Are Treasury Bills a Good Investment for Retirement Savings? (2024)

FAQs

Are Treasury Bills a Good Investment for Retirement Savings? ›

T-bills are one of the safest investments, but their returns are low compared to most other investments. When deciding if T-bills are a good fit for a retirement portfolio, opportunity cost and risk need to be considered. In general, T-bills may be appropriate for investors who are nearing or in retirement.

For retirees, who often rely on investment income to cover living expenses, Treasury bonds are a popular choice due to their stable and predictable payments. Tax benefits: The interest income from Treasury bonds is subject to federal income tax but exempt from state and local income taxes.

Drawbacks of Investing in Treasury Bills

If you're looking to make some serious gains in your portfolio, T-bills aren't going to cut it. Another potential issue for investors has to do with how T-bills are purchased. You have to bid on them through an auction process. Bidding can be competitive or non-competitive.

While interest rates and inflation can affect Treasury bill rates, they're generally considered a lower-risk (but lower-reward) investment than other debt securities. Treasury bills are backed by the full faith and credit of the U.S. government. If held to maturity, T-bills are considered virtually risk-free.

Compared with Treasury notes and bills, Treasury bonds usually pay the highest interest rates because investors want more money to put aside for the longer term. For the same reason, their prices, when issued, go up and down more than the others.

Key Takeaways

T-bills are issued by the U.S. government and are considered among the safest investments in the world, so risk should never be a significant deterrent. However, the return on T-bills is typically quite low when compared to other types of securities, such as stocks, bonds, and mutual funds.

Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.

However, should interest rates rise, the existing T-bills fall out of favor since their return is less than the market. For this reason, T-bills have interest rate risk, which means there is a danger that bondholders might lose out should there be higher rates in the future.

Key Takeaways

Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes. The interest income received in a year is recorded on Form 1099-INT.

To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.

What happens when a T-bill matures? ›

When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.

3 Month Treasury Bill Rate is at 5.25%, compared to 5.25% the previous market day and 5.09% last year. This is higher than the long term average of 4.19%. The 3 Month Treasury Bill Rate is the yield received for investing in a government issued treasury security that has a maturity of 3 months.

Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit. Money market funds and high-yield savings are also places to salt away cash in a downturn.

The FDIC does not insure safe deposit boxes or their contents. The FDIC does not insure U.S. Treasury bills, bonds or notes, but these investments are backed by the full faith and credit of the United States government.

However, should interest rates rise, the existing T-bills fall out of favor since their return is less than the market. For this reason, T-bills have interest rate risk, which means there is a danger that bondholders might lose out should there be higher rates in the future.

During a recession, investing in cash and cash equivalents becomes a strategic choice for investors who are hoping to preserve their capital and maintain liquidity. Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit.

To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.