Higher Interest Rates: A Shifting Landscape for Savers

3 Mins read

In the past three years, higher interest rates have been a bane for borrowers, but a boon for savers. Retirees and risk-averse investors have finally begun to see some returns on their deposits as bonds, both Treasury and corporate, offer semi-respectable yields. Another often overlooked option, lifetime annuities, has also become more attractive, particularly for individuals looking to create a traditional pension from their 401(k) or IRA.

However, I must caution you to act swiftly. Following Federal Reserve Chairman Jerome Powell’s recent press conference, it seems these rates may not last much longer.

Powell’s outlook suggests that interest rates could be cut as early as May. Encouraged by positive economic indicators and inflationary pressures that have been moving in the right direction for the past six months, Powell wants to ensure a continuation of this trend before feeling “comfortable” about lowering rates.

Unsurprisingly, the market was disappointed to learn that a rate cut in March is unlikely. Wall Street has consistently misjudged interest rates throughout this economic cycle, always anticipating peaks and declines prematurely. The accuracy of its predictions was off yet again this week.

But enough about Wall Street. For those of us on Main Street, the path forward is becoming clearer. Powell stated that current rates are likely the peak for this economic phase, ranging from 5% to 5.25%. Recent inflation data has been encouragingly positive and comfortably low. What Powell wants now is more evidence that reinforces our current trajectory and instills confidence in a stable path towards achieving the target of 2% inflation.

While a rate cut is not expected in March, it may very well happen in May. Therefore, seize any opportunities available before they dissipate.

The Changing Landscape for Savers

The options for savers have shifted significantly recently, leaving many wondering where to place their hard-earned money. While there are still bank Certificates of Deposit (CDs) available with attractive interest rates, the duration of these high-paying CDs has decreased. Currently, the best returns can be found on six-month CDs, offering an annual interest rate of 5%. For one-year CDs, the rates hover around 4.8%, and for 18-month or two-year CDs, you can expect approximately 4.5%. However, it’s important to note that these rates are subject to change frequently, making brokerage accounts the go-to choice for finding the most favorable deals.

To ensure stability and avoid any unwelcome surprises, it is crucial to opt for “call protected” CDs. Without this protection, banks may entice you with an attractive interest rate for a month but then abruptly close the CD. In such cases, your money would be returned to your checking account, requiring you to seek alternative investment avenues.

For those seeking low-risk options, bond funds can be an appealing choice. Investing in intermediate-term U.S. Treasury bonds and investment grade corporate bonds can yield a return of 4.5% or higher. An example is the Vanguard Intermediate-Term Bond ETF (BIV), which combines Treasurys and investment-grade corporate bonds, providing a yield of 4.5%. Alternatively, if you prefer solely corporate bonds, the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) offers a higher yield of 5.1%.

Turning our attention to annuities, which transfer a lump sum into a guaranteed monthly pension, it’s worth noting that rates have started to decline since November. With this financial product, insurance companies take your money and then provide you with a set monthly income for the rest of your life, regardless of how long that may be. However, it’s important to remember that at the end of the annuity term, the initial investment is depleted.

In November, a 65-year-old individual with a $1 million investment could obtain an annual income of $77,000 through an immediate annuity. Recent data from online brokerage reveals that this figure has decreased to $74,500. The reduction for a 65-year-old woman has been more modest, from $73,000 to $72,000.

Given Jerome Powell’s prediction of lower inflation and interest rates, it is likely that annuity rates will continue to decline in the foreseeable future. As a result, careful consideration should be given to the potential impacts on long-term financial planning.

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