With a recession on the horizon, we need to invest with a long-term mindset. We aren’t going to make double-digit returns over the next few years.
What are some investing options we have with a 20+ year timeframe? Today, I want to talk about Series “I” Bonds and Roth IRAs because they are very similar, yet very different.
Quick background. Let’s do a short review of each of these products. You can buy Series “I” Bonds directly from the US government. They have an inflation-adjusted interest rate that currently yields 9.65%. With the duration of inflation still unknown, it’s good to have inflation protection.
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The Roth IRA is basically a tax-free brokerage account. You invest post-tax money (you already paid tax on it) into your Roth IRA, and it grows tax-free. You can pull your money out of your Roth IRA at age 59 ½.
Restrictions. Both products have annual limits on the amounts you can invest. It is $10,000/year for savings bonds, and for the Roth IRA, it is $6,000/year.
If I am age 25, which should I invest in first? Compounding is one of the most powerful forces on Earth. If you were to invest solely in the Total Market Index fund (VTI) from age 25 to 65, at 8% growth, you would be doing very well.
In a perfect world, you would just start a Roth IRA at age 25, invest in VTI, and your life would work out perfectly for 40+ years. You would have $2 million at retirement, and all would be fine.
However, life happens. Over these 40+ years, you will get married, have kids, buy homes, face recessions, lose jobs, etc. I can follow the logic of investing money into a tax-free vehicle for 40+ years, but it shouldn’t be your first goal.
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Inflation changes things. As we move into an inflationary period, it changes my mindset on certain ideas that people have impressed upon me over the years. People with only 401Ks and Roth IRAs are helpless against inflation.
Say someone has $100,000 in a Roth IRA at age 40. As inflation ravages their spending power, their $100,000 does nothing for them. The situation forces them to use credit cards or loans to survive.
What if their $100,000 was producing $600-$700 in dividends in a standard brokerage account? Would that make their life easier? Plus, they can still use this money for retirement funds.
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Series “I” Bonds to the rescue. Not everyone understands how to invest for dividends or maneuver around a brokerage account (school should teach it). This is where savings bonds become vital to your success.
At age 25, I recommend investing heavily into Series “I” Bonds instead of a Roth IRA. These bonds grow tax-free, as you only pay taxes when you redeem them. Plus, they keep up with inflation.
Emergency funds are fun. The best part of Series “I” Bonds is that they can serve on your emergency fund. As much as I love the idea of having a massive Roth IRA at retirement, I would rather have an enormous emergency fund today.
As a young person, leveraging bonds to grow your net worth is a fantastic concept. Yes, the stock market will grow faster, but bonds offer less risk. The only risk you run with bonds is interest rate risk, but “I” bonds provide some protection with their inflation calculations.
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Once you establish your emergency fund with a high yield savings account, “I” Bonds, treasury bonds, and USDC, you can move into a Roth IRA.
My experience with retirement accounts. I invested in TSP in the beginning. However, each time I bought a home, I would take a loan against it.
I truly understand the thought process of investing for the future at a young age, but too much stuff can happen along the way. Having a nice emergency fund is necessary to building a nest egg.
Trying to build a nest egg without an emergency fund is ridiculous. Trust me; I tried it. You cannot go wrong with series “I” bonds, but at some point, you will regret having cash locked away behind a Roth.
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Your parents failed you. The system required input from your parents. Ponder this. You are supposed to leave home, pay for college, get married, buy a home, and save for retirement in 40 years. It’s insane and impossible.
Your parents should have provided a college education, emergency funds, and a dividend portfolio. Yes, I am a parent, and yes, I failed.
I am in the process of buying “I” bonds for my kids, they have a brokerage account, and they both already have a home I can give them. But, I still have work to do on this front. It’s a work in progress.
I understand the overwhelming odds of children going into the world today, so I am writing books, investing for income, and house hacking with roommates. As parents, we have to do everything in our power to shift the pendulum in our favor.
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Why bring up parents? I bring up parents because young adults are overly focused on retirement too early. The world sets you up for failure already; just accept it. By understanding you were not meant to win, you can play a better ball game.
Instead of trying to overcome these incredible odds of paying off student loans, buying a home, and keeping your marriage intact, take it one step at a time.
Focus on saving with your “I” bonds, ensure you have a strong marriage, and work on getting a good job and starting a business. You’ll know when you reach your stride financially because you’ll wonder why you have so much money left in your accounts.
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At that point, you can double and triple down on your Roth IRA. I know it is the opposite of what they teach you, but honestly, retirement should be the last thing on your mind. You have a hard enough road ahead to get through.
Stay debt-free until your peak earning years. I love the idea of a Roth IRA, but the Series “I” bonds can serve many purposes throughout the years. Trying to save for retirement early in life is like picking your Hall of Fame picture as a rookie.
First, let’s work on the fundamentals, having great seasons, and finally making a hall of Fame run towards the end of our career. Once you hit your stride financially, you can overwhelm your Roth for various income streams.
Men hit their peak earning years between 40-60. Before that, stay out of debt and build a large emergency fund. You don’t want to go into your peak years with debt.
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If you build multiple income streams, start businesses, and invest for dividends, you’ll have plenty of time to make a nice Roth IRA for you and your spouse.
Conclusion. The world makes you feel bad for not overcoming the massive disadvantages it places upon you. Take a breath, understand that you are losing, and get on track to change your circumstances.
For this reason, I believe Series “I” Bonds are the better investment option for most people. Once you have financial security from an emergency fund and passive income, you can begin to invest in a Roth IRA heavily.
Series “I” Bonds can help you change your future, one month at a time. To live the American dream will cost you over $5 million (college, marriage, kids, house, and fully funded retirement for two).
If your parents didn’t help with this tremendous amount of cash, you’re behind. Don’t try to catch up in one sitting. Protect your future with bonds, and tackle the rest in a linear progression.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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