Shame on me for not discovering this sooner, but my saintly mother, (85 years), has all her money in a savings accout that pays one-half percent interest. Well below inflation. That will end ASAP.
She doesn’t want to take any risk, ie stocks. We’ll be going into staggered CDs, a 3 month, a 6 month, a year, etc. She’s got about $75k. She lives comfortably off the interest, even now.
What is the smartest way to divide this money? Equal parts?
What’s the wisdom of the Board?
Thank you.
In my experience, which is very limited so I doubt it helps, the bank dictates how much money goes in a certain CD. If you want a 3-month CD, they tell you what amount goes in. The less money you want to invest, the longer the term of the CD.
Probably not equal parts. The longer ones will have better interest rates so you want to put as much money into them as you can. Let’s say she needs 20K this year to live like she does. You can take the rest and put it in a 1 year CD. Actually you could use that same principle and extend it out longer but that is the general idea. It is’t a great idea to just keep putting money in a new CD every month when a slightly longer committment would be better.
A meeting with a professional financial advisor may be in order. It isn’t a ton of money and the problem is pretty simple but it may be worthwhile. You need to get money out of a savings account in general. Look for a money-market account that will pay much better interest rates. You can still use them like a savings acoount as well and even write checks of of it.
When you look at CD rates, compare to companies like Emigrant Direct and ING. They offer full liquid cash at about the same or greater return as some CD rates.
I want zero risk myself at this time and full access to liquid the funds. I keep all my savings at Emigrant Direct.
For starters, find a real financial advisor (or two) and see what they say.
That said, you may find nearly identical interest rates in regular savings accounts. At the moment, it looks like we’re paying 3.59% on a $50,000-100,000 balance.
If you split up the principal into equal chunks, you can get 3.6% on each of two 12-month CDs with $10,000-49,000, or 3.7% if you lock the whole $75,000 into one 12-month CD.
For the .01%, you might also appreciate the liquidity of a savings account. There’s also something called a “retirement high yeild” savings account paying 3.68%
But don’t trust anonymous nicknames on a messageboard to know exactly how to handle Mom’s retirement.
I’m having a hard time understanding how she “lives comfortably” off 1/2% interest of $75,000. That’s only $375 interest PER YEAR.
The possibilities I can think of are 1) she has other sources of income so this interest is insignificant, or 2) the $75,000 figure isn’t correct.
J.
I don’t know if there is an optimization formula that lets you compute the best ratio of money/period/staggering. It has to depend on what you think the risk of needing the money is, versus the interest rate reduction for going shorter term. One thing to think about, however, is the risk of needing money fast. At her age, it is possible she may need medical or other care due to some unfortunate event, and you might need access to her funds quickly.
You really don’t need a financial adviser for something simple like a CD or savings account. Just ask your banker what products they offer and make sure you shop around a bit.
These days, you can get 5% on fully liquid savings accounts, too. The above-mentioned Emigrant Direct and ING, as well as Citibank offer these rates – but these are usually “online only” accounts which can’t be opened in branches. If mom isn’t comfortable using the interwebs they may not be for her.
As for CDs, I personally don’t like anything less than a year. If you need the money back that quickly, you might as well have it in a liquid account with a decent interest rate. A good strategy is a CD Ladder with an equal amount in each tier.
You do need a financial adviser when you’re dealing with the life savings of an 85 year-old. She has to worry about medical costs and estate planning, which are not things you want to take risks on.
It would have to be around $7.5mil to let somebody “live comfortably” off 0.5% APY, so I’m confused about this too. Also, longer term CDs do not necessarily have higher rates – for example, just taken from E*Trade:
APR APY
4.88% 5.00% -- 3 Months
4.97% 5.10% -- 6 Months
4.98% 5.11% -- 1 Year
4.69% 4.80% -- 2 Year
4.69% 4.80% -- 3 Year
4.78% 4.90% -- 5 Year
The highest yield is on a 1-year CD. I am assuming E*Trade is anticipating a general rate drop-off and does not want to lock in higher rates for such long periods of time.
