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Ditch your Bank’s Low Savings Rates

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Investment Rates Updated 5/22/2022

Currently, even after the recent Federal Reserve’s interest rate hike, my bank reduced their savings rate from .05% to .04%!  Makes no sense except for the banks, they loan our money out at much higher rates and we fund their huge profits. Bank CEOs brag about their astronomical client deposits and pay us a negative rate of return after factoring inflation into the equation.




In all fairness, most fixed income investments short of I Savings Bonds [2] and junk bonds pay an effective negative return with skyrocketing inflation [3] as noted in the following chart.

 

INVESTMENT RATES (5/22/2022)
Investment Type Percentage Rate Yearly Earnings/$100,000
My Bank .04% $40
I-Bonds 9.62% (Composite 8.37%)* $8,370*
Treasury Bills (4 weeks) .649% $649
Treasury Bills (8 weeks) .914% $914
Treasury Bills (13 week) 1.067% $1,067
Treasury Bills (26 weeks) 1.52% $1,520
Treasury Bills (52 weeks) 2.164% $2,164

*The composite rate is derived by adding the previous 7.12% six month rate and the new six month rate of 9.62% and dividing that figure by two.

Cash accounts are required for emergencies and enough to keep us afloat for three months or more; a portion of it could be put to better use.

The Treasury holds weekly Bills, Notes, Bonds and TIPs auctions that are guaranteed by the full faith of the US Government. One of the safest investments you can make. The above chart shows how much you can earn by investing in short term Treasury Bills [4] opposed to the exceeding low bank rates offered today.

Treasury yields vary with interest rate movement. When rates go up, as they are scheduled to do over the next year, the returns for Treasury securities generally follow suit. Rates do vary auction to auction and are driven by multiple factors.

The yearly earnings reflected in the above chart assume the reinvested amounts, for bills with terms of less than one-year, will equal or exceed the previous auction yields on average for the remainder of this year. With additional rate hikes scheduled, there is a good chance that total yearly earnings will exceed the amounts listed.

The Federal Open Market Committee (FOMC), a branch of the Federal Reserve that decides on the monetary policy of the United States, holds 8 regularly scheduled meetings per year. They raised rates a quarter point on March 16th and anticipate raising rates 6 more times this year to rein in the highest inflation in 40 years [3].

When the Fed Rate increases, short term bills can yield more than traditional savings accounts and CDs. Banks aren’t as quick to increase savings account and CD yields after the Federal Reserve moves rates higher.

The 4-week bill’s investment rate increased from .051% on the March 3rd auction to .193% at their March 24th auction. You can elect to have them reinvested for up to two years or in this case 24 times. As rates rise, you earn more with each reinvestment. You can cancel reinvestments at any time; the cash is returned to your bank account at the end of the investment period. Many investors ladder different terms to increase their earnings so that a set amount of cash is available at whatever interval you choose.

Treasury Bills are sold at discount (below face value); when the bill matures the investor receives face value. Review their tentative auction dates [5] and recent auction rates [6] for more information.

Sign up for Treasury Direct online [7] and use their “Buy Direct” feature to purchase any of their offerings including I Savings Bonds. It’s easy to set up and they transfer funds from your bank account for the purchases and deposit your interest and principal back to your account.

I purchase short term Treasury Bills when private sector savings and CD rates are unrealistically low. When interest rates start to fall you may find the opposite, your bank could be paying more. Review the upcoming rates with each reinvestment and compare them to your local savings and CD rates.

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Disclaimer: The information provided may not cover all aspect of unique or special circumstances, federal regulations, medical procedures, investment, and benefit information are subject to change. To ensure the accuracy of this information, contact relevant parties for assistance including OPM’s retirement center. Over time, various dynamic economic factors relied upon as a basis for this article may change. The information contained herein should not be considered investment advice and may not be suitable for your situation. This service is not affiliated with OPM or any federal entity. You should consult with a financial, medical or human resource professional where appropriate. Neither the publisher or author shall be liable for any loss or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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