How do bonds work. I want to know how they figure out how much money I will get from them in 20 yrs?

Question

I have about $1500 dollars in I bonds. How do I know what the return is on them in about 20 years. What else should I invest in. I am a single 42 yr old RN with my kids on there own.
I have a 403B thru my employer with about $40,000 dollars in it and I make about $60, 000 a year. I contribute $300 a month to a credit union savings account, and I am not sure what the balance is on that, probably not more than $1200. I would like to make some investments somewhere, but not sure where to go from here. My home is paid for. It is a dump, but it is mine.

Answer 1

You have a couple of great answers already. I wanted to tell you a little more about your I bonds. The I bond interest rate is made up of two rates. A fixed interest rate that is set when you purchase your bond and that rate changes every 6 months. But once you purchase your bond that rate is set for you until you redeem your bond. For me to know what that rate is on your bond I would have to know when you purchased it or them. The rate was set at 1.40% in May 2006 and reset at 1.40% in Nov 2006. The highest the rate has been was at 3.60% in May 2000. The lowest it has been is 1.00% in May 2004 and at several other times besides.

Besides the fixed rate of interest there is also an inflation rate added to the interest rate that is reset every 6 months. The current inflation rate is 1.55%. It was established in November and will be reset again in May 2007.

So as one of your responders mentioned, it is absolutely impossible to know how much interest you will earn in 20 on your I bonds.

Now lets talk turkey about investments.

U S government bonds are not great investements with the exception of t-bills. If you had purchased your I bond in 2004, your fixed rate of interest is 1.00%. Since that time the inflation adustment has varied from 1.19% to 2.85% giving you an average yield of about 2.50%. That yield is pitiful.

One of your responders mention mutual funds. I agree completely with him. Lets take two index funds. One based on the S&P 500--SPY and one based on the Russel 2000--IWM, a large cap fund and a small cap fund.

During that same period 2004 to currently.

SPY has yielded 11.35%
IWM has yielded 14.34%

Over a long period of time, historically equity investments have yielded about 10% annually. CDs and debt instruments such as U S government bonds have yielded about 4%.

Now equity investments do have a very large variance in their yields. In any one year the yield can very from -30% to +40% and has varied by that amount. In 2002 IWM had a -20.34% yield. In 2003 it had a +47.57% yield. In 2002 SPY had a
-21.54% yield and in 2003 it had a +28.13% yield. The negative yields frighten many investors to death. But over the long term as the economy grows they disappear and turn into positive yields.

Answer 2

"Old guy" is correct in a lot of what he says but not entirely.
First, the interest rate on I Bonds are set quarterly so there is no way to exactly calculate their value in the future. You can estimate possible interest rates and arrive at an estimated value.
Second, CDs are NOT investments - they are merely a way to save money and get a bit better interest than a regular savings account. His idea of "laddering" them is a good idea.
Where are you putting the money in your 403B ? Are you putting it into a mutual fund ? If so, do a Yield Analysis and compare the return to what you would have gotten if your funds were in a bond or a CD.
I also am in my mid-60s and, for the past 40 years, have put most of my money with various mutual funds, e.g., Vanguard, Rowe-Price, American Century. Call or e-mail any of these companies and ask them what their average return was over the past 20 years, 30 years, 40 years. The answer is between 10 - 12 %. Now off the top of your head, you may think that, with that rate of return, you will have approx twice the amount of money as you would have from a 5 % CD when you are ready to retire. BUT, because of compounding, that is not true.
As "old guy" stated, at 4% your money will double in 18 years. At 5% it will double in 15 years. At 12% it will double in SIX years and quadruple in 12 years !!!
"Old guy" made the statement that he could sleep easy at night because he didn't have to worry about losing "all of his money". Investing in a diversified group of mutual funds makes that a practical impossibility. Every company that they invest in ( 40, 50, 100 companies ) would have to go out of business on the same day for that to happen. His "peaceful nights" have cost him a small fortune !!!
Any of the above mutual fund companies will allow you to open an account with them with as little as $ 100 and monthly investments of $ 50 ( When I started, it was $ 10 and $ 10 per month ). Open an account with them and then, after a year, compare your return versus a CD at 4 - 5 %. I promise you that you will NEVER put your money into a CD after that. If I were you, I would take part of that $ 300 that you are putting into a credit union savings account, say $ 150 or even $ 200 of it, and start to invest it.
Many years ago, I started investing a small amount for my daughter. For birthday and Christmas presents, I would add to her account. She is now 32 years old and has more than $ 200,000 in various investments. When my grand-daughter was born ten years ago, I did the same for her. She now has $ 18,000 in her account. My grand-son is now 7 years old and has about
$ 9,000 in his account. They would have nothing even close to that if I had simply put the money into CDs.
As "old guy" said, if you have any questions or simply want to discuss this in more detail, just click on my avatar and send me an e-mail.
I hope all of this information helps. I would also advise you to stop at the library and pick up some books by Peter Lynch, John Bogen, and others. And definitely contact the funds that I mentioned. They are always very willing to help and give advice.

Answer 3

To best answer your question about bonds, one would need to know more details about your investment in bonds. Are you investing in bonds or bond funds? If you're investing in bonds, then we'll need to know what type of bonds did you buy? Are they zero coupon bonds? If they are, then you had bought them at a deep discount, you'll receive no coupon(interest), and the value you'll receive when they mature is simply the value stated in the bonds..

If the bonds you bought are not zero coupon bonds, then the amount of the money you'll earn each year is simply the interest stated in the bonds, and if you hold the bond till maturity (the time the bond expires), then the amount you'll receive at the end is the par value stated in the bond.

