Cashing out: Why Nick is dumping a chunk of points today

55

On last night’s Frequent Miler Live: Ask Us Anything, Grant of Travel with Grant asked us to name an underappreciated sweet spot or credit card and a reader named Matthew asked about where to find outsized value in a game that (to some) feels like it is constantly diminishing. Today I’m going to both take advantage of a sweet spot that gets less consideration than it should and the reason I’m going to do it is to help protect myself against diminishing value: I’m going to cash out a chunk of Membership Rewards points via the Schwab Platinum card and put the money into US Treasury I-bonds given a pretty appealing opportunity to lock in a great guaranteed rate of growth. To be clear, I am not a financial advisor and this post is not meant to be financial advice, just take it for its entertainment value and consult your own financial advisor if you need help determining what makes sense for your goals.

Schwab Platinum: Redeem Membership Rewards points for 1.1c per point

The Schwab version of the Amex Platinum card comes with the ability to redeem Membership Rewards points for a deposit in your Schwab brokerage account. When you redeem points for a deposit, you get a value of 1.1c per point. We’ve covered the mechanics of this redemption in the post: How to convert Amex Membership Rewards to cash with the Schwab Platinum card.

Our Reasonable Redemption Value for American Express Membership Rewards points is 1.55c per point. If you think I have either lost my mind for entertaining the notion of redeeming points for so much less value, I can understand that. Still, I’m going to cash out some points today.

I have to admit that on the surface I am not excited about the prospect of redeeming points at such low value. After all, I play this game to maximize. There are few things I love more than a good sweet spot and I love the flexibility of being able to pounce when award availability opens up.

However, the Amex points parade of the last couple of years has left us flush with Membership Rewards points. I earned more than half a million points with a single purchase earlier this year and have continued to take advantage of opportunities for more points. Most recently, my wife received an offer to open another Business Platinum card for a total bonus of 160,000 points. She’s also been getting offers for 100K on a Business Gold and I’ve been eying that 90K + 20% back on restaurants offer on the consumer Gold card. My point is that not only did Amex run some great offers in 2020 and 2021, but they continue to offer plenty of opportunities to replenish points.

And so we find ourselves with more Membership Rewards points that will definitely go unused over the next year. We also have a lot of American Airlines miles in addition to having Chase Ultimate Rewards. Capital One miles, and points in various other programs. We aren’t points gazillionaires by any stretch, but we have more points than we will use in the next year or two. Points sitting idly in an account are generally only going to diminish in value as those programs devalue. They certainly don’t earn any additional value. I suppose that if those programs pick up additional high-value uses you could think of your points becoming more valuable, but the bottom line is that unused points are very likely to diminish in value over time. Given the current situation with I-bonds, I think that holding as many points as we are is an expensive proposition.

The interesting position of US Treasury Series I bonds

Series I bonds are a type of US savings bond that earns interest on a variable composite rate that accounts for inflation. Forbes Advisor has an article that summarizes I bonds as follows:

I bonds are safe investments issued by the U.S. Treasury to protect your money from losing value due to inflation. Interest rates on I bonds are adjusted regularly to keep pace with rising prices. In addition, series I bonds are exempt from state and local income taxes, which makes them an even better low-risk investment for investors who live in high-tax states and cities.

Investors can buy up to $10,000 worth of I bonds annually through the government’s TreasuryDirect website. You can purchase another $5,000 with your tax refund, upping the annual total purchase amount of series I bonds to $15,000 per person.

You can read that entire article here.

Doctor of Credit and The Wall Street Journal also recently covered the short-term opportunity in buying I bonds. You buy them from the US Treasury website and you can read more from those other sites about the process of buying them (you can’t buy with a credit card but rather need to link up a checking or savings account, so there is no play for rewards on the purchase to my knowledge).

