Alternatives to Low Interest Paying CDs

Alternatives to Low Interest Paying CDs

| May 06, 2021

People are wondering why they’re not earning a lot of interest right now on their interest bearing checking accounts. That’s because CD rates started dropping in 2020 when the Fed lowered the federal funds rate down to 0.00-.25% in response to coronavirus.

 In 2021 rates probably won’t go down too drastically but they should continue to stay low for a while as the Fed continues to hold the federal funds rate down.

 For example, in 2019 the average one-year CD was paying .70%.  Right now, a one-year CD is averaging .20%.

 Especially with rates this low, we advise people with an average risk tolerance, to use CDs only as a place to put money that you need back sometime over the next few months.

 The idea would be to have your money in a safe place where you know you’ll get it all back at maturity when you need the money.

 Because the CD is insured by the federal government through the Federal Deposit Insurance Corporation and also because the CD doesn’t fluctuate, you know that under any kind of adverse economic circumstances, all the money will be returned at maturity.

 For example, you could put the money in a CD to earn more interest than a checking account for the next six months, with the idea that at maturity you’re going to use the funds for a down payment for a house.

 Having said that, in our view it’s really a bad idea for an investor with average risk tolerance to put money in a CD that they’re not going to touch for a few years or money they want to use for retirement income.

 First, if you don’t need the money for a few years a little fluctuation on a conservative stock and bond portfolio will rarely result in losing money and will usually cause your money to grow much faster than it will in low paying CDs.

 And of course, in our Advance & Protect models, the chances of losing money are much less than a typical Buy & Hold model because of our 3 buy/sell signals that have a great track record of reducing stock before severe market downturns.

 As far as using the interest on CDs for retirement income, it is so low that after inflation and taxes, the investor is usually losing money and most likely the CD will not provide enough retirement income to meet essential needs.

 You’d be far better off with a model like ours where you can take much higher income while maintaining a high degree of safety.

 For the money you do need to leave in cash, are there alternatives to CDs in 2021?  The answer is yes.

 For example, there are some fixed annuities with the same average maturity as a CD that may pay a little better interest. While they’re not FDIC insured, if you stick with large reputable insurance companies they’re generally considered very safe.

 Also, there are some higher paying money market mutual funds offered by well-established companies like Charles Schwab, that while not always FDIC, are considered very safe and will often pay a higher rate of interest.