Investing Cash in This Low Interest Rate Environment
Over the last couple years, I’ve received numerous phone calls from clients asking about unique ways to invest cash in this low interest rate environment. If you are nearing, at, or above age 59 ½, you may want to consider a fixed annuity. These annuities allow you to invest your money at a guaranteed fixed rate for a specified term. Additionally, investors enjoy tax deferral of all interest earned until a withdrawal is made. Due to the tax deferred nature of these products, withdrawals before age 59 ½ are subject to the IRS early withdrawal penalty of 10%. Each individual state’s Insurance Commissioner’s office sets a Guaranteed Minimum Interest Rate that must be paid on these contracts. While most states are averaging 2% annually on a 5-year fixed annuity, Washington State has a guaranteed minimum interest rate of 3% annually; making these products much more attractive than other parts of the country. Over the course of the annuity’s term, there are surrender charges for withdrawals over specified amounts. Most contracts allow for free withdrawals equal to 10% of your contract value each year. If you are willing to hold these annuities for the duration of the contract term, they can provide you with increased earnings potential and tax deferred savings—-with no contract fees.
Ultimately, low-risk investments are paying very little these days. Common options include bank savings accounts, money market mutual funds, short-term bond funds, fixed annuities, and CDs. The short-term bond funds can provide decent yields, but there is added risk to these options when/if interest rates begin to rise. Savings accounts are one of the best options if you are seeking a fully liquid, safe-place to earn a slight return. Money market mutual funds are currently paying close to 0% yield, making the savings account option more attractive at this juncture. If you are using Certificate of Deposits (CDs), consider investing in shorter term CDs in order to reinvest into higher paying Certificates as interest rates rise. Lastly, Fixed Annuities offer an attractive option in Washington State as they must pay the minimum interest rate of 3%. Furthermore, you enjoy tax deferral of these earnings. As you consider these options, make sure you understand the holding period requirements and your own liquidity needs before proceeding into any illiquid investment.