Wednesday, July 31, 2019

You're Responsible for Your Own Online Security

Credit cards, debit cards, ATMs, and electronic fund transfers (EFTs) offer excellent fraud protection but your bank, credit union and investment company's online protections aren't as strong.

In response to my post, The Best Inflation Protection You Never Heard Of, a reader commented that he/she avoids I Bonds due to security concerns with TreasuryDirect.® It didn't take long to find several threads on the topic. The primary concern seems to be this statement from the Code of Federal Regulations:
§363.17   Who is liable if someone else accesses my TreasuryDirect® account using my password? You are solely responsible for the confidentiality and use of your account number, password, and any other form(s) of authentication we may require. We will treat any transactions conducted using your password as having been authorized by you. We are not liable for any loss, liability, cost, or expense that you may incur as a result of transactions made using your password.[72 FR 30978, June 5, 2007]
Should you be concerned about security issues at TreasuryDirect,® the only place where you can purchase I Bonds? I think you should be concerned about the security of online access to your holdings at all financial services companies and I think your security is largely up to you.

Having your financial services company hacked is different than having your individual account hacked using Internet access. I'm addressing the latter but the former happens with amazing frequency and you will be protected from those breaches. You probably won't even know it happened to your company until you read about it in the paper.[1]

You will probably find wording similar to that of the TreasuryDirect® statement above at the websites of all of your banks, credit unions, investments companies, and other financial services.

First, let's look at where we are protected.

Electronic Fund Transfers.

According to the Federal Reserve, "Regulation E provides a basic framework that establishes the rights, liabilities, and responsibilities of participants in electronic fund transfer systems such as automated teller machine transfers, telephone bill-payment services, point-of-sale (POS) terminal transfers in stores, and preauthorized transfers from or to a consumer's account (such as direct deposit and social security payments). The term "electronic fund transfer" (EFT) generally refers to a transaction initiated through an electronic terminal, telephone, computer, or magnetic tape that instructs a financial institution either to credit or to debit a consumer's asset account."[2]

Section 205.6 of Regulation E states the liability of [the] consumer for unauthorized transfers, "[Regulation E] limits a consumer's liability for unauthorized electronic fund transfers, such as those arising from loss or theft of an access device, to $50; if the consumer fails to notify the depository institution in a timely fashion, the amount may be $500 or unlimited."

At first glance that would appear to cover online access to your account at a bank or credit union — they are both subject to Regulation E and it specifically mentions computers — but that does not appear to be the case. The catch seems to be in how your bank or credit union defines "unauthorized access."

Credit Cards.

According to[3],
"Under the Fair Credit Billing Act, your liability for unauthorized charges depends on whether the thief personally presented your card to make the purchase, or just stole the number.
    • If the thief personally presents your card to make the purchase, the card issuer can't hold you liable for more than $50 in fraudulent charges. (12 C.F.R. § 1026.12). Many card issuers waive this $50.
    • If the thief stole the number, but not the card, you have no liability.
In either of the above situations, however, it's important to notify the card issuer as soon as you know of the theft—by phone and in writing.
Additional information regarding how to report fraud is also available at the NOLO link.[3]

ATM and Debit Cards.

Also from,
"With ATM or debit cards, you must act quickly in order to avoid full liability for unauthorized charges when your card is lost or stolen. Under the federal Electronic Fund Transfer Act, your liability is:
    • $0 if you report the loss or theft of the card immediately and the card has not been used
    • up to $50 if you notify the bank within two business days after you realize the card is missing
    • up to $500 if you fail to notify the bank within two business days after you realize the card is missing, but do notify the bank within 60 days after your bank statement is mailed to you listing the unauthorized withdrawals, or
    • unlimited if you fail to notify the bank within 60 days after your bank statement is mailed to you listing the unauthorized withdrawals. (15 U.S. Code § 1693g).
If you can convince the bank that your notification failure was due to extenuating circumstances, it must extend the notification timeline for a "reasonable period."
If your card wasn't lost or stolen, but the number is used for unauthorized transactions, you aren't liable for those transactions so long as you report them within 60 days of the statement being sent to you.
In response to consumer complaints about the possibility of unlimited liability, some card issuers cap the liability on debit cards at $50. And some banks don't charge anything if unauthorized withdrawals appear on your statement. Also, some states have capped the liability for unauthorized withdrawals on an ATM or debit card at $50."
So, for ETFs, credit cards, debit cards, and ATMs, the fraud protections are pretty strong but what is the extent of our protection for accounts with other financial services?