The short story is that I bonds earn monthly interest based on a rate that changes every six months (in May and November). The current rate at the time of writing (April 2022) is 7.12% interest. This means that if you buy I bonds today (April 28, 2022), you will earn 7.12% interest for the first six months you own the bonds and then you’ll earn the new May 2022 rate for the second six months you own the bonds. That May rate change is set to become 9.62%. That means that if you buy bonds today (April 28, 2022), you will earn 7.12% interest on the bonds for the first six months and 9.62% interest for the next six months after that. To say that you can’t beat that with most savings products on the market would be a large understatement.

Note that you earn interest for the entire month in which you purchase the bonds, but the purchase doesn’t settle until the next business day after you buy. This means that if you buy today (April 28, 2022), you will receive the bonds tomorrow (April 29, 2022) and earn 7.12% interest for the month of April and the next 5 months, then 9.62% for the six months to follow that. If you buy after today, your purchase won’t settle until a date in May and you will therefore earn 9.62% for the first six months and then whatever the new rate becomes in November for the next six months to follow. That makes today the day to buy if you want to lock in a minimum of 7.12% and 9.62% for the first year.

There are just a couple of key “catches” with I bonds: first, you can not cash them out for a minimum of one year. You are essentially locking the money up without the ability to withdraw it for a year. If you do cash out the bonds in fewer than 5 years, you pay a penalty of the last 3 months of interest. In other words, if you buy the bonds and only keep them for one year, you will only get the interest from the first 9 months — you lose the interest from the last three months.

The other key limitation is that you can only buy $10,000 worth of electronic I bonds per calendar year per person (and you can buy a max of $5,000 in paper I bonds per person with your tax refund — you’d have needed to have selected to receive your refund in bonds when you filed).

Still, if you put $10,000 into I bonds today and cashed in the bonds in 1 year, even after forfeiting the last 3 months of interest, I believe you would have earned about $653.42 as per the schedule shown below (you would essentially stop on month #9 if you cashed out after 12 months). Note that to generate the schedule below, I averaged the rate between 7.12% and 9.62%, but that isn’t entirely accurate since you’ll earn different amounts of interest during the first six months that will then compound into a lesser principal amount for the next six months, but this chart is meant to be an approximation.

Considering that this is a US-backed savings bond, that looks like a great return. Is it possible to play the stock market right and beat that return? It certainly may be. Again, I am not a financial advisor, so make your own decisions about how and where to put your money.

However, looking at that chart makes the prospect of holding Membership Rewards points feel pretty expensive, particularly since I know without a doubt that we currently have more points right now than we will use in the next 12 months. We will certainly have a quantity of Membership Rewards points that will sit in our accounts unused during the next 12 months.

Let’s imagine a scenario where I had 909,000 Membership Rewards points that I was confident I would not use over the next year. If I redeemed those points through the Schwab Platinum card, I would have $9,999. To make the math easy, let’s call that $10,000.

If I then put that $10,000 in I bonds for one year, I would stand to earn about $653.42 in year one. It is not possible to convert that cash back into Membership Rewards points, but if we think of that money in terms of each 1.1c representing one Membership Rewards point, that $653.42 could be thought of as though it is a “bonus” of 59,401 Membership Rewards points that is unlocked by redeeming the points and putting the money into bonds.

In other words, keeping those points as Membership Rewards points rather than taking advantage of this opportunity costs me the sort-of equivalent value of 59,401 points over the next 12 months. Cashing out and buying bonds essentially earns me the cash equivalent of 4,950 points per month. Note again that these numbers aren’t entirely accurate because of the way I blended the rate for the chart above and since I can’t convert the cash back to Membership Rewards points, those numbers are meant for mental accounting rather than actual points. Still, that’s a lot of potential value that my points could earn if I convert them to cash versus earning nothing if they remain as points.

Put another way, if I redeemed 909,000 points today, I would have a cash value equivalent of 968,450+ points a year from today. Suddenly it feels better than redeeming at 1.1c per point if those points would have otherwise sat untouched in a Membership Rewards account for that time.

And that’s assuming that I cash out the bonds after a year. If the rate remains high enough for me to keep the money in bonds beyond that time, I’ll continue earning interest at whatever the newly-announced rate is come November of this year and still only forfeit the last 3 months of interest whenever I cash out the bonds (meaning that I’d keep a larger proportion of the ~$880.58 that I would be scheduled to earn in the first 12 months for every month I keep the bonds thereafter. I’d keep all of the interest earned if I kept the bonds for at least 5 years).

