Best interest rates for saving
If I were to describe investing in 2022, my first word would be volatile. We have seen daily swings in the Dow Jones and NASDAQ of 3 to 4%. I see no reason to believe this volatility will end. If you are a long-term investor I would advise you to stay in the market but be ready for a bumpy road.
For those people who do not have a long term time horizon (need their money in a short period time) or have no tolerance for risk (don’t like bumpy rides) here are some places to put your money.
First, there are bank certificates of deposit. They offer security of principle (insured by government), can be purchased in amounts as low as $500, and beneficiaries can be added in the event of your untimely passing. Banks traditionally offer CDs in time periods of six months, nine months, 12 months, 24 months, 36 months 48 months and 60 months. To offset the volatility in interest rates, people can use a laddering strategy of purchasing several CDs with different time periods. This strategy enables the investor to have money constantly renewing and hopefully taking advantage of increasing interest rates. If rates decrease, this strategy may work against you. There are also CDs that let you make one time change if interest rates go up. The most interesting CDs are called special term CDs. These CDs have time periods different than traditional CDs and are offered by banks at different times throughout the year. Currently some special CDs are paying 3.20% for 17 months.
Now let us look at products outside of the banking arena. Annuities are products sold only by insurance companies. An annuity sold to accumulate money is referred to as a deferred annuity. It provides a guaranteed rate for a period of time. It has surrender charges if the owner redeems the annuity early. These surrender charges decrease the longer the annuity in held. Annuities also have special tax treatments. No tax is owed on the growth of the annuity until you take the money out of the annuity. This differs from a CD in that you must pay taxes on a CD interest earned every year, even though that interest is still in the CD. Annuities also offer the ability to withdraw 10% of the value each year without a penalty. Taxes may be owed but there is no penalty for early withdrawal.
Then there are bonds. A bond is a debt security, similar to an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay principle, also known as face value or par value the bond, when it “matures,” or comes due after a set period of time. Municipal bonds – those issued by government agencies – may have special tax treatments, and you should pay attention to how your bond is taxed.
Bonds can be purchased individually or through mutual funds. Buying bonds through a mutual fund enables you to participate in the purchase of multiple bonds while limiting the number of transactions you must make. Bonds are also rated for creditworthiness. The higher a bond’s rating, the lower interest rate it will carry.
If a bond or an annuity does not have a rating or has a low rating, it must pay higher interest rates. Understand you will only get higher rates if you are willing to take higher risk. Always ask about the rating of your bond or annuity so you can understand the risk of your investment.
Bob Hollick is a State Farm Insurance agent based in Washington. His column appears every other Friday in the Observer-Reporter.