of buying I bonds so you can accumulate a target amount that works for you.

Caveat #2: You can’t buy I bonds within an IRA or employer-sponsored savings plan, such as a 401(k) plan. You’ll need to buy I bonds with money that you didn’t save in these programs.

Caveat #3: Ideally, you’d want to start building your I bond fund at least five years before you need to start spending the money. The reason is, if you withdraw money from an I bond before five years have elapsed from the date of purchase, you’ll lose three months’ interest. This isn’t really a deal-breaker: Even if you lose three months’ interest, you’ll still have earned much more interest compared to using bank CDs and savings accounts.

Caveat #4: You can’t cash in an I bond within 12 months of when you purchase it. So don’t plan on using a specific I bond to pay for expenses within the first 12 months of the date you purchase it.

You can learn more about I bonds at the TreasuryDirect website.

As you can see, it will take some advance planning to use I bonds to your best advantage. Given that you can earn hundreds or even thousands of dollars in extra interest income, it’s a very good use of your time.