Compare the rate of return there to something like Bask Bank, which awards American Airlines miles rather than interest, and the I bonds win by a large margin (though of course they are much more restrictive given that you can’t withdraw in the first 12 months).

Obviously if you have the cash on hand and interest in buying I bonds, you may “have your cake and eat it too” in the sense that you may be able to buy whatever amount in bonds you want without redeeming your Membership Rewards points.

In my case, because I’ve moved a lot of my long-term savings into investments over the past couple of years and because I have recently tied up some cash in other endeavors, I’m not in position to max this out without cashing out some amount of rewards to replace the money I decide to put into I bonds. Note that cashing out via Schwab is not instant. It takes a few days. If you literally don’t have enough cash to buy I bonds today, cashing out via Schwab won’t work quickly enough to get you the cash to buy the bonds (which I believe must be purchased by ACH payment). In my case, I do have enough cash to cover the purchase of the bonds I want, but I’d need to replace that cash in the near-term, hence my interest in redeeming Membership Rewards points for a deposit in a Schwab account. I’m therefore going to redeem some quantity of points today. I haven’t decided exactly how many I will redeem, but it makes sense for me to do this with some of our current excess.

Again, the sense of urgency here for me is that today is the last day to lock in the 7.12% rate for the first six months. We know that the May rate (for the next six months you own the bonds) will increase to 9.62%. We don’t know what the rate will be in November. It certainly may increase, in which case I could keep the money in bonds for longer than a year if I want. If it decreases, I’ll be happy to have locked in 7.12% for the first six months of ownership (and that will essentially remain true for as long as I own the bonds). Any way you shake it, this is better than I could reasonably expect to earn in any other product with comparably low risk.

Bottom line

I won’t necessarily be looking at redeeming 900K points today (particularly because I do intend to use some Membership Rewards points for premium cabin flights in the next few months), but since I know we have more points than we will use in the next 12 months and we have some easy targets to take down more points in the near-term, we will redeem some Membership Rewards points for a Schwab deposit today. To be clear, that deposit won’t clear soon enough to literally use that money to buy the bonds, but rather it will replace the money we put into bonds today. I don’t love redeeming points for value far below the reasonable redemption value, but it seems hard to accept the points sitting idly in a Membership Rewards account when I know that I could put them to use for what is essentially a locked-in rate of return. It seems like a poor-value use of points in today’s dollars, but the juice should become worth the squeeze within a year or two, particularly if the Amex point parade marches on.

3.5 15 votes
Post Rating

Subscribe
Notify of
guest

This site uses Akismet to reduce spam. Learn how your comment data is processed.

55 Comments
Inline Feedbacks
View all comments
rks

Anyone knows if only the points associated with CS platinum can be redeemed or any other amex card points not associated with CS can be, too?

LK_

All Amex MR points you earn (whether from Personal or Biz cards) pool together, and can be cashed out using the CS Plat

Malmel

Harry Sit with Finance Buff has incredibly detailed information on this topic. It’s worth studying.

Alex

I just went to purchase I Bonds and lock in the 7.12% rate…But when I reach the ‘Purchase review’ screen it states:

“Purchase Date(s): We may have changed your purchase date(s) to the next available business day.
04-29-2022”

Does anyone know if this mean this will not settle until Monday and I will miss out on the 7.12% rate?

NCTipper

That’s normal. 4-29-22 would be ok but you better pull the trigger soon or the purchase date will be Monday, which is May and changes the interest rate. Which probably won’t be the end of the world but I’d prefer to get in this month.

John

Hmmm, spent 200,000 points on Emirates flights recently that the value was $27,000. To me, that is a better return than the I-bonds. Think I will just hold on to my points.

EricF

Great redemption, but cash ticket price = “value” only if you’d have considered paying that cash price for that seat.

