Posted on Monday, 7th November 2011 by

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A site visitor has a $50,000 CD maturing and wanted to know what she could do to increase earnings with little risk of losing the money that she worked a lifetime to acquire. Her bank is offering a meager .9% CD yield. I am not a financial advisor and I can only relate what I would do in this case. Each situation is different and my following comments assume that this individual may need these funds to maintain her lifestyle in retirement and can’t afford undue risk. If you are in this situation consult a professional Certified Financial Planner (CFP) that will evaluate your personal situation and steer you in the right direction.

First Things First – If I was in this situation I would buy $10,000 in I Savings Bonds from the Treasury now. I bonds are currently yielding 3.06%, the interest rate changes every six months based on inflation. The previous 6 month period paid I Bond holders 4.6%! Individuals are limited to purchasing $10,000 a year in I bonds, $5,000 for paper bonds that can be purchased through a local bank and another $5,000 online through Treasury Direct (a book entry system) available online at http://www.treasurydirect.gov/tdhome.htm. Paper bonds are sent through the mail and generally received several weeks after the purchase. A husband and wife can purchase $20,000 this year combined and I Bonds offer a safe haven for your maturing CDs and earn excellent yields. Many financial advisors project increased Inflation down the road and I bonds will help to protect your nest egg.

  • Note – You often hear that I Bonds are paying 0% interest. This is not true. I bonds pay two interest payments, a fixed rate and a variable inflation rate. Fixed rates on some issues are set at 0% however the inflation rate is based on the CPI and I Bonds have been paying very generous inflation rates. I bonds purchased when they were first issued in 1999 have a 3% fixed rate and are now paying owners over 6% interest after combining both components.

Paper bonds will no longer be available starting next year except for one situation. If you have a tax refund due next year, you can elect to receive a paper I bond instead of a check from the IRS. After January, except for tax refunds as mentioned above, all I bonds must be purchased online. EE bonds rates are only .6% now and they don’t increase when inflation raises its ugly head. The only downside to savings bonds is that you can’t cash savings bonds in for the first year and if you cash them in within 5 years of purchase you forfeit 3 months of interest, a small penalty. Paper bonds can be cashed in at any bank and the online bonds are purchased and redeemed through fund transfers from your checking or savings account.

Savings bonds are backed by the full faith of the U.S. Government and are one of the safest investments around. If you buy savings bonds this year you can purchase more on or after January 1, 2012 if desired. Savings bonds mature after 30 years and interest payments stop at that time. Another advantage is tax deferred income; you don’t pay taxes on your earnings until you cash them in.

Married couples can elect to either jointly own each bond or each person elect the other to be the beneficiary. It is often best for married couples, for inheritance tax purposes, to own them jointly. If you are single, widowed or divorced it is recommended to elect a beneficiary (only one beneficiary is allowed per bond). If there are multiple beneficiaries (children or family) that you wish to leave money to, divide the bond purchases into equal amounts and then assign beneficiaries accordingly.

What Next – My next step would be to purchase and ladder $30,000 in Certificates of Deposit (CDs) to provide a stream of readily available cash periodically and to take advantage of anticipate increased yields. Find a bank or credit union with the best yields in your area and offer lower early redemption penalties incase funds are needed prior to maturity. To ladder your CDs effectively buy at least three CDs that mature at different dates as noted below so that you will always have ready cash available as they mature every year in this case. If you wish to have funds available every 6 months you can change the maturities to 6, 12 and 18 months and follow the same procedure as they mature.

In the example below, renew the one and two year CDs to three year terms as they mature. This way you will always have one third of the total invested available plus accumulated interest each year and let them auto renew after they are all at three year maturities. Many recommend a 5 year ladder, however I think interest rates are going to increase over the next two years and this way you will have a CD due each year that could possibly renew at higher interest rates and be locked in for 3 years at a time. The following maturity rates were used for this example:

  • 1 year CD – $10,000
  • 2 year CD – $10,000
  • 3 year CD – $10,000

Visit our Financial Planning section and my Higher Yielding Savings Opportunities article for additional information and resources.

An Essential Step – Set up a $5,000 emergency cash savings account or bank money market that may pay a higher rate.

Finally – 3 options for the remaining $5,000.

1) Higher Risk Option –  If you have other income and savings and willing to assume some risk you could consider an Exchange Traded Fund (ETF), fund symbol SDY. The SPDR S&P Dividend fund (SDY) only charges a .35% annual fee and invests in the S&P 500 dividend achiever stocks. This ETF invests in companies that have increased dividends for the past 25 years, in good times and bad. Companies like Johnson & Johnson, Coca-Cola, Clorox, Abbott Labs, and Kimberly-Clark that pay higher dividends. This fund pays a 3.2% yield and has the potential to appreciate in value. It sells for $53 a share and the fund can drop as much as 50% in a bear market. ETFs can be purchased through a discount broker.

2) Moderate Risk Option – Purchase the ETF symbol TIP. TIP is an exchange traded fund that invests solely in American Treasury Inflation Protected securities. It is paying around a 4.5% yield right now and costs $117 per share. Over the past 10 years it has been as low as $91 to a high of $117 per share.  You can also buy TIPs direct from the Treasury however you must transfer them to a stock broker or bank to sell them down the road. The ETF simplifies the process.

3) Low Rick Option – Add this amount to your emergency savings or to the CDs if you prefer to stay out of the market totally.

Learn more about your benefitsemployment, travel, and financial planning issues on our site and visit our Blog frequently at http://fedretire.net to read all forum articles.

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The information provided may not cover all aspect of unique or special circumstances, federal regulations, and financial information is subject to change. To ensure the accuracy of this information, contact your benefits coordinator and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our articles are not intended nor should they be considered investment advice. Our reply is time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change.

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