Banks and Credit Unions.

As I previously mentioned, banks and credit unions are subject to Regulation E and that regulation seems to protect online access to your account. A review of a few online-fraud policies, however, reveals a loophole that limits their guarantees of "100% fund recovery" if you "share" your login credentials or don't "adequately" protect them.

My credit union states in its "Zero Liability Guarantee for Online Fraud" policy, "You should not share your UserID and/or password with anyone. If you share this information with anyone, any actions they perform on your accounts online are considered to be authorized by you."

I found similar statements at bank websites. Wells Fargo's states, "To qualify for the protections provided by the Online Security Guarantee, you must. . . Never disclose your personal account information to others (including your Personal Identification Number (PIN), online username, password, one time passcodes, RSA SecurID® token, or any other security credential you may use to access your accounts)"[4]

Wells Fargo's statement goes on to warn that, "If your device allows access to anyone other than you via fingerprint, that person will also be able to access your Wells Fargo Mobile downloadable applications on the same device when Touch ID® or fingerprint is enabled, and their transactions will be considered authorized."

So, if your phone's fingerprint access feature fails, allowing someone to gain access to your login credentials, Wells Fargo treats that as your authorization for that person to make transactions in your account. And, those fingerprint readers may not be as secure as you think.[5]

You can find your investment company's online-fraud protection policies, well. . . online.[6,7,8] Most of the investment companies I researched do offer full protection against fraud except for fraud committed when you share your login credentials. The problem is that most have a very broad definition of "sharing." Fidelity Investments states, for example,[6]
"What are examples of where I won't be covered?

If you grant authority to, or share your Fidelity account access credentials or information with, any persons or entities, their activity will be considered authorized by you. Losses of cash or securities transferred to outside accounts that are beneficially owned by you are not covered by this guarantee. Also not covered is any activity by an employer/plan administrator, financial intermediary, or third-party who is authorized by you to access your data (or who received your data as a result of that access), or with whom you've shared your username, password, or account number, or from malware or a breach of security that affects the systems of any of those parties."
Fidelity also lists some types of assets that aren't protected:
"What assets may not be covered?

Assets including certain annuities and insurance products, Fidelity Advisor Fund accounts, and Fidelity Advisor 529 accounts are not covered because they are held away from or maintained by someone other than Fidelity."
In a timely email, Charles Schwab just this week sent me the following information:
"We want you to have the highest level of confidence when you do business with Schwab. That's why we offer you this simple guarantee: Schwab will cover 100% of any losses in any of your Schwab accounts due to unauthorized activity. Read more about our Security Guarantee at"[7]
That sounds excellent until you click on that link and see the limitations of the guarantee:
"Does the guarantee apply to my account if I use a financial application ("app") or program that retrieves my account data from Schwab for things like financial planning or to help me manage my finances?

Yes, with some conditions. You must not share your Schwab login credentials with anyone or through a non-Schwab app. A firm that retrieves, aggregates, and presents account information to a customer for financial activities is known as an "aggregator." When you authorize an aggregator and instruct Schwab to allow the aggregator access to your account information, the aggregator as well as its employees, agents and financial apps and companies the aggregator does business with who receive your Schwab account information ("aggregator third parties") are considered your authorized persons. The guarantee only applies to unauthorized activity in your account. What an aggregator or an aggregator third party does in connection with your account and your information is authorized, so the guarantee does not apply to their actions."
Sharing login credentials typically invalidates that "100% guarantee" that your loss will be recovered. How broad can a financial service company's definition of "sharing" be?