Personally I’ve had such award availability issues lately that I can’t value MR any higher than the 1.53 cpp Biz Plat pay-with-points-get-35%-back rate.

dizzy

I hate CS so much, I would have cashed out at the old 1.25 rate let alone the 1.1 rate. Never can get approved (then again, amex won’t approve me for the vanilla plat either). 5 biz cards in 1 year including 2 different biz plats? No problem

Parts Unknown

Cashed out $17k this year, took the MR balances down to almost nothing. No regrets.

Captain Greg

Nick, I’d be curious to hear your thoughts about doing this instead of the Roth IRA again. I guess this is money you want to have access to before you’re 59.5? To me, the Roth is still the way to go. An index fund historically gives better returns than the current 1-year I-bond rate, and that return will surely sink much lower over time. Plus zero taxes. To me, it’s a no-brainer to push those MR points into a Roth IRA again. As long as you’re going to cash out, why not put it into the no tax longer-term higher yielding investment?

Timothy

Pretty sure Nick makes way more than the income limit for directly contributing to a Roth IRA.

Alex G

Back door Roth then! Which I’m sure he does too

Alex G

Or YOLO it in out of the money AMC and GME calls.

Just kidding. Not financial advice.

I’ve now evolved into redeeming points more often for real money value vs theoretical money spent at a hotel that sets its own theoretical prices. Kudos to you

Lynn

Anyone else remember the days when you could buy these with a credit card without any fees? That was fun! I still have some of those I bonds as the conservative part of my investments. You only had to hold them for 6 months back then.

Mary

Yep, I did well with that! It was a sad day when they stopped accepting credit cards.

Hank

Omg, did this over and over and over again with SPG Amex. I think I bought them, held them for 6 mos(?), dumped them and rinse/repeat. Excellent ROI.

Jake

In one sense it be better to dump UR with pay yourself back at 1.5cpp but I know you must have more MR than UR and that Hyatt is so valuable to you. Is there any formula you know of that can quantify diminishing value with the more points you have kicking around? I know in general MR is less valuable for this reason but wish I could be more precise about it.

Dugroz Reports

Thanks for this info. While I won’t be doing this with points, it’s a good reminder of the deadlines for the rate changes.

LarryInNYC

Reading this article makes these bonds seems like magic. The unstated issue is that in low inflation (low CPI increase) environments these bonds can pay 0 % interest. That’s why Nick focuses on the short-term nature of the investment and the fact that today you can lock in good expected rates for the entire 12 month period that you must keep the bonds. It’s also why it’s desirable to lock in the lower 7% interest rate and then the 9 % rate — that way you’re not worried about the second sixth month period going to 0% and having to hang on to the bonds for the 12 month period at, effectively, 4.5 %.

Personally, my guess is that we’ll be in a period of reasonably high inflation for more than the next six months so that there will be a few more periods of desirable interest rates on these bonds. My qualification for making that guess? I’m some schmo on the internet. So who knows?

Very inclined to put some cash into these tonight.

Larry K

I am not a financial planner. This is not tax or investment or financial planning advice.

If you really think you might liquidate the I bonds in a year you need to consider taxes. Most points redemptions don’t require you to pay taxes. Bask bank interest is taxable, so that is more apples to apples. But if your effective rate in the year you redeem the bonds is 20 percent, then you are paying $126 for the privilege of using 900,000 points to generate $10,623 after 1 year instead of redeeming those points for value later without paying taxes.

This play makes more sense to me if you are planning to hold long term. The benefit of I bonds is not just the interest rate but the ability to generate compounding interest in a tax deferred instrument. You don’t pay yearly like with other bonds with coupons. Only when you sell. So it works like a retirement account if you anticipate lower tax rates in the future.

One other thought. This play may not make sense if you already hold ANY bonds in a non-retirement account or if you are holding any liquid fixed income products that you think will earn less than 9 percent next year. You could instead sell them to buy I bonds.

Last edited 24 days ago by Larry K
Larry K

I agree right down the line.

