Brett and Mary S. from Anchorage, AK ask: Hello Mitch, We’re a retired couple from Alaska, and we’ve recently been lamenting what seems to be the end of high yields on savings accounts and CDs. It feels like it ended just as it started! We’re curious if you have some general thoughts on what’s next for retirees looking for low risk returns on cash. Thank you.
Mitch’s Response:
Thank you for sending in your question. Your question and general concerns are shared amongst many retirees, I’m sure.
Now that the Federal Reserve seems to have officially pivoted to easing monetary policy (via gradual rate cuts), banks and financial institutions are responding by lowering interest rates on savings accounts, CDs, and other yield-bearing accounts. Anecdotally, there was not a single bank paying 5% on a one-year CD as of last week, according to a national bank survey conducted by Bankrate.com. The average yield on money funds also fell below 5% for the first time in over a year.1
Looking ahead, with the Fed projecting an additional 100 basis points in rate cuts over the next year, we might reasonably expect these yields to continue ticking lower.
For retirees like yourselves, I can fully understand why you’d be lamenting the end of these solid, very low-risk yields. But it’s important to remember why the yields went up in the first place: inflation. When you take a 5% annual yield on cash and adjust it for, say, 4% annual inflation, your “real” return is closer to 1% or even breakeven. As seen on the chart below, the double-digit yields on 3-month CDs that were a feature of the 1980s were not delivering outstanding returns for investors. They were essentially just maintaining purchasing power during a major inflation event.
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Yields on 3-Month Certificates of Deposit (1975 – Present)
At the end of the day, retirees should not think of cash in terms of earning a return. Savings accounts, CDs, and money markets are better thought of as relatively safe places to hold cash and to keep pace with inflation. Over time, “real” cash returns have been quite low, and I’d expect that to continue being the case going forward.
Some retirees may see a future of lower yields on cash, and as a result, decide to go out searching for better yield options. But I’d urge caution here. Remember that yield is compensation for risk, so if you come across products offering greater than 5% yields on your savings in the current environment, I’d read the fine print and understand the risks.
Over the long run, investors and retirees should think of cash as emergency reserves—typically about one year’s worth of income needs—where you’re mitigating purchasing power risk. In other words, you want your cash to keep pace with inflation, which in the current environment, may mean that a 4% yield is satisfactory.
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3 Fred Economic Data. January 12, 2024. https://fred.stlouisfed.org/series/IR3TCD01USM156N#
4 Zacks Investment Management reserves the right to amend the terms or rescind the free 4 Strategies for Spending Money in Retirement offer at any time and for any reason at its discretion.
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