  • Providing your login credentials to any other person, such as a financial advisor, is generally considered sharing. One company's website suggested that giving your login credentials to your spouse is sharing and recommended that spouses submit paperwork to give one another access to their accounts, instead.
  • Providing login credentials to a third-party aggregator is typically considered sharing. Popular third-party aggregators include, Vanguard's Portfolio Watch, and Fidelity Investments Fullview.
  • As mentioned above, Wells Fargo assumes that you have shared your login credentials with anyone who can fool your smartphone's fingerprint ID feature.
  • Fidelity Investments assumes that someone who learns your login credentials by a security breach or malware is authorized to access your account.
  • TreasuryDirect®'s statement above appears to state that anyone who has your login credentials is authorized to make transactions in your account regardless of how the credentials were obtained.
The message is quite clear: if you want a guarantee against online fraud, don't share your login credentials with anyone or anything and don't let them be stolen. Some recurring themes run through these policies.

  • You have no fraud protection guarantee at any investment company I have researched if you share your login credentials,
  • The company's definition of "sharing" can be quite broad,
  • Investment companies can have vastly different descriptions of what they consider "adequate" protection of your credentials, and
  • Some company's don't protect all types of accounts.

When I began research for this post, I had hoped to be able to provide some general guidelines for all banks, credit unions and investment companies regarding their online fraud protection. Unfortunately, I found that they vary so much that I needed to read every policy for every financial services company that I use to understand my protections and what I am required to do to be eligible for their "100% online guarantees." I changed my passwords at each one, in part so I no longer run afoul of "third-party-aggregator sharing" rules and to be completely honest, in part because the protections weren't as ironclad as I had assumed. I strongly suggest that you do the same.

So, bottom line, fraud protection at investment companies, banks and credit unions is significantly weaker than for credit cards, debit cards, ETFs, and ATMs.

But what about SIPC, you ask? Isn't it the equivalent of FDIC for banks? No, SIPC offers protection of assets at failed brokerage firms. According to their website[9], "SIPC protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash. Most customers of failed brokerage firms are protected when assets are missing from customer accounts."

Unless it is failing, your investment company backs your brokerage accounts, not SIPC.

Having read this post, extremely risk-averse investors might be tempted to try to find financial services companies with no Internet access. They may be surprised by how difficult that has become. This is the world we live in: we're forced online but not adequately protected from online security problems. Security is largely in our own hands.

Fortunately, there are steps we can take to secure our accounts. Unfortunately, none is perfect.

Here's my advice. Google "online fraud protection company name" for every bank, credit union, investment company or other financial services company you use online. (Links to a few are provided below in REFERENCES.) Search their websites for the following information:
  1. Is there an online fraud guarantee?
  2. Under what conditions are you not covered?
  3. What types of accounts are covered?
  4. What actions does the company require on your part to ensure that your login credentials are "adequately" secured?
Here's a tech hint that will help when they play the fine-print game. Command+ on a Mac or CTRL+ on Windows will usually increase that tiny font as much as you'd like. (I'm looking at you, Fidelity.)

Because this post is already, as my grandfather would say, longer than a horse's face, I have posted  some recommend security measures you should implement with all of your financial accounts, including TreasuryDirect® at How to Secure Your Online Financial Accounts.


[1] For Big Banks, It’s an Endless Fight With Hackers, New York Times.

[2] Regulation E, federalreserve.

[3] Your Liability for Unauthorized Credit and Debit Card Charges,

[4] Wells Fargo online fraud policy.

[5] That Fingerprint Sensor on Your Phone Is Not as Safe as You Think, New York Times.

[6] Fidelity Investments online fraud policy.

[7] Charles Schwab fraud policy.

[8] Vanguard Investments Online Fraud Policy

[9] Securities Investor Protection Corporation (SIPC) website.

