Ask Terry Questions safe financial instrument that pays 3%

safe financial instrument that pays 3%

By Terry Savage on September 12, 2014 | Chicken Money

Is there a fairly safe financial product that can earn 3% a year? I’m retired and would like to put about 150,000. into such an instrument (if it exists). This is about 25% of my liquid assets.

Terry Says:  Sadly, in today’s world of Fed-manipulated low interest rates, there is no “safe” ie “chicken money” place to earn 3 percent a year.  Yes, you CAN earn 3% a year — but it will come with caveats, restrictions, and risks.

The SAFE short-term investments are U. S. Treasury securities.  And today 6-month T-bills are yielding only 0.02 percent!  Even 10-year U.S. Treasuries are yielding only 2.58 percent.  But then you are locked in for 10 years!  Yes, you could sell those 10-year bonds.  But if rates rise in the meantime, they will be less attractive, and the price will drop from the  $1,000 per bond you would pay today.  Thus, even in the safest bonds — U. S. Treasuries — you could lose some of your money because of rising rates.  That is not “risk-free”!   And yes, you could hold on to those bonds for the full 10 years — but you’d be stuck earning less interest than the market offers if the general level of interest rates were to rise — either because of inflation fears, or because the Fed stops pushing rates down.

There are all kinds of risk involved in investments that have higher yields.  For example, you could buy an S&P 500 stock index fund from Fidelity or Vanguard.  The current yield us just under 2 percent.  Of course, you could make far more than that if stocks rise — or you could lose money if stocks fall.  You could sell your mutual fund shares at any time, and fees are negligible when you buy an index fund.

There’s another risk:  liquidity risk.  For example, you could putchase a tax-deferred annuity that has a guaranteed fixed rate of 3 percent.  BUT, if you try to take your money out for the first 10 years, the surrender period, you will pay a hefty penalty that can eat into the value of your original investment.

Then there’s credit risk– something else you face when searching for higher yields.  For example,  Spain just sold 50 year bonds — yes fifty years! — at a yield of 4 percent!  But do you want to lend money to Spain for 50 years — at any interest rate?  I thought not.   But you could buy a bond fund, where money mangers choose among a variety of lower quality bonds — and get higher yields.   Still, if rates in general rise, the value of those bond fund shares would tend to fall.

By now you get the picture:  You choose your risk — and you balance that risk against the return being offered.  The markets are fairly efficient.  They price in risk by increasing yield.  Except in the United States, where the Fed puts its finger on the scale of risk/reward — to the detriment of savers who need to earn a decent return on the money they accumulated for retirement.



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