I know they’ve taken a bad rap lately because of overzealous sales reps taking advantage of senior citizens wealth and locking it up for 10 years, but the proper annuity can offer zero risk with withdrawl options over a period of time.
Might be worth looking into.
I asked our banker why an 8 month CD was paying significantly more than a 1 year CD at my bank.
“Oh, it’s because they need funds for the next 8 months, so are willing to pay more for that time period.”
Actually, the OP calls for informed opinions and there is no single correct answer. So let’s move this to IMHO.
samclem GQ moderator
Go here and learn: Savings Bonds: About — TreasuryDirect
Huh? You must use some pretty unusual banks!
As others have said, make sure to look into other possibilities like ING Direct or whatever other outfits you guys have down there that offer decent interest rates on savings accounts. You might still want to go with CDs after that, but you should check out that possibility so you have something to compare CD interest rates against.
Mom is depression-era frugal. She owns her home. She doesn’t pay for food. Her bills include the utilities, phone, cable, health care, (Kaiser), a gardener mows the lawn, taxes on the house, (a few hundred per year), and a few other things. No car. Doesn’t buy clothes or anything trivial such as new decorations for the house.
There’s a small pension, a few thousand per year. She won’t have anything to do with the internet.
The concept of laddering CDs is, as I understand it, to take advantage of rising interest rates. As shorter term CDs mature, they are rolled over into one with a higher rate. Longer CDs have better rates, but if the rates are rising strongly, you lock into a lower rate. If the CDs are staggered, access to the money when needed is easier. We’ll have some in savings for instant access.
I think I need to speak to a few professional planners. Parse a consensus on how to split up the funds, then take the money and run off to Tahiti.
Or not.
Once again this Board has proved itself a valuable asset. My thanks to you all for replying so quickly, and well.
Another option is three 3-month Treasury bills or 3-month CDs, with equal amounts in each. With this approach, one T-bill or CD will mature every month, so as long as there is enough other income or cash to cover a given month, all the money will be liquid after a 3 month cycle.
That’s not how any CD works that I’ve ever seen or heard of.
They may well have minimum requirements (e.g. a CD has a minimum balance of 500 at such-and-such term) but basically, you pick the term (from the bank’s choices) that fits your needs, and deposit as much in it as you want.
Now, some sort of fixed vehicle, where you’re guaranteed xx dollars on yy date based on zz initial investment, would certainly involve a tradeoff between investment amount and length of the vehicle. Sounds more like some sort of bond, though.
Re the OP: If you do invest in CDs, remember that typically the interest gets credited to the CD, rather than made available for immediate spending. So you have to bear in mind that this money may be locked up for some time. Say, you invest 100 in a 3-month CD paying 1 % per quarter (just to simplify the calcs). At the end of the quarter, you get back 101. If you invest 10,000 in a CD paying 5% a year with a 5 year term, you’ll have something over 2500 in interest (because of compounding). So in 5 years, you’ll have > 12,500. In the interim, though, you have no access to any of that money unless you break the CD in which case you forfeit a large chunk (3ish months) of interest.
You may seriously want to look into a higher-yield savings account vs. CDs, at least for some of the money. As others have said, a financial adviser would be a worthwhile thing to consult.
What? She can live comfortably off of .5% interest on $75K. That’s about $31 a month! That aside, since she needs the interest from the CDs, you do have to stagger them so that she can withdraw the accrued interest at maturity. If she wants bimonthly withdrawals make sure you have something maturing every two months. Other than that, go for the highest interest you can get. Personally, I shop for special deals that are offered by credit unions and smaller banks. For example, I’ve found a CD that allows a step-up to a higher rate should a higher rate become available during the CD’s term.
Pay attention to the yield cruve.
A lot of conventional wisdom (ie the entire content of most consumer financial planning websites) on laddering across CD terms makes the unstated assumption that you get a meaningfully higher rate for a longer term.
That is often NOT true, especially now. Two folks upthread mentioned that already but it sank like a stone.
There is no advantage to buying a 3 year CD when a 1 year CD pays the same rate. And as between 4.87% and 4.88%, the yield difference is $1 per year per $10,000 invested. Not material.