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Inheritance safest in U.S. securities
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Q I recently received an inheritance of $140,000.
I am 70 and have about $300,000 in my IRA. I have my cash, the $140,000, in an ING account which is only paying 1.5 percent. What are my best options to increase this yield with interest rates on certificates of deposit being so low -- under 3 percent?
MARVIN, MINNEAPOLIS
A Interest rates on savings are unbelievably low. I got a call the other day from my mom and she read me the rate on her savings account. It was a fraction under 1 percent. And many people who live off their savings are frustrated with the minimal yields.
Nevertheless, I think the best option is to stick with safe securities. That means investments backed by the full faith and credit of the federal government, from U.S. Treasury bills to FDIC-insured certificates of deposit to your savings account. In light of all the uncertainties in the markets and the economy, the trade-off of a low rate in exchange for default-free savings seems reasonable to me.
I would also stay short-term and not reach for a higher yield by buying long-term securities. The biggest risk savers face over the next five years or so is inflation. Even small rates of inflation, say, in the 2 to 3 percent range, reduce the purchasing power of savings with time. But many economists reasonably worry that inflation could go much higher than that following the extraordinary actions the Federal Reserve has taken to bail out the banking system and avoid a depression. The question isn't whether a reprise of 1970s-style, high-and-rising inflation will play out. But it's a risk, one with an outcome that could hammer savings.
You can shelter your money from the risk of inflation by investing in high-quality, short-term securities, such as Treasury bills. You can reinvest the money at higher interest rates if inflation does stir. The evidence is strong that Treasury bills hold their value against inflation.
You could also invest in some five-year Treasury Inflation Protected Securities or TIPS. These securities are a hedge against inflation as measured by the consumer price index. You can buy the federal government's securities directly from the Treasury at www.treasurydirect.gov.
Meanwhile, with your inheritance safe, you can explore other options for the money. If you do find something better, you can always fund it when the T-bills and other short-term securities mature.
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org.
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