Since the United States stock market collapse of 2008, millions of Americans have seen their retirement savings dwindle. Many of these savers had their nest eggs exposed to the equities markets, and have subsequently suffered two periods of extreme losses in one decade. As a result, “safe money places” are getting a lot of attention.
So, what are safe money places?
Safe money places are vehicles that are used for the money that you cannot afford to lose; they’re products that provide peace of mind, knowing that your principal is protected from loss as a result of market fluctuations. Although some conjure up visions of fireproof safes and the space under their mattress when they think of safe money places, true examples of these products include: savings accounts, certificates of deposit (CDs), checking accounts, fixed annuities, indexed annuities and U.S. government savings bonds.
An alternative to a safe money place is a “risk money place;” a vehicle where you put the money that you can afford to lose. Risk money places offer the potential for much higher returns than safe money places. On the other hand, they do not guarantee that you will get back all of the money that you put in. (In fact, you may get back nothing!) Some examples of risk money places include: equities products, such as stocks and mutual funds, as well as bonds, commodities and real estate.
One must always remember the direct inverse relationship between risk and return when considering risk money products versus safe money products. The risk/return tradeoff dictates that, in order to realize greater returns, one must generally accept a greater risk and vice versa.
That being the case, how can people saving for retirement in today’s low-interest rate environment have the potential for greater returns, without having to accept the losses of risk money places? A thorough review of the potential for gains on today’s safe money places is warranted.
Although safe money products offered through banks are easily attainable, they are also crediting extremely uncompetitive rates today. Where some of these products offered rates as high as 10 percent after the turn of the century, not one of them offers a rate that exceeds half of one percent today:
- Savings Accounts: currently averaging 0.13 percent annually
- Certificates of Deposit: currently averaging 0.34 percent annually
- Checking Accounts: currently averaging 0.49 percent annually
U.S. government savings bonds have historically been a long-term safe haven for retirement dollars, offering credited rates as high as 6.31 percent (in May of 1995). Today, savings bonds are much less attractive:
- Series EE Savings Bonds: currently earning 0.60 percent
- Series I Savings Bonds: currently earning 0.00 percent with an inflation component rate of 1.53 percent
Those using insurance companies as depositories for their retirement dollars have had the ability to earn as much as 20 percent or more in a single year over the past decade. Although current credited rates on annuities are dismal, these are the most aggressive safe money rates available today, relatively speaking:
- Fixed Annuities: currently averaging 2.86 percent annually
- Indexed Annuities: currently averaging 3.32 percent for annual point-to-point crediting strategies
Given the lack of rate competitiveness on safe money products, what alternatives are available for safe money retirement accumulation? All of the safe money products that we reviewed offer a stated credited rate each year – with one exception...
Indexed annuities actually earn interest, subject to a limit (cap), based on the performance of a stock market index (such as the S&P 500 index). And while it is true that the average cap rate available on indexed annuities today is a far cry from the double-digit caps available just a decade ago, indexed annuity products offer the greatest potential for gains while also guaranteeing safety of principal. What’s more, there are indexed annuities with annual point-to-point caps as high as 8.55 percent available today!
Never mind that indexed annuities are the most competitive safe money choice available today, they also promise a guaranteed return of principal plus interest at the end of the annuity term AND a credited rate of no less than zero percent annually, ever! And if that gets your attention, you’ll be impressed with indexed annuities’ liquidity options, death benefits, tax deferral benefits and guaranteed lifetime income that cannot be outlived.
That being said, it sounds like there is at least one safe money product left that provides the potential for attractive returns, without having to accept the losses of risk money places. Given today’s low interest rates on safe money, my retirement dollars are going into indexed annuities.
Sheryl Moore is President and CEO of Moore Market Intelligence, an indexed product resources in Des Moines, Iowa. She has over a decade of experience working with indexed products and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at [email protected].