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How to manage retirement savings with high interest rates
Savers, it’s time for your happy dance.
Interest rates will remain higher for longer in 2024. Federal Reserve maintained interest rates hit a 23-year high this week, while also cutting its estimate for rate cuts this year from three to one.
High rates are certainly good news for short-term savers, “with higher yields on savings accounts, money markets and CDs easily outpacing the inflation rate,” Greg McBride, chief financial analyst at Bankrate.com, told Yahoo Finance.
“These rates are expected to remain above the inflation rate for at least the next year, making them a great place for an emergency fund or any savings earmarked for short-term goals or expenses,” added Ken Tumin, senior industry analyst at LendingTree.
That said, the current tariff environment is even more fortuitous for retirees and those approaching retirement. I spoke with several wealth management advisors to understand how these groups should approach investment decisions.
See more information: What the Fed’s Rate Decision Means for Bank Accounts, CDs, Loans and Credit Cards
Choose high rates
Retirees often forget to set aside enough money to cover living expenses for a year or two after retirement. There’s no better time like the present to stockpile cash in low-risk fixed income investments like Treasury bonds and CDs.
An easy way to do this is to reduce some of the profits from your equity holdings in your retirement and non-retirement accounts, which have been in decline over the past year. The S&P 500 index (^GSPC), for example, has increased by more than 24% in the last 12 months.
“When you reach retirement 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 are selling their undervalued investments to raise the money they need,” Jake Sadler, founder and senior advisor at Wealth of Curiositiesin Annapolis, Maryland, told Yahoo Finance.
“If this continues for a long time, especially early in retirement, it can permanently reduce the chances of your money lasting a lifetime,” he said.
One strategy, especially for those close to retirement: “Build a ‘risk-free’ cash reserve using high-yield CDs and money market accounts with higher rates now that you can draw from if the markets start to work.” against you in the early years of retirement,” he said.
>> Find out more about high yield savings accounts, money market accountsIt is CD Accounts.
The most ‘seductive’ options
Some certificates of deposit and high yield savings accounts now offer rates greater than 5%. The most attractive CD rates – offered primarily through online banks – were recently around 5.65% for a 1-year certificate.
The story continues
“This provides retirees with a valuable opportunity to keep up with inflation while keeping money accessible,” Michael A. Scarpati, founder and CEO of RetireUSA, told Yahoo Finance.
Although most bond funds have the same returns as the money and savings markets, they carry more risk and are not FDIC insured.
“In this climate of high interest rates and uncertainty, high-yield cash investments really are the right choice. There is no need to add extra risks if we can get the same returns on cash positions while maintaining peace of mind,” he said.
Owning stocks is essential for many retirees, even decades after leaving the workforce. (Getty Creative) (lucadp via Getty Images)
Don’t abandon actions
This, however, is not an all-or-nothing game.
Higher interest rates on CDs and money markets are worth rooting for, but long-term returns on stocks are still a bigger factor in your financial security when you consider their lifespan. Most people don’t consider longevity when planning retirement.
Having enough money to live on in retirement, possibly for three decades, may be overkill. Adding to this challenge: increased costs for everything from groceries to healthcare to home insurance have been relentless.
Nearly half of all retirees report that their retirement expenses are higher than they expected, and about half believe that Medicare would cover more of their healthcare expenses, according to a recent survey conducted by investment manager Schroders.
Owning stocks is essential for many retirees, even decades after leaving the workforce. The possibility of living to 100 It screams the need to have some long-term growth, increasing the return on your investment.
The standard advice today is to take 125 minus your age (it used to be 110), and that’s the percentage of your retirement savings that should be invested in stocks. For a 65-year-old person with a moderate risk tolerance, for example, their retirement account could reach 60% in stocks. This is to take advantage of the potential growth over time that stocks typically provide compared to fixed-rate options like bonds, money markets, or CDs.
If you really want keep it simpleyou can do what Jordan Belfort, author of “The investment wolf” told me: Stick to an S&P 500 index fund, which so far this year is up 10.99% and has gained about 10.7% on average annually since it was introduced in 1957.
Savers looking for a safe investment for a year or less can still get the best returns in years with Treasury bills, or T-bills, short-term bonds issued by the federal government. (Getty Creative) (rrodrickbeiler via Getty Images)
The advantage of Treasury notes
Another benefit of the Fed holding the highest interest rate constant is that all savers looking for a safe investment for a year or less can still get the best returns in years from Treasury Bills, or Treasury bills, short-term securities issued by the federal government. On June 12th, a one year Treasury bill rate was 5.13% and a six-month Treasury bill it was at 5.38%. O three-month Treasury bill it was yielding 5.25% on June 11.
As long as the Fed keeps interest rates high, investing short-term money in Treasury bills offers moderate returns coupled with tax savings since they are exempt from state and local taxes.
“Treasury bill yields remain higher than most online savings accounts and short-term CD yields and the tax benefit is key,” Tumin said.
You can buy newly issued Treasury bonds in terms ranging from four to 52 weeks through your bank or brokerage, which may charge a commission. You can also purchase them online for as little as $100 through the government. Treasury Direct program, commission-free.
See more information: Types of US Savings Bonds and How They Work
The early years of retirement can be a time for spending on travel, buying a new car, renovating a home, and celebrating, all of which depend on access to cash accounts. (Getty Creative) (gradyreese via Getty Images)
No risk of losing money
A side benefit of moving a portion of your savings into cash accounts is that you’ll be prepared for expensive expenses that often arise after retirement.
“The first phase of retirement can be an exciting time,” Sadler said. “This phase is often accompanied by a feeling of delayed gratification, and large expenses are very common during this period – think trips, new cars, renovations and celebrations.”
Since you know you’ll need the money, say within 1 to 5 years, cash is a great place to save, he said. “There is no risk of losing money, and with higher rates, you can earn more on what you save during this period.”
One caveat: Remember that your reasons for holding money don’t always change, even when interest rates fall. “If saving more money serves a specific purpose, then honor that purpose,” Sadler said. “Safety is often much more important than performance when it comes to this.”
Kerry Hannon is a senior columnist at Yahoo Finance. She is a career and retirement strategist and author of 14 books, including “In control over 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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