5 ways to beat low CD rates: Are they worth It?

Although a boon to borrowers, today's low interest rates offer little reward for people socking away money in CDs.

Frustrated? Join the club.

But don't give up on saving. Most CDs still offer better returns than money market or savings accounts and, because they're covered by FDIC insurance, are among the safest investments around. Here are the pros and cons of five options to beat low rates and get the most from your savings.

1. Go for Longer-Term Certificate of Deposit

Long-term CDs generally carry higher interest rates than short-term CDs. Best seven-year CD rates for $1,000 deposits topped 3% as of July 1, while best rates for 1-year CDs were about half that amount.

But with interest rates at record lows, CD rates have nowhere to go but up, and you lose your chance to take advantage of higher rates when your money is tied up in a long-term CD. The American Bankers Association Economic Advisory Committee predicted in June that interest rates will rise modestly by the end of 2011.

2. Build a CD Ladder

A CD ladder is a group of CDs with different maturity dates to provide liquidity. You might build a 12-rung ladder of one-year CDs, for instance, each with a maturity date in a different month to provide access to the cash throughout the year. A CD ladder also spreads out your exposure to rate changes because of the variety of maturity dates.

Investors wonder whether to shorten a CD ladder -- invest in shorter-term CDs -- in a low-rate environment. Shortening the ladders gives quicker access to reinvest cash in higher-rate CDs in case rates go up. But what if rates don't rise as soon as you expect? Then you end up wishing you had left the money in longer-term CDs. No one knows for sure when the Federal Reserve will increase rates, so the issue is a tough call, even for experts.

3. Rising-Rate CDs

Rising-rate or bump-up CDs give you the option to increase the CD rate at some point during the term if interest rates climb. The downside? These CDs often start with a lower APR than conventional CDs on the market, and there's no guarantee the bank will increase its rates during the term.

4. No Penalty CDs

With conventional CDs, you forfeit some of your interest earnings if you withdraw money early. No-penalty CDs let you withdraw before the term is up without paying any interest penalty, an attractive feature that enables you to withdraw and reinvest money in a higher-rate CD in case interest rates go up before the maturity date. But like rising-rate CDs, no-penalty products typically feature a lower APR than other CDs on the market.

5. Indexed CD Investments

These CDs are tied to an index, such as the S&P 500, gold prices, or the Dow Jones Industrial Average, and provide a percentage of the return. You get a far better yield than you would on a typical CD if the index does well, but you get no return on your investment if the index does poorly, although your original deposit is safe. These CDs might look appealing at first glance, but they're complicated and difficult to compare to find the best deal, and they have stiff early withdrawal penalties. You forfeit principal, not just interest, when you take your money out early.

Although CDs are relatively simple investments, they come in greater variety than a generation ago. Understand a certificate of deposit's features, penalties, and maturity date before investing, and question any deal that sounds too good to be true. Regardless of the rate environment, don't be afraid to invest in CDs at different banks. Search online for the best CD rates to meet your savings goals.

Is retirement a time to relax? Not when it comes to your finances

by Jim Sloan

Let's say you're on the cusp of retirement. You're looking forward to it, in large part because for the last 30 years or so you have been watching your investments like a miser and you're looking forward to not having to worry about finding the best cd rates or high interest savings account anymore.

Think again.

Investment, inflation and health care risks abound

Just because you have saved diligently and have socked away enough in your savings accounts or money market accounts or stock portfolio to live comfortably in your twilight years, these three things could happen:

  1. Stocks take a tumble? Chances are a lot of your retirement savings are still tied up in the market, and although you were smart and opted for lower-risk investments as you approached retirement age, a steep drop like the one that occurred, gulp, just two years ago, could have a big impact on your portfolio.
  2. Inflation takes off. Not to be a naysayer or anything, but inflation happens. Is your portfolio designed in a way to cover that inconvenient economic force?
  3. Medicare doesn't cover all your medical needs. Have you budgeted for supplement health insurance?

