I ask because at my old job one of the coworkers was going to retire, and he was talking to another guy. He said he had 200k invested and he could take $1,000 a month out w/o it affecting the principal. So that comes out to a 6% APY (he’d be taking 12k out a year on a 200k investment with the principal staying at 200k) on an investment that (from the way he talked) would not really run the risk of destroying the principal.
I thought the only truly safe investments were CDs, treasury bills and treasury bonds, but those are usually 3% or so.
A 30 year treasury bill will give almost 5%, but I don’t know if I’d consider that a safe investment considering where our economy is headed.
So are there relatively safe investments that offer 6%, or are you at moderate+ risking losing your principal at those kinds of returns?
Then again, he said this in early 2008. Back then the Federal reserve rate was 2-3%, now its about 0.25%. So CDs and treasury bonds that offer 3% now might have been offering 6% back in early 2008.
I think you’re overlooking how unusual current rates are. If this is correct (and it matches my memory) 5-6% on a CD was not hard to find up until the last few years:
Yeah, that is my impression. With the fed rate at 0.25% and our economy in a mild deflation I’m not surprised that the best investments like CDs and treasury bills are offering is 3%. The average inflation rate is about 3% a year, for 2009 it’ll probably be -1%.
According to bankaholic and bankrate the best rates on 5 year CDs is about 3% right now. But if the fed rate was at 2% or so and our economy was growing (as well as inflation) at about 3% a year, I’m sure the best CD rates would be closer to 7% for a 5 year.
Here’s a very basic lesson in the markets - if a return is greater than US Treasury rates, then you are taking on more risk.
In good times, those extra returns have a low risk probability. In bad or abnormal times like a year ago, those risks are magnified.
Look at how many investments ‘rated’ AAA turned into gold plated shit as soon as the market went south. Or how many derivatives turned into exploding radioactive waste.
If you have an investment in something that pays more than treasuries, read the fine print and understand exactly what extra risk you are taking on. This is the single greatest step you can take to protect yourself as an investor. I Case in point, Moody’s et al told you some investments were AAA that are now worth zero 18 months later. ;( GE was bluest of the blue chips with a ‘guaranteed’ dividend - not.
Better: “Interest rate” is the price of money. “Return” is the price of risk.
US Treasury securities have (so far) zero risk of loss of principal and zero risk of failure to make interest payments. So the interest rate of T-bills, T-notes, and T-bonds is the price of loaning money to a borrower certain to repay.
A T-security with an increasing time to maturity normally has a higher price (interest rate).
Investments with increasing risk carry an increasing price to attract funds. This is the additional return.
So in normal conditions, when a 13-week T-bill is paying an annualized 1% (rate made up), an investment returning an annualized 6% with similar access has a significantly higher risk.
True, but the treasury rates vary wildly. In 2006 they were at 5%, now they are under 1%. So getting a safe 6% ROI should’ve been pretty easy in 2006. Not so much in 2009.
So, as another basic question (I don’t know much about this stuff) what about investing across countries? Would the CD rates in nations with higher economic growth and inflation like China, Vietnam or India offer anything higher than those found domestically in the US?
If you invest in a place like China, then you take on foreign exchange risk. This can be good or bad depending but undoubtedly is additional risk compared with your home currency.
You also tale on sovereign risk. Most people would rate the political and economic risk of China defaulting on debt or nationalizing industry as higher than that of the US. again this ‘higher’ risk generally means a higher interest rate, and youLre fine as long as nothing blows up.
At the height of the 1997 asian bubble, Slovalian debt was trading only 30 basis points above treasuries. madness and a result of too much money and not enough fear.
As a sidetrack, what is going to destroy his principle is inflation. You can’t take 6% out of an investment that makes 6% and have the “same” amount of money next year - next year his $12k will only be worth - maybe $11k.
If you have the opportunity - do not fall into this trap. Save enough that you can withdraw “SOME” of the interest, but keep enough of the interest to grow the principle. ESPECIALLY if you plan on having a long retirement.
(I bought a lot of dividend stocks last year when the market was truly crappy. They pay OK now that they’ve recovered, but on my investment they are paying 7% and 8% in dividends (I didn’t buy Pfizer) - plus the gain (which this year has been very good). They certainly are not “safe” investments though. Market could drop.)
No, by definition US Treasuries are the safest investment and pay the least amount of interest. If an investment promises to pay Treasury rates + a premium then it is more risky.
Now if you’re say treasuries + 50 basis points implies it is almost as safe, then that’s probably true on average and excepting something like the Lehman collapse. Itr should also be safer than a junk bond that pays treasuries + 2000 basis points.
All that said, there was an awful lot os safe inv ents paying treasuries +50 basis points 15 months ago that is now worthless.
That’s what I was thinking. Annuities are safe, but lousy investments. As interest/Treasury rates rise, which they will, usually the annuity is locked in. It costs money to get out of them, and commissions to the seller are taken out up front.
No, I think he was talking about tiding himself over until he wanted to sign up for social security (I’m not sure if he was waiting for age 65 or 67 or what). I think he had a few years before he was going to sign up.
My impression is he was talking about living off his investments until his pension and SS kicked in.
Some investments such as the Vanguard Long-Term Bond Index have produced dividend yields between five and six percent reliably for many years, including during the recent crash. At the same time, the price has not varied up or down by more than about 10% from the long-term average. Such funds include a mix of treasury bonds and corporate bonds, thus benefiting from the reliability of treasuries in a downturn and the earning potential of corporate bonds when the economy is doing well.
Variable annuities have got justified bad press in these areas, but immediate fixed annuities can have a role. This guy could get a fixed return of over 7% for life, but would never see his capital again.
Good advice. Damn, Sharebuilder doesn’t sell it; however, they offer FGOVX, Fidelity’s government bond index, and its history and holdings look pretty similar. Rated four stars by Morningstar, too.
Think I’ll transfer a chunk into it when I come into some funds. CD rates are rather poopy.
