For decades, savers could rely on steady interest from certificates of deposit (CDs) to grow their wealth without taking on significant risk. However, today’s persistently low interest rates present a unique challenge for retirees who want their money to work harder without jeopardizing their principal. At Wealthy Choices®, I help clients navigate these financial waters and find strategies that balance their income needs with their risk tolerance.
What’s the Risk of Low Interest Rates?
Low interest rates mean less income generated from safe, traditional savings vehicles like CDs or savings accounts. For example, in the mid-1980s, a one-year $1,000 CD earning 12% interest would generate $127.47 in a year. Today, that same CD might earn only 2%, yielding just $20.20. Over time, this gap adds up, leaving you with significantly less income to cover your expenses.
For retirees who rely on their savings to supplement their income, these reduced earnings can strain their financial plans. The question becomes: How do you make up the difference without exposing yourself to unnecessary risk?
Exploring Alternatives to CDs and Low-Yield Savings
Low interest rates don’t mean you have to settle for less. There are options available to increase your income while staying aligned with your financial goals:
- Dividend-Paying Stocks
- Many companies have a long history of paying and increasing dividends, sometimes for decades. These stocks, often called Dividend Aristocrats, can provide a steady income stream. However, it’s important to remember that dividends are not guaranteed and may be reduced or eliminated. Thorough research is key, and it’s always wise to consult a financial professional before making investment decisions.
- Short-Term Bond Funds
- These funds offer potentially higher returns than savings accounts or CDs, with less volatility than long-term bonds. However, be mindful that rising interest rates can lead to price declines in bonds and bond funds.
- Fixed Annuities
- Fixed annuities are contracts with insurance companies that offer guaranteed principal and interest, providing a predictable income stream. While they are not FDIC insured, their guarantees are backed by the claims-paying ability of the issuing insurance company. Keep in mind that withdrawals before age 59½ may incur penalties, and these investments are designed for long-term purposes.
- Equity-Indexed and Variable Annuities
- These products offer varying degrees of growth potential and risk. Equity-indexed annuities, for example, allow you to earn returns tied to a stock market index, while variable annuities offer investment options in mutual fund-like portfolios. Both options come with unique features and considerations, so understanding the details is essential.
Creating a Strategy That Fits Your Goals
Finding the right combination of investments to generate more income doesn’t have to be overwhelming. The key is matching your comfort level with risk to strategies that meet your income needs. For example, you might combine dividend-paying stocks with a fixed annuity for stability and growth potential.
At Wealthy Choices®, I’ve worked with clients to craft tailored strategies that account for their unique circumstances, risk tolerance, and financial goals. Whether you’re exploring new investment options for the first time or want a second opinion on your plan, I’m here to help.
Don’t Settle for the “Hardship” of Low Interest Rates
Low interest rates are challenging, but they don’t have to derail your retirement plans. With the right approach, you can explore opportunities to grow your income and maintain your financial independence.
Ready to consider Income Options?
If you’re concerned about how low interest rates are impacting your financial future, let’s explore solutions together. Contact me at 781-577-2311 or visit WealthyChoices.com to start creating a strategy that works for you.
Stock investing includes risks, including fluctuating prices and loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