Tuesday, July 23, 2019

Navigating the TreasuryDirect® Maze

In a previous post, The Best Inflation Protection You Never Heard Of, I wrote about U.S Series I Savings Bonds. Like Treasury Inflation-Protected Securities (TIPS), I Bond returns compensate for inflation, as measured by the CPI-I Index.

I like Series I Bonds but the TreasuryDirect® website, not so much.

The two types of bonds (I Bonds and TIPS) are otherwise significantly different. I Bonds have some unique features as I previously explained, but they also have significant maximum purchase restrictions that make them cumbersome for wealthy retirees to accumulate.

Those maximum purchase restrictions were one of two issues raised by readers of that post, the other being difficulty in navigating the TreasuryDirect® website to purchase the bonds.

Individuals can purchase up to $10,000 of I Bonds per social security number per (calendar) year, which means a couple can purchase $20,000 annually. A single, retired friend complained that it would take decades to buy enough I Bonds at $10,000 per year to fill his bond portfolio. I suppose I can somewhat sympathize with that "problem" except that I know a lot of people who would love to have it.

I, too, need to own TIPS in addition to the I Bonds I purchase but I don't think of my inability to buy as many I Bonds as I'd like as a reason not to purchase any. Other than the maximum purchase limitation, they have some very attractive features.

TreasuryDirect® e-commerce capabilities could use some work. I just spent two weeks working with a couple of well-educated clients who struggled mightily but were ultimately successful in purchasing I Bonds for both spouses. I will offer some tips that might help you navigate the website (and therein lies the first tip: don't go to or

The first step to purchase I Bonds at TreasuryDirect® will be to open an account for yourself and one for your spouse if you are married. You can submit your application(s) online by clicking here and then click the "Go" button. But, there is some prep work you will need to complete first.

For each account that you will open at TreasuryDirect® you will be required to submit a TreasuryDirect® Account Authorization Form, FS Form 5444, and snail-mail those completed forms to the Treasury Retail Securities Service address on the form. The form requires a bank's signature guarantee or a brokerage's signature guarantee or Medallion Guarantee. Certification by a notary isn't acceptable. Do not fill out the form until you are in the presence of the guarantor.

You will need a source of funds to purchase the bonds, of course, and you have two options. Typically you will want to purchase bonds using an account at a bank that accepts Automated Clearing House debits and credits. (There is a second way using a "Zero-Percent Bond" to make payroll purchases or a recurring bank debit.) You will provide your banking information when you create the TreasuryDirect® account, so have check(s) available to provide the routing and account numbers.

One of the clients I helped was notified that his account application "needed further security checks." About a week later, he was informed that his application had been accepted, though he was unable to find out why additional checks had been necessary.

You may also need to move funds into the bank account before the bond purchase. If you need to sell stocks or funds, for example, to purchase I Bonds, then be aware that it may take a few days for the brokerage sale to clear and another few days to transfer the sale proceeds to the bank account. There are sometimes ways to link bank accounts and brokerage accounts to make this work faster in subsequent years.

As I pointed out in the aforementioned post, you will normally want to purchase I Bonds from a taxable account. If you withdraw retirement account funds, the transaction will be taxable at ordinary income rates and may be subject to penalties. TreasuryDirect® accounts cannot be retirement accounts.

TreasuryDirect® sells several different types of bonds. Once you reach the purchase page, be sure to select "Series I", the second radio button from the bottom of the page.

To summarize the steps:
  1. Collect social security numbers for each of the spouses.
  2. Find a check for each of the bank accounts(s) from which you will make the purchase of I Bonds.
  3. Go to TreasuryDirect® Open Individual Accounts and open an account for each spouse. Set up strong passwords for the accounts, write them down and store them safely (A strong password is very important so please don't ignore.) Save copies of all confirmations for a paper trail.
  4. If you are asked to submit FS Form 5444, download it and take the blank form(s) to your bank or brokerage for signature guarantee(s). Mail the completed form(s) to the address stated on the form. (Update: I edited this after a reader comment below. Though I was unable to find a definitive statement online, it appears that this form is only required if 1) your submission can't be validated online or 2) you are randomly selected to submit it. Regardless, you will be instructed to submit it as part of the application submission process if it is required.)
  5. If you will use funds from a brokerage account instead of a bank, sell the appropriate amount of assets. Use funds from a taxable account — TreasuryDirect® accounts cannot be registered as retirement accounts.
  6. When the brokerage trade is completed and funds are available, transfer those funds to the bank account(s) that you registered during the TreasuryDirect® account creation process in step 4.
  7. When the bank deposits are available, log onto your TreasuryDirect® account(s), click the red "BuyDirect" tab, select "Series I Bonds" from the options, and enter your purchase. Your registered bank account number from which funds will be drawn will be in a drop-down box.
When you return to purchase more I Bonds next calendar year, you will be able to skip steps 1, 2, and 3.  TreasuryDirect® e-commerce software and paperwork requirements are a bit of a maze but the steps are necessary to protect your account. These instructions should help and you can console yourself with the thought that next year's purchases should be a lot easier.

Wednesday, July 10, 2019

My Preferred Planning Software is MaxiFi

I've been working on a research paper with UNC econometrician, Neville Francis for the past year and that has given me the opportunity to look at several free online retirement planners. Overall, I have to say that most were disappointing.

I have also worked for several years with another online retirement planning tool that is not free but is quite affordable, economist Laurence Kotlikoff's MaxiFi.[1] I recently asked Dr. Kotlikoff some questions about his product.

Dr. Kotlikoff, you say that MaxiFi is based on "consumption smoothing", the "proposition that households want to have a stable standard of living through time as well as across good times and bad times." What does that mean to a retiree or to someone saving for retirement?
Consumption smoothing is at the heart of economics-based financial planning. It's firmly anchored in human physiology. None of us wants to splurge today and starve tomorrow. Nor do we seek the opposite. Whether retired or still working, rich or poor, we're after the same thing — a highly stable living standard. Leaving aside issues of investment risk, the core financial planning question is how much to save each year to achieve a smooth consumption ride. MaxiFi calculates this directly based on your lifetime resources net of future taxes and gross of future Social Security benefits. In so doing, MaxiFi eliminates the guesswork in planning your retirement finances. It also helps you find investment strategies that limit your investment risk. In contrast, conventional financial planning asks you to set a goal for annual retirement spending. My goal is $1 billion.
A retirement planner recently commented to me that retirees don't all want "smooth consumption"; some want to spend more early in retirement. But spending more at some ages than others isn't inconsistent with "smooth" consumption, is it?  
MaxiFi has a Standard of Living Index that lets you tell the program you'd like to have a higher living standard earlier in life and a lower one later on. The tool will recommend discretionary spending that follows your desired living standard path as closely as possible subject to not putting you in debt. You can also specify special expenditures, like a major trip when you reach 70. MaxiFi will budget for this and have you pay for it by spending less ever year before and after the trip.
Most retirement planning tools measure success with "probability of ruin", or the percentage of simulated future scenarios in which a retiree can expect to not outlive their savings. Please explain why you prefer consumption smoothing.
Conventional planning is built on three mistakes. First, it asks people their retirement spending targets. Mine is $1 billion a week. So right away I've made a mistake. But even if I guess a "reasonable" number, I'm going to be miles off the level that MaxiFi will calculate. Second, conventional planning assumes you'll keep saving what you are now saving. That's mistake number 2. What you are now saving is surely wrong. The third mistake is assuming you'll spend your targeted amount year after year in retirement whether your assets go through the roof or fall through the floor.

