Leonard Treppa always saw U.S. savings bonds as a simple, sensible way to save for retirement. But now he’s retired, and the bonds are a contrary, complicated mess.
What are the Warren, Mich., man’s 89 savings bonds worth? No one at the bank seemed to know. Tellers didn’t even want to look at all those bonds at once. Instead, they asked Treppa and his wife, Alice, to bring in a few bonds at a time.
Are the bonds paying 4, 5 or 6 percent? Is one month better than another to cash them in? Again, no one at the bank had a straight answer.
“I got a nice, blank look back,” said Alice Treppa.
U.S. savings bonds: They’re simple to buy, nearly impossible to track.
The rules are downright bizarre. And many times not knowing the real deal can cost savings bond holders hundreds of dollars in lost interest. Some bonds, for example, pay only 4 percent interest. Others are guaranteed to pay 6 percent for the next few years. Cashing the wrong bond puts more money in Uncle Sam’s pocket and less in yours.
The U.S. Department of the Treasury estimates that Americans own about $186 billion in U.S. savings bonds–just a fraction of the $5.6 trillion invested in mutual funds but a sizable sum nonetheless for many middle-class families.
But all those bonds we got through payroll deduction plans, for birthday gifts or inherited from Grandma–how much are they worth?
Most of us don’t have a clue. Some of us can’t even pinpoint where we put our bonds.
Unlike many investments, savings bonds don’t provide a monthly statement to tell you the current return on your holdings. Ask too many detailed questions at banks and you get blank stares or, often, wrong answers.
To better explain this savings bond mystery, let’s take an up-close look at the savings bond portfolios of three Detroit-area families.
Daniel Pederson, one of the country’s best-known experts on savings bonds, prepared individual statements for each family, based on a list of their bonds.
Pederson used to be a supervisor of the savings bond division of the Detroit branch of the Federal Reserve Bank of Chicago. In 1990, he started Detroit-based Savings Bond Informer Inc. (800-927-1901), in part because he realized the government worksheets he was handing out were worthless.
Now Pederson prepares statements for financial planners and individuals. For reviewing 51 to 100 bonds, for example, the company charges $49.
Leonard and Alice Treppa got their hands on some of those mind-numbing government worksheets in 1998.
An eight-page blue booklet gave several tables showing all the values for $50 bonds that were issued over the past 31 years.
What if your bonds had a face value of $75 or $100 or $200?
Well, you needed another white chart to show you how to multiply the values on the blue table to figure out the value of your bonds.
“I told Len, `If you want to do it, you can do it,’ ” Alice Treppa said.
Len didn’t want to do it.
What he did do was sweet-talk one of his bank’s tellers into giving him a redemption book that the bank uses to cash bonds. He then spent a few hours at home figuring out the value of the bonds. His estimate: $8,994.02.
“But I couldn’t get any information on how much interest they were paying,” Leonard Treppa said.
To be fair to bank tellers, the U.S. Treasury hasn’t been a big help.
In this decade alone, the federal government has changed the rules three times on Series EE savings bonds. What interest rate your bonds are paying depends heavily on when you bought them.
The face value on the bonds doesn’t tell you much. Newly issued bonds can be worth as little as half their face value. Others can be worth as much as seven times the face value.
Take a look at just two of the Treppas’ bonds.
A $100 bond, bought for $50 in May 1985, is now worth $120 and is paying 4 percent.
A $100 bond bought in May 1992 is worth $73.44. But it’s guaranteed to pay a rate of 6 percent through May 2004.
Once, someone at the bank suggested that the Treppas sell all their savings bonds and invest in certificates of deposit. Leonard Treppa hesitated because no one could tell him what interest rate his savings bonds were earning.
Pederson said the couple’s savings bonds are worth $9,007.34, not quite double their original investment of $5,125. But he showed the couple that a large batch of their bonds are paying 6 percent. That’s much better than a one-year CD, which is now paying about 4.5 percent.
A small group of their savings bonds, however, are paying only about 4 percent.
The reason for the difference?
Bonds bought from May 1987 through February 1993 have a guaranteed rate of 6 percent for the first 12 years. The family’s March 1987 bonds, for example, dropped to 4 percent in March 1999. Other ’87 bonds will drop to 4 percent later this year. But the ’92 bonds will continue paying 6 percent through 2004.
Leonard Treppa, 57, said the retired couple is looking for more monthly income. He and his wife thought about changing some Series EE bonds into Series HH bonds. The HH bonds give the bond holder current income, or an interest payment every six months.
Pederson nixed that idea. One problem with HH bonds is that they will pay only 4 percent for the next 10 years, no matter how high interest rates might climb.
Pederson suggested that the couple simply cash a few 4 percent Series EE bonds the next time they need extra money. If the couple want to buy mutual funds, Pederson recommends cashing the 4 percenters.
The Treppas’ bond portfolio stops in 1992 when Leonard Treppa went on medical disability and left his job at the General Dynamics tank plant in Warren, Mich. He retired in 1994.
But an even quirkier bit of bond data can be found with savings bonds bought in 1994.
And here we turn to the 126 savings bonds held by the James and Virginia Rawls family.
James Rawls, 45, and his son Jalen, 6, have 10 savings bonds that are earning a current annualized rate of 16.6 percent.
