Lackluster CD Rates Present a Challenge for Investors (Forbes)   Leave a comment

 

Seal of the United States Federal Deposit Insu...Image via Wikipedia

 

The current super-low interest rates are making some people happy, for instance those who are looking to buy a car, apply for a credit card, or transfer an existing credit card balance. But for people who are struggling to make ends meet using the income earned from the interest on their savings accounts, such as retirees, today’s rates are making things increasingly difficult.

In June, the Federal Reserve Board said that, at least for the near future, they plan to keep interest rates low. So for investors who depend on interest to survive, it’s going to take a bit of legwork for those looking to sink their money into a CD to find rates that will, at the very least, keep up with inflation. Other alternatives are dividend-paying stocks or short-term bond funds, but both of those options come at the cost of not being FDIC-insured.

“In this interest-rate environment, you either have to take on a little more volatility or accept a lower return,” says Laura Thurow, co-director of Baird Wealth Private Wealth Management Research.

The best CD rates available are still the ones with the longest terms. According to most consumer financial services companies, the average return an investor can expect on a five-year certificate of deposit is 1.64%, although with a bit of digging, some banks are offering as much as 2.36% for a CD on those terms. While those rates are vastly better than the ones available for short-term CDs, investors still run the risk that, if they tie their money up for so long for such a low return, interest rates will increase before the CD matures.

For the most part, investors want to steer clear of CD situations where they would find themselves tempted to break the terms and withdraw their money early, as early-withdrawal typically comes with stiff penalties by way of high fees. These fees could eat up any interest that accrued in the meantime. The same, aforementioned consumer financial services company discovered that some 13% of banks charge investors one year’s interest if they cash out their 5-year CD early. Ouch! And, more and more, banks may be increasing their penalties for early withdrawal of funds to discourage investors from cashing out early.

People seeking other options for safe ways to invest their money, but also wanting the highest possible interest rates, should look into rewards checking accounts, online savings accounts, or I bonds. There are plenty of pros and cons associated with each of one of these investment choices – as with CD’s – so sit down and do your homework first.

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Posted July 31, 2011 by ilanamelissagreene in Uncategorized

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