Conventional planning's "probability of ruin" Monte Carlo simulations calculate the chance you'll run out of money if you make all three mistakes, i.e., if you a) save the wrong amount each year before retirement, b) spend the wrong amount year after year after retirement, and c) never adjust your annual spending once you retire. I can't fathom why anyone would wish to know the probability of financial survival in the context of making three major financial mistakes. Financial planning is supposed to help us make the right financial decisions, not tell us something we don't want to know about something we shouldn't be doing.
I can find lots of free "single-purpose" planning tools on the internet, tax planners, sustainable withdrawal rate calculators, life expectancy calculators, Social Security optimizers, RMD calculators, asset allocators, etc. Is there an advantage to incorporating them into a single program like MaxiFi?
All our financial decisions are interconnected. Take life insurance. You can't decide how much to buy until you know the living standard you need to insure. But your sustainable living standard (if no one dies) depends on the amount of insurance premiums you'll be paying. So, your living standard and life insurance needs must be jointly calculated. MaxiFi does this. It jointly handles all the factors you mention and more. The advantage of MaxiFi's integrated financial planning is that all its suggestions and calculations, including federal and state taxes, are absolutely internally consistent. If you use piecemeal calculators you'll get a set of suggestions that don't add up.
MaxiFi asks for only a few of my expenses as input. Why is that?
MaxiFi asks you to specify your "off the top" expenses on housing and other must-spend items, like alimony payments, out-of-pocket medical expenses, or college tuition. These expenditures are like negative income. Your other resources less a) these off-the-top expenses and b) your lifetime taxes determine your lifetime budget — what you can spend on a discretionary basis over the rest of your life. MaxiFi then smooths this spending. If we were to ask you to specify everything you were going to spend each year, year in and year out, you'd give us amounts that were either a) unaffordable or b) left some of your lifetime budget on the table.
Is MaxiFi a "Monte Carlo" simulator?
MaxiFi does Monte Carlo simulations on your living standard. It calculates 500 living standard trajectories you might experience based on how you are investing. It then compares these 500 trajectories with 500 based on investing more safely and 500 based on investing at greater risk. These trajectories take into account that you'll adjust your spending annually in light of how well your investments fare, always with the goal of having a stable living standard. Best yet, MaxiFi combines all of the 500 trajectories in a single index of your average lifetime happiness — what economists call your Expected Lifetime Utility. This index, which takes into account your tolerance for risk, lets you compare in terms of three numbers (one for each of the three sets of 500 trajectories) how your current investment strategy stacks up against investing at less or more risk. Lifetime expected utility maximization is the gold standard of economics-based portfolio guidance.
Can MaxiFi tell me if I should purchase life insurance or an annuity?
Absolutely. It calculates how much term life insurance you need to hold each year to ensure survivors have the same living standard to the dollar had you not died. It also shows you how much higher or lower your living standard will be if you purchase an annuity.
Can I perform what-if analyses with MaxiFi? What kinds of things can I test?
You can set up as many alternative profiles as you'd like and compare them against your base case in terms of their lifetime discretionary spending. For example, you can easily learn how much more you'll get to spend if you downsize or if you go back to work or if you switch jobs or if you annuitize your retirement accounts or if you wait to take your Social Security benefits.

But MaxiFi also does its own what-ifs for you. Once you run your base plan, MaxiFi asks you to MaxiFi It. When you run this report, MaxiFi looks for safe ways to raise your living standard by maximizing your lifetime Social Security benefits and finding the retirement account withdrawal strategy that will reduce your lifetime taxes.
Where can I learn more about how MaxiFi works?
Go to Check out the videos, the case studies, and other descriptions posted there. And then try it! I promise, you'll get hooked on its ability to safely raise your living standard and finally take the guess work out of financial planning.
(Note: If you prefer video instruction, I have added two links below to recent MaxiFi Webinars.)[2,3]

Those are some of the reasons Dr. Kotlikoff believes MaxiFi's economics-based approach is best. Now, here's why I like it.

At $99 per year with $70 renewals, it's quite affordable for the do-it-yourselfer.

Dr. Kotlikoff and his team have steadily improved and refined the product, beginning with E$Planner, for over 25 years. That leaves the others with a lot of catching up to do with both the economics and the technology.

As a computer scientist, I know from experience that Dr. Kotlikoff has a top-notch technical staff and their help desk has always been available when I needed it with real people who know their product.

MaxiFi completely avoids the limitations of probability-of-ruin estimation. Instead, it incorporates consumption smoothing and maximizies the utility of achievable spending.

