The Federal Reserve has been gradually raising interest rates over the past year. Rising interest rates might mean higher prices for borrowers, but could be good news for retirees with some cash in the bank. Here’s how savers can benefit from higher interest rates.
[See: 9 Easy Ways to Save $500 More Per Year for Retirement.]
Shop around for a new bank account. The days of earning less than 1 percent interest on your savings account are over. It’s now possible to stash your cash in a savings account paying more than 1 percent interest, but you might have to move your money to get it. “Most banks are being very stingy with their payouts on savings accounts and CDs, but there is notable improvement to be had if you are willing to shop around,” says Greg McBride, chief financial analyst for Bankrate.com, who has observed savings accounts paying out as much as 1.8 percent. “Make sure that you are getting the best that the marketplace has to offer.”
However, don’t expect your current bank to hand you a higher rate on your existing savings. You might need to switch financial institutions to get a top rate and be willing to switch again if that bank doesn’t continue to pay a competitive rate. But taking the time to move your money could be worth it. If you have $10,000 in an account earning 0.5 percent interest, you’re only getting $50 per year in interest. However, if you transfer your savings to a high-yield savings account paying 1.5 percent interest, you will earn $150 within a year. An extra $100 might be worth taking the time to open a new bank account. Retirees who keep a large reserve of cash to pay for living expenses have the most to gain by seeking out a savings account with a higher rate. Getting even a half a percent more in interest will give your retirement spending power a boost without taking on any additional risk.
[See: How to Max Out Your 401(k) in 2018.]
While selecting a new bank account, pay attention to how the interest rate might change over time. “Retirees should watch out when opting for high-interest savings accounts,” says Anandi Krishnamurthy, a certified financial planner for AKrish Financial Advisory in Cupertino, California. “Very often, the high rates advertised are teaser rates that expire in a short period of time, usually 3 months.” Remember to read all the fine print before chasing a higher interest rate.
Choose short-term CDs. Long-term CDs generally pay higher rates, but you also lose access to your cash for a longer period of time and have to pay a fee to get it sooner. However, interest rates are still below historic norms and could increase in the near term. So, you don’t want to lock your money up in a five-year certificate of deposit and miss out on potentially higher interest rates later this year or next year. “With rising interest rates, I lean towards one-year or two-year CDs. The marginal extra interest rate offered in the three- and five-year CDs is not worth locking up the funds for the longer time period,” Krishnamurthy says. “As long as the Fed continues on its announced path of rising rates, there will be opportunity to invest at higher rates when these CDs mature.”
[Read: How to Cope With Stock Market Declines in Retirement.]
Ladder your CDs. CD ladders split your investment among multiple CDs that mature at regular intervals. As each CD matures you can move that portion of your money into a higher paying CD or use it for current expenses. “If rates are to go up and you can get a better CD , at least some of your money is going to come out and get a higher rate,” says Ryan Bayonnet, a certified financial planner for Hyland Financial Planning in Akron, Ohio. Each time a CD in your ladder is up for renewal you can check to see if you can get a better rate. CD ladders can also protect you from drops in interest rates, because even if rates fall, some of your money is still in CDs paying a higher rate.
A portfolio of short-term CDs with different maturity dates can give you more flexibility to take advantage of changing interest rates than a long-term CD. “Laddering your investment pays off in an environment like this,” McBride says. “Maintain a bias toward, ideally, one year and less. There’s not really a compelling reason to go more than two years. That way you get an opportunity to reinvest as interest rates go higher.”
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How Retirees Can Take Advantage of Higher Interest Rates originally appeared on usnews.com
