Try these low-risk investment alternatives with higher returns
November 21, 2017 by Don Anders
With interest rates still close to all-time lows, conservative investors are realizing that traditional forms of low-risk investments are not keeping up with inflation. According to Bankrate.com, the average interest rate for a five-year bank CD is 2.13 percent, and the average bank money market is 0.12 percent APY.
Considering inflation is historically 3 percent, that discrepancy between return on investment and rising prices can be detrimental to a retirement plan. Look at it this way: If your investments are returning 1 percent per year and inflation is 3 percent per year, you actually lost 2 percent in value on your money in one year.
That might not seem like a big deal, but when you look at the increasing life expectancy in the United States, it becomes an issue. Currently, the average life expectancy is around 85 years old. Assuming that life expectancy does not increase over your lifetime, a 60-year-old retiree could be retired for 25 to 40 years.
Let’s do some simple math:
• 1% interest – 3% inflation = -2% purchasing power
• -2% purchasing power x 25 years = -50% purchasing power
• -2% purchasing power x 40 years = -80% purchasing power
Why people invest in CDs or money markets
From my experience, people who invest in CDs, money markets and other lowing-paying interest rate investments do so for one of three reasons:
- It’s how they’ve always invested, so they just continue with what they’re comfortable with.
- They’re worried that all other investments will involve risk.
- They don’t know all of their options.
If you’re in the first category, you might want to consider staying in those types of investments. Sometimes a better return on investment isn’t as important as being comfortable with your investments. If you fall into the second two, here are some investment options that are fixed, will typically keep up with inflation, don’t have any investment risk and are offered by insurance companies instead of banks.
Multiyear guaranteed annuity. How does a multiyear guaranteed annuity work? This is the closest investment to a CD. It gives you a fixed interest rate for a set period of time and it will not change over that time frame.
For those guarantees, the insurance company will ask you to leave your money there for a specific time period, just like CDs. The differences between CDs and MYGAs are typically that the insurance company will allow you to take out up to 10 percent from your MYGA without losing any of your interest, and the interest grows and compounds tax-deferred.
Who should use it? Someone who doesn’t want any surprises. If you want to know exactly how much interest you will make over a certain time frame, regardless of market performance or future interest rates.
Fixed indexed annuities. The interest rate on a fixed indexed annuity is based on a designated market index. There are many different market indexes you can chose from including S&P 500 index, gold, real estate, foreign markets and many more. What makes these accounts fixed is that they have a minimum guaranteed interest rate, or floor, where if the market index decreases in value, your account will not decrease in value with it.
