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Don't Forget U.S. Savings Bonds When Saving for Retirement

We all know we should save for retirement, even though study after study shows that most Americans aren't saving enough. The average person retiring at age 65 will spend 18 years in retirement. If you're relying on Social Security payments and a pension from your workplace to keep you in a comfortable lifestyle, you may want to think again.

Experts estimate that you'll need 70 to 80 percent of your pre-retirement income — lower earners will need 90 percent or more — to maintain your standard of living when you stop working. This rule of thumb is based on the assumption that once you say goodbye to the 9-to-5 routine, you'll also eliminate many of your current expenses: commuting costs, upkeep of a professional wardrobe, membership in work-related associations, etc.

Some retirees, however, find themselves spending more in retirement than they did while they were working. New hobbies and trips to visit family and friends all cost money. Other expenses to keep in mind are Medicare, prescription drugs, insurance, rent/mortgage, travel and entertainment, utilities, groceries, gifts for the grandchildren, and unexpected expenses.

What steps can you take to make sure those retirement years are truly golden? Save as much as possible and diversify your portfolio with a 401(k) or similar thrift plan, stocks, CDs, mutual funds, and IRAs — as well as U.S. Savings Bonds. Two types of savings bonds, EE and I bonds, are available for purchase.

Backed by the full faith and credit of the United States government, savings bonds are safe and secure. Unlike other investments whose values can go up and down, savings bonds are designed never to lose value. Available in both paper and electronic form, Series EE and I bonds earn interest that accrues monthly, compounds every six months, and is payable when the bond is redeemed. EE and I Bonds earn interest for 30 years from issue date.

EE bonds earn a market-based rate, indexed to the average yields of 5-year Treasury securities. The I bond is inflation-indexed. Its earnings formula has two parts: a fixed rate of return that remains the same for the life of the bond and a variable rate tied to inflation as measured by the Consumer Price Index for Urban Consumers (CPI-U). The Treasury announces new rates each May and November.

Savings bonds also offer tax advantages. Interest is always exempt from state and local income taxes, and federal income tax can be deferred for up to 30 years for EE and I Bonds or until the bonds are redeemed or reissued to a new owner. After retirement, you can cash bonds to supplement your retirement income and report the tax-deferred interest as income at a time when you might be in a lower income tax bracket.

Savings bonds are liquid and redeemable in as little as a year after issue at many financial institutions nationwide. (A three-month interest penalty applies to savings bonds held less than five years.) They can be used before retirement, if necessary, to meet unexpected emergencies or to pay for some of life's little pleasures without dipping into other retirement investments.