Sales set record, but advisers warn against overuse

WHY THE SAVINGS BOND BOOM?

December 28, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- Cash is trash and CDs are yesterday's news, so U.S. savings bonds must be history, right?

Wrong. Sales of Series EE bonds set a record this fiscal year, which ended Sept. 30, with more than 50 million Americans investing $17.3 billion in them. That's a 28 percent increase over 1992, when $13.5 billion were sold.

In Maryland, $496 million in savings bonds were sold, a 27 percent increase over last year.

The reason for the bonds' popularity, however, is less clear. While personal finance experts say that the bonds can have their place, they worry that the bonds, which have a guaranteed yield of 4 percent, are being used as a substitute for long-term investments.

"I'm in favor of anything that will make people save. It's better than going out and buying a fancy lunch, but if you want to do something for your kids, you'd probably be better off to open up a growth and income mutual fund," said Paul Brown, a financial planner and co-author of the book "Grow Rich Slowly."

Some of the bonds' advantages include:

* Safety. The bonds guarantee the principal and a 4 percent return.

* Flexibility. They can be cashed in any time after six months, so unlike a CD, investors are not locked in for another six months. If you cash the bond after nine months and six days, for example, you get nine months' worth of interest.

* Small face value. Bonds come in denominations as small as $50 (issue price $25) so they are easier to give as gifts or for beginning investors to buy.

* Forced savings. The bonds can be deducted automatically from many companies' payrolls, so they may force some people to sock away some money that they might otherwise spend.

* Tax exemption. The interest on bonds is free of state and local taxes and, if the money is spent on education, free of federal taxes. This can make them look more attractive than their 4 percent interest rate might indicate.

The bonds are also a good place to park cash for six or 12 months. With a guaranteed 4 percent minimum, they compare favorably with the average 2.8 percent rate for six-month certificates of deposit.

But as New York-based financial planner Rob Harrigan points out, that only works out to $60 for $10,000 in bonds. Add to this the hassle of not being able to purchase the bonds through brokers and the difficulty in replacing lost coupons, and many investors may not feel the difference is worth while, Mr. Harrigan said.

"For 4 percent I would go out and buy a Treasury, which yields 3.2 percent. There the difference over six months is only $40 and HTC you have more flexibility," he said. Until March 1, the guaranteed interest rate on bonds held for at least five years was 6 percent. Now, the minimum is 4 percent.

There's a difference between an EE bond's guaranteed rate and its current market rate. The market rate is adjusted every six months, to 85 percent of the rate on five-year Treasuries. It's currently 4.25 percent.

Before the rate was cut, sales of the bonds averaged $2 billion a month. That slid to $800 million a month, however, as investors turned to higher-yielding investments.

Still, a record 46 million people bought the bonds through payroll deduction plans last year, including 1.2 million in Maryland.

BOND TABLES INSIDE

The tables of redemption values show how much saving bonds purchased in a given month and year are worth if redeemed in January. Values for savings notes, the "Freedom Shares" issued from 1967 through 1970, are on Page 3D. The redemption values for Series EE and Series E bonds dating back to 1941 begin on Page 9D.

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