What to do with cash?
In the age of high inflation and low yields, low and medium risk investments such as cash, fixed annuities, and bonds are currently providing yields far below inflation. In the first quarter of 2022, not only are most bond yields at least 5% below the current consumer price index (CPI) but bond funds have lost money due to rising yields. Over the past couple of years, we have had clients contact us regarding investing their cash assets in stocks. That made a lot of sense when their investment accounts were doing well and they were earning next to nothing in bank savings accounts, money markets, and short-term bonds; however, we expressed our concerns with the stock market being overvalued. We explained that for money that a client would typically like to be lower risk, we felt that stock valuations were exceptionally high and there was a potential for significant declines in the coming year(s). Our opinion was that there would be a better buying opportunity in the future when stock prices have dropped. For clients who did not want to wait, we encouraged dollar-cost-averaging a small amount periodically into their stock portfolios.
Well, stocks have dropped quite a bit, but we feel there could be more downside. We will let clients know when we feel that it is a good time to invest excess cash assets in stocks. Once the market bottom is in, it could an excellent opportunity to allocate money to a dividend paying or growth stock strategy. So, what are options for cash right now. Below we will discuss a few.
Low Risk and Very Liquid
Bank accounts (checking, savings, and money markets) are a good option for low risk and very liquid money. They are covered by FDIC insurance, which provides security, but this insurance is limited. You can use this link to read more about FDIC insurance from their website.
As the Federal Reserve raises short-term rates like they have expressed they will do this year, bank account rates should also rise. Because the rates of checking, savings, and money market accounts are variable, they should be fairly responsive to changes in the Fed rate. The issue with these accounts is that they don’t pay very much at all. Some of the best rates we have found are with internet based banks, such as American Express, Discovery, and CapitalOne 360. You can visit their websites using the links. Currently, CapitalOne 360 is paying the highest rate of 0.70%, but we recommend you visiting their sites for up-to-date information. With these accounts, you link your local bank account to the savings account and transfer money back and forth. We have found that the internet-based banks generally pay a much higher rate. Out of curiosity, I checked M&T Bank’s website where I have a personal checking account. I was surprised that the rate for My Choice Money Market where they state “Save and earn more when you open a money market account..” was a 0.03% and there is a fee of $15 a month if you don’t maintain a balance of $2,500. We are certainly in the age of low yields, but I think you can find rates higher than 0.03% that are FDIC insured. We encourage you to examine the rates you are currently receiving in your bank accounts and see if you can do better.
Low Risk with Limited Liquidity
In this category, we are still focusing on investments that provide some form of security but will have limited liquidity.
Certificates of Deposit
We currently do not recommend CD’s. For bank deposits, we recommend a high yield savings account. For example, CapitalOne 360 is paying 0.70% on a highly liquid savings account while their five-year CD is only paying 2.50%. So, the CD rate is definitely higher, but you have locked up the money for a five-year period. If the Fed raises short-term rates as much as they are anticipated to, the savings account rate could be higher than 2.50% in the coming year.
Fixed Annuities
Fixed annuities provide a fixed rate of return over a period of time, similar to a CD. The principal investment and interest payments are backed by the claims paying ability of the insurance company. Typically, fixed annuities pay a higher rate than CD’s and some offer annual liquidity. For example, some may allow you to withdraw the interest without penalty. Five-year rates are currently at least 1% above the CapitalOne 360 CD rate. As of 5/23/2022, Athene Annuity and Life Company is paying 3.85% on their five-year fixed annuity.
Because of rising short-term rates, we would either look at shorter time periods, such as two- or three-year periods and consider laddering the purchases. For example, Athene is paying 3.35% on their three-year fixed annuity. If you were interested in moving $30,000 into fixed annuities, you could make one purchase now and two more at future dates when you anticipate rates being higher.
Series I Savings Bonds
This is our favorite option, but you are limited on how much you can invest. The maximum annual amount per Social Security Number registration (per individual) is $10,000 each calendar year. The interest rate is a combination of a fixed rate that stays the same for the life of the bond and an inflation rate that is set twice a year. For bonds issued from May 2022 through October 2022, the combined rate is 9.62%. Obviously, this rate, backed by the U.S. government, is much better than all the other options we have discussed. You can learn more about them using this link – Access Treasury Direct to Learn About Series I Savings Bonds.
As far as liquidity goes, your money will be tied up for at least one year. I bonds earn interest for 30 years unless you cash them first. You can cash them after one year. But if you cash them before five years, you lose the previous three months of interest. For example, if you cash an I bond after 18 months, you get the first 15 months of interest.
Opening an account was fairly painless and took about 30 minutes on the Treasury Department’s TreasuryDirect website. If you would like more information on the account opening process, contact Stephen Hetrick at hetrick@retirementc.com. He recently opened accounts for him and his wife and he can review the steps he took.
The Benefit of Maximizing the earning of your Cash Holdings
Let us look at a hypothetical example for a couple. We will assume interest rates are constant, so we will be looking at the current available rates and assuming they won’t change over the next year. Let us also assume the couple has $100,000 in a savings account at PSECU and they want 50% of the money to be liquid, 25% should be available after one year, and 25% will not be needed in the next three years. In the PSECU savings account earning 0.05% on 5/27/2022, $100,000 would earn $50 over the next year.
Now let’s look at an example of allocating the $100,000 as follows:
$50,000 in the American Express High Yield Savings account earning 0.65%.
One-year’s earnings would be $55,000 * 0.65% = $358.
$10,000 each ($20,000 total) in Series I Savings Bonds
One-year’s earnings would be $20,000 * 9.62% = $1,924.
$25,000 in a 3-Year Fixed Annuity
One-year’s earnings would be $25,000 * 3.35% = $838.
Would you prefer to have a $50 return on $100,000 or $3,120? The impact of structuring your cash investment wisely can be surprisingly large.
This is just an example. If you would like to see how your cash can be structured to maximize your return, you can schedule a call or virtual meeting using this link Contact Us. We have no affiliations with the banks listed or TreasuryDirect. Retirement Collaborative LLC is not licensed to sell insurance; however, Stephen Hetrick is an independent insurance agent, and he can review annuity rates with you.
Have a great Memorial Day Weekend!
Disclaimers
This information is intended for clients of Retirement Collaborative LLC. Please do not reproduce or distribute it. The information contained in this publication is intended to provide general educational information on some of the available cash investment options outside of Retirement Collaborative LLC. It is not intended to offer investment advice. Investment advice will only be given after a client engages our services by executing the appropriate investment services agreement and shall be subject to the terms and conditions therein. Information regarding investment products and services are provided solely to read about our investment philosophy, our strategies, and to be able to contact us for further information.
Market data, articles, charts, and other content in this brochure are based on generally available information and are believed to be reliable. Rates provided are those readily available on the referenced companies’ web sites. Retirement Collaborative LLC does not guarantee the accuracy of the information contained in this article. The information is of a general nature and should not be construed as investment advice and relied upon in making investment decisions. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital.