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Many Get Tangled in 'Simple' Savings Bonds

Investing: Returns on the popular government security can be hurt if owners fail to pay attention to the complex regulations.

November 26, 1998|JOHN CUNNIFF | ASSOCIATED PRESS

Surely, you might be inclined to say, no investment should be simpler to understand than U.S. Savings Bonds, often owned by ordinary folks not accustomed to financial intricacies.

But if that is so, why are these investors holding $5.3 billion of savings bonds that have ceased to pay any interest at all--in effect, granting the U.S. government interest-free loans of their money?

And why is it that, according to at least one survey, bank personnel more often gave wrong rather than correct answers when asked how long it takes for a bond to reach face value at the guaranteed interest rate?

Savings bonds are one of the more complex investments in the market, with different interest rates and maturities and requiring different strategies because of compounding and tax considerations.

To call savings bonds a simple investment, said Dan Pederson, is one of the most egregious misstatements that can be made about investments. The myth persists, however, and it costs bondholders dearly.

Pederson shared in the myth until, as a Federal Reserve employee, he spent a week answering the customer-service phone. He recalls it as "the longest, most difficult week of my career at the Federal Reserve Bank."

The questions were basic: "How do I?" . . . "When does this happen?" . . . "How does this work?" . . . "Does it matter if I?" . . . "Which form do I use?"

The callers were thoroughly confused. Later, he found "experts" were too.

It was the beginning of a career. Shortly thereafter, in 1990, Pederson formed Savings Bond Informer Inc. to provide statements and analysis of savings bonds, consult with owners and advisors and offer seminars.

Complexity? The fourth edition of Pederson's "Savings Bonds," subtitled "When to Hold, When to Fold and Everything In Between," requires 276 pages to guide people through popular but costly misconceptions.

With prodigious patience, research and determination, Pederson manages to analyze and describe the characteristics of each bond and otherwise answer questions that stump bankers and advisors.

How such a hash was allowed to develop, then promoted and dished to the public as everyman's investment without a warning label, is a story for another day. In the meantime, as Pederson shows, the results can be measured in frustration, dollars, missed opportunities and taxes.

These aren't small dollars either. More than 55 million Americans hold about $180 billion in savings bonds, making them, as Pederson points out, "one of the world's most widely held securities." And most misunderstood.

Some examples:

* A man redeemed all his bonds right before retirement, when he was at the highest income bracket of his life, not realizing that all interest income would be reported in that calendar year.

* A father purchased an EE bond for its educational feature only to discover that he might not meet the criteria for the tax-free status.

* A financial planner learned that more than $50,000 of his client's $240,000 bond holdings had stopped earning interest more than five years earlier.

Pederson's book, published by Sage Creek Press, is considered authoritative and contains more information than might be needed by any single owner. But the reader will finally find answers.

And if readers still have questions, the book contains a form that allows owners to get an assessment from the company. The tab is $15 for one to 10 bonds, up to $89 for 500 bonds.

The address of Savings Bond Informer Inc. is P.O. Box 9249, Detroit, MI 48209.

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