I was trying to read on bogleheads about methods to get additional I bonds if you form a corporate entity. It’s complicated and I’m not ready to dive too deep, but many people were kind of bristling at the idea of creating an entity or even just using a side hustle entity just to buy I bonds. It’s a funny intersection of the two hobbies. Stuff like that is old hat for us.

Theresa

You can also buy additional I-Bonds in a trust. I don’t do that but there are articles on it for anyone that wants to buy more than the $10,000 per person limit.

Dugroz Reports

Thanks for mentioning this. I manage a family trust, and it’s hard to find good interest-bearing instruments!

mat

the only issue I see is buying today instead if in May. Ibonds fixed rates are almost zero, so you’re relying on the variable rate for eternity. The May Ibonds should have a positive fixed rate, though unknown at the moment. I’d much prefer to wait a few days and lock in a better base rate plus the higher variable rate. But thats me and not you. and you’ve got a mm MR’s while I do not. 🙂

Theresa

The base rate has been zero for a long time. I think you will be waiting years for it to go above zero.

Matt

The base rate was .5% (modest, but certainly not zero) in 2019. If the federal reserve indeed raises rates at the pace they’re indicating, the base rate will likely be non-zero sometime this year. That’s not a reason to wait, because we’re talking about 10 (to at most around 50) basis points, but by next year there could be even more value to loading up on these versus other “safe” savings products if inflation remains even modest (2% or more) and the base rate is at or above .5%, especially given that the interest compounds biannually, federal taxes are deferred, and there are no state or local taxes.

Last edited 24 days ago by Matt
John

What about the taxes on the interest u make? Shouldn’t u factor that in?

Theresa

There is federal tax but no state tax, and they aren’t taxed if used for education if your income does not exceed a certain amount. I believe that. includes investments in 529 plans.

LarryInNYC

Apparently you can elect whether the interest is reported annually or only in total when you cash out the bond. The later is a very interesting alternative for someone who is near retirement, but it does make the accounting a little more difficult.

Alex

Taxes on IBonds can be reported annually. However, once you start doing it, you must continue for the duration of bond ownership. Also you do not get the interest paid out so you have to tap into your own pocket to pay the tax. There’re some advantages with this approach, of course.

And yes, taxes should be a part of this equation because by cashing out MRs and putting them in a profit-generating investment you exchange a non-taxable asset into a taxable one.

LarryInNYC

Are you sure that putting the money into a 529 would be considered “educational expenses”? My guess is no — I think it has be paid to an accredited higher education provider within the same tax year.

Last edited 24 days ago by LarryInNYC
Dr. McFrugal

Nick— You can also buy additional I-bonds for your kids by opening a minor linked account. The Finance Buff has an article on it. And it is easy to do. I did it for my daughter and will likely do it for my son who will be born in two months too.

Larry K

Other than for people who think their tax rates will increase when they are ready to cash out, it’s hard to imagine the benefit of reporting interest yearly. Also a hassle.

I assume that most people who are looking at I bonds are also putting pre-tax dollars into retirement accounts, and they probably hold bonds in those accounts (whether they know it or not). Pretty much the same thing. If you think one makes sense, it would be weird to decide on a different approach with I bonds. For me, the tax deferral makes I bonds even more of a no-brainer than they already are.

Add in the possibility of using for educational expenses. Though it’s important to note a few things. First, the tax benefit phases out for higher income families. Second, tax law can change and there is no guarantee that the educational tax advantage will continue with I bonds in X years when you expect educational expenses. Nothing is guaranteed with 529 plans either, but it’s a pretty safe bet that it would be unusual for Congress to take away the benefits of 529 plans retroactively. With I bonds they could change the rules at any time.

With respect to a question below, I believe it is indeed the case that if you meet the income requirements, you can redeem I bonds to put money into a 529 without tax consequence and then use the money for qualified expenses. At least I think that was the rule a while ago. Caveat above applies and dumping a large amount of money into a 529 in one year might have gift-tax record keeping implications. (The lifetime gift tax exclusion is high, but the record keeping burden if you exceed the year gift limit is not insignificant.)

I am not a tax or financial guy, just a dude on the internet who may have no freaking clue what he is talking about. Do your own research!

