Retirement Savings – Safety
With interest rates now rising, it may be the time to invest in a certificate of deposit ladder or US Treasury Bills.
In saving money, safety has always had an opportunity cost; that is, lower rates of return than for instruments incurring greater risk. In retirement, we don’t want to loose our savings, that is for sure. So, how can we offer ourselves the greatest opportunity while we are obsessed more with the return OF our money than the return ON it?
The Certificate of Deposit, or CD, is Still King
Regardless of the trend of recent decades toward greater sophistication in retirement savings, the certificate of deposit, or CD, is still king. The obvious advantage of the CD over traditional savings accounts is that they typically yield significantly higher interest; with the primary drawback being the commitment that one incurs to maintain the deposit for a specified period, usually from six months to five years. The longer the term of the CD, the higher the associated interest rate.
So, how do we maximize growth in CDs while maintaining access to funds we need? One common method is “laddering,” that is, purchasing multiple overlapping CDs with maturity dates spread out so that funds are made regularly available without having to suffer the lower rates associated with shorter terms. Today, however, we have the added concern that interest rates are so low that the added interest of a longer term is possibly not worth the risk of having the money obligated when rates go up.
Shopping for CDs is a balancing act; weighing the available rates against the obligation of the time deposit. To add complexity to the decision, penalties for early withdrawals vary significantly between banks. The penalty for withdrawing early from one bank may be quite stiff, while another bank may only penalize the account a small portion of the interest earned, often as little as one month’s interest. Especially today, comparing penalties is a critical part of CD shopping.
CD rates on Fidelity.com as of 9/25 are as follow:
3mo 6mo 9mo 1yr 2yr 3yr 5yr 10yr
2.15% 2.25% 2.35% 2.55% 2.90% 3.10% 3.40% 3.55%
So, what are the alternatives to the certificate of deposit? In an effort to retain old depositors and woo new ones, banks are occasionally offering high yield savings or money market accounts with interest rates comparable to CDs, but with complete liquidity. It is wise to keeps one’s eyes open for offers like this, but one must be wary of limitations and fine print.
Finally, there is another great saving option that offers baby boomers more liquidity than a CD and that is US Treasury Bills, a great safe place to keep some of your retirement savings.
Treasury bills, or T-bills, are sold in terms ranging from a few days to 52 weeks. Bills are typically sold at a discount from the par amount (also called face value). For instance, you might pay $990 for a $1,000 bill. When the bill matures, you would be paid $1,000. The difference between the purchase price and face value is interest. It is possible for a bill auction to result in a price equal to par, which means that Treasury will issue and redeem the securities at par value.
You can sell T-bills and get your cash the next day!
You can buy bills from TreasuryDirect. You can also buy them through a bank or broker.