Posted on Monday, 13th March 2017 by Dennis DampPrint This Post
According to Kiplinger’s, core inflation will increase in 2017 above last year’s rate. Higher inflation generally results in higher Cost of Living Adjustments (COLAs) the following year. The Federal Reserve is expected to raise interest rates soon and several more increases are anticipated this year. This alone will provide relief to all savers including retirees living on a fixed income. The Federal Reserve has only raised interest rates twice since 2006 and the current rate of .75% is well below their 2.5% target rate. We can expect Certificate of Deposit (CD) rates to increase accordingly.
Interest rates have been so low for so long that fixed income investments such as CDs and savings deposits lost money since the meager interest earned didn’t offset inflation all of those years. Low rates also pushed many into higher risk investments that are subject to dramatic prices swings. The government decided to penalize (tax) savers to pay the interest on our national debt! The lower interest is really a tax on those who sacrificed, saved, and did the right things in life to prepare for retirement and their future in general.
The downside to a higher COLA is that costs are projected to increase this year in several areas including health care.
As interest rates increase savers can park a part of their next egg in higher interest rate CDs and I Bonds rather than in higher risk investments. With the bull stock market just surpassing its 8 year anniversary, the second longest bull market in history, many are seeking conservative investment options to protect their core savings.
I Savings Bonds now earn 2.75% interest! The I Bond rate increased last November and this rate is good through April 30, 2017. The rate is adjusted every six months. If you buy an I Bond from www.treasurydirect.gov you will receive this rate for 6 months from the date of purchase and then it will change to the new rate that will be announced May 1. I Bond interest changes with inflation every six months and as interest rates increase so do the return on I Bonds. I bonds and inflation protection securities including Treasury Inflation Protected Securities (TIPS) value increases with inflation and are generally considered to be a good place to park some of your savings when interest rates are rising.
I originally purchased paper I bonds through payroll deduction when they were first released in 1999. Those early I Bonds had a high fixed rate and they are paying 5.75% today and have paid as high as 8% over the past eight years. The first I bond I purchased for $200 in 1999 has a cash value of $528 today, over two and a half times what I paid for it; an excellent and safe investment overall.
There are certain limitations that you should know about before purchasing I Bonds.
Individuals are limited to purchasing $10,000 in I Bonds each year, a husband and wife can purchase $20,000 total for the year. You can’t cash them in for one year and if you cash them in within the first 5 years you own them they charge you 3 months of the earned interest. I asked the Treasury the question; “if a bond owner dies is the 1 year waiting period and interest penalty waived like it is for Certificate of Deposits?” They said no, you can’t cash them in early and the penalty stands.
By the way, EE Bonds are only paying .1%! What most people don’t realize is that if you hold your E Bonds for 20 years or more the Treasury guarantees that an EE paper Bond, purchased at half its face value, will be worth at least its face value after the first 20 years. (This equates to approximately a 3.5% yield) If an EE Bond does not double in value (reach its face value) as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20 year anniversary of the bond’s issue date to make up the difference. When you buy EE Bonds online the Treasury guarantees that your investment will double in 20 years.
NOTE: EE Bonds are also an attractive option for many who are still working and won’t be needing their savings for 20 years or more. I’ve purchased E Bonds through payroll deduction starting when I first entered federal service after the military in the early 1970s! I cash in bonds over 30 years old and reinvested the proceeds as they mature. The nice thing about savings bonds is the interest earned isn’t taxed until you cash them in!
You have to purchase Savings Bonds and Treasuries online direct from TreasuryDirect.gov. They no longer issue paper bonds except for those who select them as an alternative to receiving a check for their income tax return. I liked Savings Bonds better when you could go to your local bank and purchase paper bonds. The only way you can verify ownership with the new program is to visit your account online and print out your statement. If you have paper I or EE Savings Bonds you can cash them in at your local bank for the most part. Some banks no longer accept them so call first before taking them in.
Funds from the sale of savings bonds and Treasuries held in a TreasuryDirect.gov account are paid out direct to the financial institution account of your choosing and electronically transferred the day of the transaction. You also buy bonds that way; funds are transferred direct from your designated account to TreasuryDirect.gov. If you buy US Treasury notes, bills, or bonds the interest earned is also directly deposited to your account on the date of issue.
Savings bonds over 30 years old no longer pay interest and you may wish to cash them in and either buy new ones, invest the money elsewhere, or put the money into a CD or savings account. When you cash in savings bonds the interest is reported to the IRS and you will have to report the interest on your tax return for the current year. If you are signed up for Medicare Part B your premium is income adjusted. Cashing in savings bonds and taking capital gains from other investments can increase your Modified Adjusted Gross Income (MAGI) sufficiently to dramatically increase your Income Adjusted Medicare Part B premiums. It should also be noted that interest earned on tax free municipal bonds is included in your MAGI for determining your income adjusted Medicare premium.
A number of financial institutions are offering more attractive rates for money market and special savings accounts. I earn .8% interest on special savings accounts at my local bank and .5% at our credit union. Even though these rates are low they are higher than most financial institutions are paying today. CDs are now paying up to 2.3% for five year and 1.1% for one year certificates if you look around. I was able to purchase CDs earning 1.5% for a fifteen month term last year from our credit union. The ten year Treasuries are paying 2.4%. Again, not that great but better than we have been able to get for some time and rates may be going up dramatically this year. The Federal Reserve is expected to increase interest rates several times this year to normalize rates.
Stock market corrections can dramatically decrease many retiree’s retirement account balances near term. If you can’t weather the storm or tend to panic when stock prices fall it’s wise and prudent to seek out conservative fixed income investments such as higher interest FDIC insured savings accounts, CDs, Treasuries, and savings bonds.
For Thrift Savings Plan (TSP) participants the L Income Fund is designed for retirees that want to keep up with inflation but still have the majority of their investment protected from market fluctuations. The L Income Fund invests 74% of the account in the (G) Government Bond Fund, 6% in the (F) Fixed Income Fund, 11.2% in the (C) S&P 500 Index Fund, 2.8% in the (S) Small Cap Fund, and 6% in the (I) International Fund. The G Fund is guaranteed not to decease in value and the bonds are special issue federal government bonds.
Take some time to evaluate your accounts and look at ways to increase your yields wherever possible. It takes time and energy to review where you are now but the energy expended can pay off handsomely down the road, plus you will potentially be reducing your risk which is especially important for retirees on fixed income.
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Disclaimer: Opinions expressed herein by the author are not an investment or benefit recommendation and are not meant to be relied upon in investment or benefit decisions. The author is not acting in an investment, tax, legal, benefit, or any other advisory capacity. This is not an investment or benefit research report. The author’s opinions expressed herein address only select aspects of various federal benefits and potential investment in securities of the TSP and companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that retirees, potential and existing investors conduct thorough investment and benefit research of their own, including detailed review of OPM guidance for benefit issues and for investments the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.