Many retirement planning tools address only the decumulation phase, when we retire and begin spending down our wealth. MaxiFi is a life-cycle planner and is useful at any stage.

Lastly, as Dr. Kotlikoff mentions, MaxFi integrates many calculations into a single model. Most free online simulators handle only a part of the problem, like maximizing Social Security benefits or modeling investment returns. Retirement planning isn't a problem that can be solved by solving many individual sub-problems independently.

If you're interested in financial planning software, give MaxiFi a try. You can use it to build a retirement plan or to create a "second opinion" of one you already have. It's also a good tool for your annual retirement plan checkup.

I rarely promote products at my blog but I know that many of my readers are do-it-yourselfers and many have expressed interest in software tools. I have a lot of confidence in MaxiFi. A multi-client version called MaxiFi Pro is available for advisors.

There are a number of new entrants into the online retirement planning field and I'll keep looking for free or affordable, unbiased, comprehensive planning tools. If you are especially fond of another tool that shares these attributes, please add a comment below.

To be clear, I don't believe that software can effectively replace a good human retirement planner given the current state of the technology, though the latter will no doubt cost more. I think you'd be way better off using a good human planner who uses good planning software. But for now, at least, I prefer MaxiFi for the do-it-yourselfer.


Economist, Zvi Bodie now links to his "trusted sources" at I find the entire website very useful and particularly the videos. provides a wealth of retirement planning software. I encourage you to take a look. Full disclosure, I act as an advisor to NewRetirement.


[1] MaxiFi web-based planner, website.

[2] MaxiFi Webinar, June 26, 2019, VIDEO.

[3] MaxiFi Webinar, June 13, 2019,VIDEO.

Wednesday, July 3, 2019

The Best Inflation Protection You Never Heard Of

In a recent post, I discussed inflation's potential impact on your retirement income (see Remember Inflation?) and I warned against letting three decades of low inflation lull us to sleep.

Inflation rates are low right now, about 1.9% per year according to the U.S. Department of Labor. Even at that rate, a 2019 dollar in 2049 would purchase only $0.56 worth of goods and services in constant dollars of 2019 by the end of a 30-year retirement. Assuming the long-term average inflation rate of 3.15%, that dollar in 2049 would be worth only $0.38 in 2019 dollars.

Of course, there isn't a strong argument that inflation rates won't be significantly worse than average sometime in the next thirty years as they have been in four of the past eleven decades. The reality is that no can predict future inflation, mean or worst-case, with any certainty.

It is nearly certain that we will see some level of inflation over several years of retirement and even low levels will erode the purchasing power of nominal annuities and pensions. The only real question is how much.

Economist, Zvi Bodie and I recently published a paper[1] recommending that retirees consider purchasing CPI-adjusted annuities and CPI-adjusted bonds (TIPS)[2] instead of their nominal alternatives.

Retirees with pensions rarely enjoy inflation protection and when they do it is limited. I have several friends and family members covered by the Kentucky Teachers' Retirement System, for example. According to their website, their pensions currently offer a 1.5% cost of living adjustment which is much better than nothing but won't adequately compensate for historical average inflation or even today's low rate.

Annuities, whether CPI-adjusted or nominal, aren't the best solution for every household but there are other inflation-protecting alternatives to consider. TIPS are another choice for consideration but for this post I'll suggest U.S. Treasury Series I Savings bonds, or I Bonds.[3]

I Bonds are meant to be used as inflation protection for individual households and can only be purchased online at®.[4] The interest rate they pay consists of a fixed rate, currently 0.5% plus a variable inflation rate, currently 1.4% per year, that is recalculated twice a year. The fixed rate has been as high as 3.4% in 1998. These components constitute a "composite rate" that is currently 1.9% per year. Before you lose interest in a 1.9% return, consider several additional features of I Bonds that distinguish them from CDs or money market funds that don't compensate for inflation.

