With savings account rates at historic lows, many retirees and other savers are uncertain where to go to stretch their dollars while keeping their assets as safe as possible.
Options include certificates of deposit, money market accounts, U.S. Treasury securities and fixed-deferred annuities.
How do they compare?
Here’s an overview
Certificates of deposits (CDs): Issued primarily by banks, a certificate of deposit is a savings vehicle with a fixed maturity date and a fixed interest rate that is insured by the Federal Deposit Insurance Corporation for up to $250,000 per CD holder. CDs are used for short- to medium-term savings needs. They offer a higher investment return than traditional savings accounts but lower rates of return than fixed-deferred annuities.
Money market accounts: A money market account usually combines the flexibility of a traditional savings account with a higher interest rate and the ability to write a limited number of checks. Money market accounts seek to maintain a stable $1 unit value and, because of their stability, often are used as “parking places” for liquid assets. These accounts also are backed by the FDIC and require a larger minimum balance than a savings account.
Treasury securities: Treasury securities are loans to the federal government and come in three forms. T-bills offer the shortest terms — four, 13, 26 and 52 weeks. T-notes occupy the middle, maturing in two, three, five, seven or 10 years, while T-bonds, known as “long bonds,” offer a 30-year maturity date and will pay interest on a semiannual basis. Treasury securities rank among the safest investments because they have the backing of the “full faith and credit” of the U.S. government as to the timely payment of interest and principal. However, they are subject to inflation and their values fluctuate in response to changes in interest rates.
Fixed-deferred annuities: A fixed-deferred annuity offers some of the benefits of a CD, including the ability to generate interest safely, while also giving the holder the ability to delay the payment of income taxes on money earned on the annuity. Their aim is to return your principal investment to you with interest. Fixed-deferred annuities are used for long-term funding needs related to retirement. However, access to the funds in an annuity is limited, and fixed-deferred annuities involve insurance-related fees and charges. They are issued by insurance companies and are not backed by the FDIC. Therefore, the financial stability of the issuing insurance company is key. You can evaluate the financial strength of an insurance company by checking its ratings by independent sources, which include Moody’s, A.M. Best, Standard & Poor’s and Fitch.
Claire Damgaard is an agent with New York Life Insurance Company in Dubuque.