Investing for Income When Interest Rates are at Historic Lows

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In today’s shockingly-low interest rate environment, which the Federal Reserve has pledged to maintain into 2014, it is more difficult than ever to find safe high-yielding investments. A reader writes:

“I have a CD coming due and the interest rate is going to be terrible. I’ll probably just renew it at the best rate I can get because it’s safe. What would you do instead? Also, I have some savings in US EE Savings Bonds. Since they are getting about 4% interest, I’m going to hold on to them because they beat any CD’s today. Is it worth buying more at this time?”

For starters, if you can safely keep getting 4% on your original investment, that is a decent return in today’s environment. Most individuals, in most scenarios, would do well enough to keep holding that. But, if a bond matures and stops paying (EE bonds earn interest for up to 30 years), you’d want to do something better with the money. Even a miniscule return is better than 0%.

Let’s do some research: By searching on we can see that the best 1-yr CDs are now paying a little over 1%, and 3-yr CDs around 1.5%. According to, current rates on EE bonds are 0.60%. Yes, these rates are lousy: they don’t even outpace the rate of inflation, much less provide additional living income. In other words, if you buy these kinds of super-safe investments, you may not lose principal on paper, but you are guaranteed to lose purchasing power over time!

In the aftermath of the U.S. recession and global credit crisis, ultra-safe U.S. Government bonds are currently priced very high, meaning yields are very low. I own some U.S. Treasuries for diversification, but wouldn’t buy any right now. So, current yields across traditional safe investments — CDs and government bonds — are terrible: now what? Your investment options depend on your uses for the money in question, plus your other resources:

If it’s money set aside for some definite, essential purpose at a set date in the future (like say college expenses), then that money must not fluctuate much in the short term. You may have no better choice but to roll it over into another CD or savings bond at the best rate you can find.

If it’s “emergency” money that you keep on hand for things like major repairs, health care, or living expenses between jobs — then a CD is not a good choice since you can’t get to the money quickly without a penalty. (According to Bankrate, the typical early withdrawal penalty for CD’s with a maturity of one year or less is three months’ interest.) I use savings or money market accounts for these purposes (Bankrate shows some Internet banks paying around 0.8% now). And I’ve typically kept enough in these kinds of accounts for about 1-2 years of living expenses. Many experts recommend 3-6 months.

On the other hand, if it’s money that you really don’t need for several years or longer, and the timing is somewhat flexible (like say a house or car down payment), and you’re just keeping it in a CD out of caution, then that’s where I would dig deeper and look at options out in the stock/bond market. Part of being a savvy investor is being willing to take on somewhat greater risk, for greater return, when that makes sense. As you gain more experience, you will learn that risk is indeed rewarded, on average. But you must match that risk to your abilities: both financial and emotional. You must have the financial means to outlast inevitable market cycles in some of your investments, and you must have the confidence not to panic out when an asset class is having a bad year, or more.

Most of the money that I might need within about a 5-year time frame is in a short-term corporate bond fund (yielding about 1.8% now) or a conservative balanced fund of dividend paying stocks and intermediate bonds (yielding about 3.2% now). I would add to either of these in the current environment. Be advised these are both very conservative investments, but they aren’t insured, so the principal will fluctuate. You can get even higher income by picking individual dividend-paying stocks (yields of 5-6% are possible), but that takes some time and experience, and I don’t do it, or recommend it, unless you have lots of time and interest.

If you have all of your money in cash and conservative income-producing investments, then you probably need to allocate more to stocks. To really answer the question, you have to know your own asset allocation: do you want to be owning more/less/the same percent of cash and bonds right now? But that’s a serious discussion of its own that requires deeply understanding your risk tolerance. And that’s a topic for another article…

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