No, it’s not a typo.
Bonds issued from March 1993 through April 1995 pay a hefty premium in the month that they turn 5 years old. The payment is credited to the bonds exactly five years from the issue date. (The issue date is the date typed in the right corner of the bonds. It is not the date that may be hand-stamped on the bonds.)
Let’s say that James Rawls walks into a bank tomorrow to cash two of his $5,000 bonds. Not knowing the rules–and not waiting about three months–could cost him $456 in lost interest for two bonds.
That’s because the bonds, now worth $3,008 each, were issued in August 1994. They won’t get the lump-sum payments until Aug. 1.
Pederson estimates that more than $4 billion in savings bonds, or about 2 percent of outstanding bonds, qualify for a five-year lump sum this year or next.
Rawls, who works at Henry Ford Health System in Detroit, buys savings bonds for sons Jalen and Julian, 3, through a payroll deduction plan at work.
James Rawls buys bonds because a wise uncle bought bonds. Uncle Larry didn’t give toys for birthdays, he gave savings bonds.
But even Uncle Larry, who knows bonds, had a hard time getting the bank to explain when a $500 bond bought today would reach its face value.
The answer is about 14 1/2 years, if the interest rate averages 5 percent.
None of the Rawlses’ bonds, bought from May 1992 through December 1998, has reached face value yet, according to Pederson’s report. The Rawlses’ bonds are now worth about $15,294, up from an original investment of $12,825.
Nancy Doman of Royal Oak, Mich., thought she had 50 savings bonds sitting around the house. But once she dug through files, baby books and the jewelry box, she came up with 161.
The value?
“I haven’t a clue,” she said.
Their value, according to Pederson, is $7,687.75. Some bonds were received as gifts over the years for the children; others the couple bought directly. The original cost: $5,612.50.
Nancy and Bill Doman had been talking for several months about reviewing the bonds held by their four children.
Joe, 18, graduated this year from Royal Oak Kimball High School and heading to the U.S. Naval Academy in July. His tuition is covered by an after-graduation commitment to the U.S. Navy or Marines.
But Andy, 17, graduates next year. And the family’s going to need money for his college tuition. Soon they’ll also need tuition money for George, 14, and Courtney, 11.
Nancy Doman thought some bonds stopped earning interest. She also wondered if it would make sense to cash some bonds now and buy new ones, especially if the new ones were paying higher rates.
Pederson told her that all 161 bonds were still earning interest. Bonds issued in December 1965 and after earn interest for 30 years.
He said it doesn’t make sense for the family to cash their bonds only to buy new savings bonds.
First, there’s the tax issue. For many people, the federal government will count all interest earned on a Series EE bond as taxable income in the year you cash the bonds. The higher your income-tax bracket, the worse the tax hit. (You don’t take a big tax hit at once if you’ve paid taxes on the bonds over the years that you’ve owned them. Most people don’t.)
A $50 bond issued in July 1985 cost $25 to buy and now has a value of $60. But selling it would add $35 in income to your tax return for 1999.
Some people can get a tax break if they use Series EE bonds for higher education. But many of the Domans’ bonds won’t qualify. The bonds must have been bought Jan. 1, 1990 or after. Also, the child cannot be listed as an owner or co-owner of the bond. And the parents’ income in the year that the bonds are cashed determines the tax break. Your modified adjusted gross income, if married and filing a joint return, must be less than $109,650 in 1999 to qualify for any break.
More important, many of the Domans’ bonds are paying 6 percent, much more than new bonds sold today. Series EE savings bonds bought today pay just 4.6 percent. The rate changes every May 1 and Nov. 1. Pederson expects the new rate for Series EE bonds to drop to 4.3 percent on May 1.
So many bonds, so many rules, so many reasons for studying your bonds before making a move.
WHEN, HOW, WHERE TO CASH YOUR BONDS
You can find the best month to cash your bonds by referring to a Table of Interest Accrual Dates for Series E bonds.
The table is available by calling the Federal Reserve Bank of Minneapolis (savings bond operations, including the one formerly in Chicago, now operate out of Minneapolis). You can call 800-553-2663 between 8:30 a.m. and 5:30 p.m. on weekdays.
An accrual table also is found on Page 84 of Daniel Pederson’s book “Savings Bonds: When to Hold, When to Fold and Everything In-Between,” ($19.95, Sage Creek Press).
You also can call the Federal Reserve Bank of Minneapolis to find out specific information, including interest rates, on your bonds.
The Savings Bond Wizard, developed by the federal government, can tell you what your bonds are worth. Download the free program from the Treasury Department’s Web site, www.savingsbonds.gov.
Or you can order a Savings Bond Wizard, a Windows program, for $20 by calling the U.S. Government Printing Office at 202-512-1530.
You can pay a fee to have the value of your bonds calculated by calling the Savings Bond Informer at 800-927-1901. The service also lists the current interest rate and ranks which bonds are best to cash first.
Who will cash your bonds? If you’ve had an account with a bank for more than six months, there’s no limit to the amount of savings bonds they can cash.
If you don’t have an account with the bank, the bank can cash up to $1,000 worth of savings bonds at a time. That’s $1,000 in current value, not face value. For example, a bank may refuse to cash two $500 U.S. savings bonds if the bonds are actually worth $2,000.