Should you sell the bond before the maturity, though, you might receive more (or less) than the amount stated in the bonds. This will depend mostly on the interest rate the bond is paying and the interest rate at the time you sell it.

So if you could, please add more details about your bonds investment. Or if you want, you can message me so we could discuss it further.

I would also want to add something. From what you wrote about yourself, i would recommend the following:

1. Make a commitment on starting a regular investment scheme. That is to make specific amounts of investment in specific scheduled times. This way, you utilize a powerful investing tool called Dollar Cost Averaging. You might want to read further into this at http://beginnersinvest.about.com/cs/newinvestors/a/041901a.htm

2. Spread your investment into bonds, stocks and for-ex funds. Considering your age, i would suggest a 40%-50%-10% allocation (or something along this proportion).

The reason is that stocks are more volatile and is riskier than bonds, although they also offer more upside potential. A point of example, after the 30's crash, it took 19 years for the stock market to climb back to it's 30's value. A younger person might not have problem waiting out the market, but in 19 years, you'll be 61, imagine starting over again at that age.

Spreading your investment this way allows you to participate in the stock market gains, but also limit your risks. Remember the old adage : Never put all your eggs in one basket.

Answer 4

If you want to remain a happy dawg, you need to be careful what you do with your money. Bonds go up and down, you can't reliably figure out where you'll be with them in 20 years. I'm not sure how it goes, but I think it's when the interest rates go up, the bonds go up, and when the interest rates go down, the bonds go up. Or maybe it's the other way around. And when I say the interest rates, I mean the rate that Allen Greenspan use to control, and than now Ben Bernake controls. The Fed rate.

What you should do with your money depends on how lucky you feel. Most investments are win/lose types of items. In other words you can win (make it big) or lose (lose all your money).

I'm now 66 (a young 66 mind you) but when I was your age, I dabbled in the stock market trying to figure out a way to win big. I was lucky in the sense that I didn't lose any money. But I didn't win much either. It was pretty much a waste of time. I would have been better off just listening to the little old ladies who are retired and living in Florida. I got wind of what they do with their money (put it in CDs) while I was reading a book about retiring in Florida, and I wondered why the attraction to CDs.

They do that because CDs (Certificates of Deposit) are FDIC insured by the Federal Government for up to $100,000. You can't lose your money, so you can sleep better than if you had your money in stocks, or whatever. Because in stocks or whatever, you can lose it all overnight.

Stocks, over the last 100 years or so, have paid an average of 7% return. But from that, you need to deduct fees, etc. So, on average (and only if you are lucky and don't lose everything) you can count on a little less than 7% return. There are periods that stocks provide a return that is multiples of the average 7%, but overnight they can disappear. It's scary when you give it some serious thought. With CDs you can count on (right now anyway) a little over 5% return, but it's without worry. You can sleep nights knowing that your money is secure, and that your 5% is being earned. And based on what the rate is when you buy your CDs, you can count on the interest not being reduced because you are locked into it.

But there are rules you need to understand and follow. For example the FDIC insurance is for only $100K per bank. So, if you have more than $100K, you need to spread your money around in different banks. I would recommend $50K in each bank, and let it sit until the $50K doubles to $100K (at an average of 5% it'll take about 15 years). Then move $50K of it to another bank--a new one. Also, it's a good idea to create a CD ladder. That is divide your $50K into five CDs of $10K each. Make one a 1 year CD, the other a 2 year CD, the other a 3 year CD, the other a 4 year CD, and the last a 5 year CD. That way, each year, a $10K CD will mature, and you can either withdraw it if you need the money, or reinvest it into a new CD, but this time, a 5 year CD. Each year when a CD mature, you reinvest it into a 5 year CD. Keep repeating that year after year for 15 years. Then you'll have about $100K, and it'll be time to open another account in another bank. But while you're doing all of this, you always have a CD maturing each year, in case you need some money for a major expense. Also, keep in mind that the CDs that you are reinvesting each year will be growing in value each year so that the initial $10K CD will eventually be worth $20K. It will have doubled in value in about 15 years (based on an average 5% rate).

That's what the little old ladies in Florida do, and I happen to think they are pretty smart, and get to sleep soundly every night because they don't have to worry about losing their money overnight like the people who are in the stock market need to do.

Also, with no worries about losing your money, you can more easily figure out where you'll be financially in 20 years.


In closing, let me add that you shouldn't buy your CDs from your local brick and mortar bank at a street corner in your hometown. Go with the internet banks, like ING Direct, and Emmigrant Direct. There are tons of others like these two. They pay much higher interest rates than your hometown bank. They can afford to do so because they operate on a lower cost of operation. They don't have to pay for all those bank buildings and bank presidents in every little town in the country. Hometown banks pay an average of less than one percent, while internet banks pay in excess of 5%. I'm sure you understand the value in going with internet banks. They are FDIC insured just like your home town banks. And they're just as safe.

Take a moment to go to www.bankrate.com and check out the 100 best CD rates available in the country. You'll be glad you did, and you'll feel great figuring out where you'll be financially in 20 years because of how many CDs you have and what good rates you're getting on them.

It's difficult to share my true excitement about the peace of mind that CDs have given me. Reading your question made me want to bite my nails in fear about what could happen to you and your money if you are not careful. If you have questions because of what I've written, feel free to click on my avatar and email me. I'll be glad to share with you anything I know. We can be sort of financial pen pals until you feel confident you've learned all you can from me and are ready to experience (modest but yet considerable) stress free financial gains.