Tom

Great article!

In the points blog world there is an under appreciation for cashing out points.

Especially in an inflationary environment!

Even using chase or Amex points to book international first class flight isn’t free if you can cash out the points at 1.5 or 1.1 cents.

Opportunity cost is a real thing.

Thank you for writing this article and encouraging people to think outside of the aspirational box only!

Biggie F

On the $5K per person from income tax refund … Are you sure it is per person? I thought that it was per return, thus only $5k annually through this route per couple, assuming the couple is filing jointly.

Asking because I would like to be wrong here ….

Josh

I was also under the impression that the limit was 5k per return, if filing jointly.

Theresa

No, you are right. It is per return.

NCTipper

Nice analysis, Nick, I’ve been an I bond investor for years and have some from 2001 that right now are earning 10.23%. Of course they started as $50, but you’ve got to start somewhere.

You should know there’s also a sorta Frequent Miler-style trick available for those looking for ways to earn the current 6.5%+ on an additional $20k: using Player 2 as a “gift recipient”. You can buy your wife $10k in I-bonds in your account but keep them in your “gift box” on Treasury Direct. She can buy you $10k but keep it in her gift box. Then next year you can actually gift each other the I bonds and you’ve each got $20k that earned the rates you discussed. You wouldn’t be able to buy any more I bonds next year though, so if inflation is still rampant you might want to keep the gifts in their boxes until inflation is tamed.

DavidS

Exactly. You are basically front loading future year purchases now to begin accruing interest at the current inflation rates. We have done this and will deliver the “gifts” once rates come down and new purchases do not make sense. One thing to be aware of if buying multiple years of “gifts” is that they would need to be delivered to the recipient in separate years to avoid exceeding the single year purchase limit.

e.g. If I buy two $10k gifts for P2 who has already maxed 2022 purchase, they will earn interest from the date of purchase, but could not be delivered until $10k in January 2023 and January 2024 – assuming no other purchases by P2 in those years. The 1/23 delivery could be liquidated in 4/23 (12mos after purchase). The 1/24 delivery could be liquidated immediately. (Alternatively, they could be delivered in year 29 if no other purchases were made then.)

Of note, even when inflation has been ~0% recently, I-bonds continued to return higher rates that TIPS – a product with a similar level of risk.

Alex

I really don’t get it. You set the RRV at 1.55, redeem at 1.1, effectively losing 0.45c/pt. You’re losing $4090 in value right away in exchange for $653 in interest which is still taxable for federal purpose. And all that is also based on an assumption that you don’t have $10K sitting in a lower-yield account that you can use instead of cashing out MRs.

Reno Joe

What Nick is playing upon is the present value of his points.

Let’s say that Nick is flush with points and given his consumption of points each year, he has X points that he wouldn’t consume for six years. The question becomes which is more valuable: 1) 1.1 cents accruing interest for six years or 2) 1.55 cents in six years?

1.1 cents earning 9 percent per year (compounded annually) for six years becomes roughly 1.84 cents. Even if we say that the reasonable redemption value stays at 1.55 cents, Nick’s 1.84 cents wins.

Continuing, while there is certainly in today’s 1.1 cents, there is uncertainty in tomorrow’s 1.55 cents. It is reasonable to expect a devaluation in the RRV. Nick’s proposal becomes even more attractive.

A final point to consider is that Nick is flush with points AND, being the crafty little devil he is, he is likely going earn even more points over those six years. Those X points might never see the light of day. In that sense, those X points have zero value to Nick in the future. If that’s the case, cash ’em out. Have an appreciating asset, not a depreciating asset.

Each person’s circumstances are different. For Nick, it seems like a smart move.

James

Surprising that you’re dumping after the downgrade. Very strange to dump at 1.1 when you could’ve gotten 1.25 just a few months ago.

Joe

I think you numbers may be off by a decimal point

Brant

Taking free money and turning it into more free money. This is a great country we live in! God bless America! I especially like how you labor over whether your free money is earning enough additional free money. Managing all that free money almost seems like a career.