The best inflation protection you never heard of.
[Tweet this]

CD's typically can be purchased with terms up to five years. I Bonds pay interest for 30 years.

The early withdrawal penalty for a CD depends on its term. A 5-year CD, if redeemed before the end of its term, will typically incur a penalty of about nine months of interest and a 1-year CD typically three months. I Bonds can't be redeemed for one year after purchase but there is no penalty for redemption after five years and only a 3-month penalty for redemptions between one and five years.

If I Bond interest rates decline, you have locked in your rate for up to 30 years. If rates increase, you can sell your old bonds and buy new ones, subject to annual purchase limits described below.

According to Dr. Bodie, "...another advantage of I Bonds is that [should interest rates rise,] investors could then cash out their existing I Bonds (and keep principal plus accrued interest) and buy new ones at the higher rate of interest. In other words, whether interest rates go up or down, the investor is protected. (But note that if you buy new I Bonds you would be subject to the $10,000 limit.) If you have the money, you would have to be nuts not to invest in I Bonds up to the limit."

I Bonds can never yield less than zero, so in the worst case your investment will maintain its purchasing power. In the event of deflation, I Bonds would increase in value.

From a tax perspective, according to®.[4], I Bonds are somewhat similar to a non-deductible IRA in that tax on interest can be deferred. You don't have to pay taxes on earnings until the bonds are redeemed, though you can choose to pay annually if that benefits you. I Bonds are subject to federal income taxes but not state or local income taxes. CD and money market fund interest can be subject to all three if held in a taxable account and interest is taxed as it accrues annually.

I Bonds do have some drawbacks. A household can purchase a maximum of $10,000 per Social Security number per year. Still, that's $20,000 per year for a couple. Additional purchases can be made up to $5,000 per Social Security number per year if the purchase is made from a federal tax refund.

Some advisors suggest that the maximum annual purchase limitations mean I Bonds will be less interesting to households with a lot of savings. Perhaps, but I find them too good a deal to pass up even if I'd like to buy more (and I would).

I Bonds can't be purchased in a retirement account. Certain entities in addition to individuals, however, are permitted to open®.[4] accounts including a personal trust, such as a revocable or "living trust."[5]

The real interest rate on I Bonds will be relatively low because they are extremely safe, backed by the U.S. Treasury and protected from inflation.

With the very low early-withdrawal penalties, I Bonds can be an excellent solution for investing an emergency fund or for any other future liability beyond one year and for protecting that investment against inflation. They are accessible by retirees with limited resources in denominations as low as $25. Even households with large retirement savings may want to max out I Bond purchases before buying TIPS.[6]

It's a struggle to find retirement strategies for under-saved households but I Bonds provide one. Households that are able to save some of their early-retirement income from pensions and Social Security benefits could use those savings to purchase I-bonds that would then provide inflation-protected consumption later in retirement.

To find out more about Series I Savings Bonds and how to purchase them, go to®.[4]. Creating an online account at®.[4] is currently the only way you can purchase them. If you prefer video explanations, please see the links below.

TIPS: (the old-fashioned kind)®.[4] is an excellent informational website but it could be a better e-commerce site. Don't enter "" into your browser (it's ""). Likewise, don't enter "", that's a different website. To purchase I bonds, go to the homepage "" and click on the green "Open an Account" link toward the upper right.

For more help creating an account and funding it, see Navigating the®.[4] Maze.


[1] Hedging Against Inflation with Real Annuities, Zvi Bodie and Dirk Cotton.

[2] TIPS in Depth,

[3] Series I Savings Bonds,

[4] America’s Best Kept Financial Secret: I Bonds, Zvi Bodie on PBS.

[5] How To Transfer I Bonds to an Entity Account,

[6] Comparing I Bonds to TIPS,

[7] How to Buy Digital Savings Bonds Online, VIDEO.

[8] How to Buy Digital Savings Bonds as Gifts, VIDEO.

[9] How to Protect Your Nest Egg from Inflation, Zvi Bodie, VIDEO.

[10] Guided Tour for Opening an Individual Treasury Direct account,