Savers, time for your happy dance.
Interest rates will remain higher for longer in 2024. The Federal Reserve kept interest rates at a 23-year high this week, while lowering its estimate of rate cuts this year from three to one.
Increased interest rates are certainly good news for short-term savers, “with the highest yields on savings accounts, money markets and CDs easily exceeding inflation,” Greg McBride, chief financial analyst at Bankrate.com, told Yahoo Finance.
“These interest rates should remain above inflation for at least the next year, making them a great place for an emergency fund or savings intended for short-term goals or expenses,” said Ken Tumin, a senior industry analyst at LendingTree.
That said, the current interest rate environment is even more favorable for retirees and those nearing retirement. I spoke with several wealth management advisors to understand how these groups should approach investment decisions.
Read more: What the Fed’s interest rate decision means for bank accounts, CDs, loans and credit cards
Go for the high rates
Retirees often overlook setting aside enough money to cover living expenses for a year or two after retirement. There’s no better time than now to store cash in low-risk fixed-income investments like government bonds and CDs.
An easy way to do that is to remove some of the gains from your stock holdings from your retirement and non-retirement accounts, which have taken a hit over the past year. For example, the S&P 500 index (^GSPC) is up more than 24% over the past twelve months.
“When you retire and start withdrawing money from your investment and retirement accounts, and the markets take a turn for the worse, retirees may find themselves in a position where they have to sell their investments that have fallen in value to raise the money they have earned. need,” Jake Sadler, founder and senior advisor at Curio Wealth, in Annapolis, Maryland, told Yahoo Finance.
“If this goes on for too long, especially early in retirement, it can permanently reduce the chance that your money will last a lifetime,” he said.
One strategy, especially for people nearing retirement: “Build a ‘risk-free’ buffer of cash using high-yield CDs and money market accounts with the higher interest rates you can tap into now if the markets start moving against you in the early years to work. of retirement,” he said.
>> More information about savings accounts with a high return, money market accountsAnd CD accounts.
The most ‘attractive’ options
Some certificates of deposit and high-yield savings accounts now offer rates above 5%. The most attractive CD rates – mainly offered through online banks – were recently around 5.65% for a one-year certificate.
“These offer retirees a valuable opportunity to keep pace with inflation while keeping cash accessible,” Michael A. Scarpati, founder and CEO of RetireUS, told Yahoo Finance.
Although most bond funds offer the same returns as the savings and cash markets, they involve more risk and are not FDIC insured.
“In this environment of high interest rates and uncertainty, high-yield cash investments are really the trend. There is no need to add additional risk when we can achieve the same returns on cash positions while maintaining peace of mind,” he said.
Don’t abandon stocks
However, this is not an all-or-nothing game.
Higher interest rates on CDs and money markets are worth cheering for, but long-term returns on stocks are still a bigger factor in your financial security when you consider your longevity. Most people don’t take longevity into account when planning their retirement.
It can be difficult to have enough money to retire, possibly for up to three decades. Adding to this challenge, rising costs for everything from groceries to healthcare and home insurance are not sustainable.
Nearly half of all retirees say their post-retirement expenses will be higher than they expected, and about half believed Medicare would cover a greater share of their health care costs, according to a recent survey by asset manager Schroders.
Owning stocks is critical for many retirees, even decades after they leave the workforce. The possibility of living to a hundred years screams the need for longer-term growth that will benefit your investment returns.
The standard advice today is to take 125 minus your age (it used to be 110), and that is the percentage of your retirement savings that should be invested in stocks. For example, for a 65-year-old, with a moderate risk tolerance, her retirement account might consist of as much as 60% in stocks. That’s to take advantage of the upside potential growth over time that stocks typically deliver compared to fixed-income options like bonds, money markets or CDs.
If you really want to keep it simple, you could do what Jordan Belfort, author of “The Wolf of Investing,” told me: stick with an S&P 500 index fund, which is up 10.99% so far this year and approximately 10.7% has increased. % average per year since introduction in 1957.
The advantage of T-bills
Another benefit of the Fed keeping higher rates steady is that all savers looking for a safe investment for a year or less can still get the best yields in years from short-term Treasury bills, or T-bills securities issued by the federal government. government. On June 12, the interest rate on a one-year T-bill was 5.13% and that on a six-month T-bill was 5.38%. The three-month T-bill yielded 5.25% on June 11.
As long as the Fed keeps interest rates high, investing short-term money in Treasuries provides a moderate return, combined with tax savings, because they are exempt from state and local taxes.
“Government bond yields remain higher than most online savings accounts and short-term CD yields, and the tax benefit is critical,” Tumin said.
You can buy newly issued government bonds with maturities ranging from four weeks to 52 weeks through your bank or broker, for which you may be charged a commission. You can also buy them online for a minimum of $100 through the government’s TreasuryDirect program, commission-free.
Read more: Types of US Savings Bonds and How They Work
No risk of losing money
An additional benefit of transferring some of your savings to cash accounts is that you are prepared for major expenses that often arise after retirement.
“The early stages of retirement can be an exciting time,” Sadler said. “This stage is often accompanied by a sense of delayed gratification, and major expenses are common during this time – think travel, a new car, renovations and celebrations.”
Because you know you’ll need the money, say, within 1 to 5 years, cash is a great place to save, he said. “There’s no risk of losing money, and with higher rates you can earn more on what you save during that time.”
One caveat: remember that your reasons for holding cash don’t always change, even when interest rates drop. “If saving more cash serves a specific purpose, respect that purpose,” Sadler said. “Safety is often much more important than efficiency when it comes down to it.”
Kerry Hannon is a senior columnist at Yahoo Finance. She is a career and retirement strategist and author of fourteen books, including ‘In control at 50+: how to succeed in the new world of work” and “Never too old to get rich.” Follow her on X @kerryhannon.
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