Central bankers left a key interest rate unchanged in May, but three rate hikes in 2017 and up to four projected for 2018 by year-end finally seem to be translating into savings account and certificate of deposit rates that are becoming at least somewhat attractive to risk-averse retirees.
The top online high-yield savings accounts were paying 1.75 percent recently, while Synchrony Bank was offering a 2.35 percent yield on a 14-month CD, according to Bankrate.com.
Online banks are scrambling to leapfrog competitors, so it pays to shop around for the highest rates, Bankrate said. It also pays to stay short term: The 2.35 percent yield on Synchrony’s 14-month CD is just half a point lower than the best 5-year CD.
Bankrate analyst Greg McBride believes retirees are nearing an important inflection point, where rates on so-called risk-free investments such as FDIC-insured CDs rise enough to provide a positive, inflation-adjusted return.
The big question is whether it will be too little, too late, or if retirees will indeed flock back to safe investments as a haven from stock market volatility.
For years, financial advisers have been coaxing retirees to own more stocks as an inflation hedge, and they listened. A Gallup study released last year showed people 65 and older were the only age group to show an increase in stock ownership during the period 2009 to 2017.
And they may be reluctant to jump into annuities, even though higher interest rates generally translate to higher payouts. That’s because annuity rates have been hurt even more severely in recent years by new life expectancy tables that account for increases in longevity. A tiny uptick in rates won’t reverse the effects of the life expectancy changes.
“Interest rates would have to move significantly to move the needle” much on annuity rates, said Stan Haithcock, an annuity agent. “But eventually it does move the needle, it’s just not quick enough that it pays to try to wait” for increases, he said.
On the flip side of the interest coin, keep in mind that borrowing rates are increasing even faster, so retirees still holding debt should consider stepping up those payoff plans, experts said.
“Credit cards are a direct pass-through pegged to the prime rate, so when it goes up, cardholders see it right away,” McBride said.
But if they can minimize debt exposure and rein in their own personal cost of living, retirees stand their first chance in more than a decade to earn a risk-free, after-inflation positive return, he said.
Janet Kidd Stewart writes for Tribune Content Agency.