You can use the -i flag correctly by providing it with a suffix to add to the backed-up file. Extending your example:
sed -i.bu 's/oldword/newword/' file1.txt
Will give you two files: one with the name file1.txt that contains the substitution, and one with the name file1.txt.bu that has the original content.
Mildly dangerous
If you want to destructively overwrite the original file, use something like:
sed -i '' 's/oldword/newword/' file1.txt
^ note the space
Because of the way the line gets parsed, a space is required between the option flag and its argument because the argument is zero-length.
Other than possibly trashing your original, I’m not aware of any further dangers of tricking sed this way. It should be noted, however, that if this invocation of sed is part of a script, The Unix Way™ would (IMHO) be to use sed non-destructively, test that it exited cleanly, and only then remove the extraneous file.