The point is that your retirement years will have to include at least a little bit of planning and economic engagement. You'll still be following interest rates and looking for the highest cd rates. A high yield savings account will still be your Holy Grail.

7 steps retirees can take to guard against disaster

With that in mind, here are seven tips to ensure your retirement remains productive:

  1. Keep an eye on portfolio growth and inflation. If your portfolio is growing and inflation is relatively low, your estate should grow in your retirement. However if inflation is growing and your portfolio is experiencing a low or negative return, you could run out of money before your retirement is up.
  2. Build a portfolio that is bigger than you think necessary.
  3. Take a close look at the market and inflation before deciding on retirement. If inflation is high and market returns are low, you may want to hold off before taking distributions. Other options include retiring, but with a part-time job, or dramatically reducing your living expenses by downsizing, according to a story published by U.S. News & World Report.
  4. How much will you need to supplement Social Security? Many retirees buy annuities, and many financial advisors recommend that annuity payments cover your living expenses, such as for housing and food.
  5. Get advice on distributions. If you thought tax laws leading up to retirement were complicated, wait till you retire. If the terms "stacking" and "leap frogging" are foreign to you, find a financial advisor who can advise you on the appropriate diversification of taxable and nontaxable assets, according to a MarketWatch report.
  6. Take taxes into consideration. Most retirement income is taxable, so you'll need to find out if you need to file a tax return after the age of 65. According to the Wall Street Journal, you'll like have to pay taxes on pension payments, IRA distributions, dividends and interest income in retirement. Up to 85 percent of your Social Security benefits may be taxable.
  7. Coordinate Social Security benefits with your spouse. The usual advice is to wait past the age of 70 to start taking your Social Security payments. That will give you the largest benefit, and those checks will be very handy when you're much older and no longer able to work. In cases where there is a high wage earner in the family, it might be beneficial to file for benefits and then suspend payments for the high wage earner while the spouse collects, according to The Wall Street Journal.

You get the idea. Financial management in retirement is not the no-brainer many of us thought. We haven't even mentioned things like "required minimum distributions," which, ironically, could end up costing you a pretty penny in tax penalties if they aren't handled properly. This is capitalism, folks. No one said it would be easy.

Bridge the gender gap to become a financially secure female retiree

by Jim Sloan

Mother's Day is an opportunity each year to acknowledge all the sacrifices mom's make. This year, it was also an opportunity for the media to spotlight how women face more difficulties in preparing for a secure retirement than men.

Millions of baby boomer women, many divorced, widowed or never married, find themselves living on their own in retirement. They often arrive at retirement with smaller retirement savings accounts, fewer Social Security benefits, less knowledge of such investments as certificates of deposit and a life expectancy that could have many outliving the resources they need for a comfortable life.

In one of a number of Mother's Day articles this year that focused on the challenges facing women in retirement, Women's Institute for a Secure Retirement (WISER) president Cindy Hounsell told the Associated Press, "there has been progress, but not enough."

Why women face challenges

While it would be stereotyping to suggest that women aren't good savers or remain largely uninvolved in family finances, it is fair to say that they are at a disadvantage to men when it comes to retirement preparation. They typically spend about 12 years out of the workforce raising children or caring for sick relatives, and this leaves them with fewer retirement benefits than men.

Here are three other disadvantages:

  1. The percentage of women living alone over 65 is twice that of men. A single person is at greater risk of living in poverty than a married couple.
  2. Nearly 70 percent of all people aged 85 or more are women, and many are living in poverty or near-poverty because of high out-of-pocket medical expenses.
  3. Women make 77 percent of what men earn, another factor in the smaller amount of Social Security benefits they receive in retirement.

Positive signs

Despite these challenges, surveys by AARP suggest more women are handling household finances. According to the Associated Press, an increasing number hire financial advisors to help them plan ahead.

Here are two other encouraging developments:

  1. Women are more likely to pick a safe investment, such as a certificate of deposit, but an increasing number of groups focused on helping women in financial planning are encouraging them to invest in stocks and other higher-yield savings accounts that will increase their nest egg.
  2. Young people are taking steps to help their older moms organize and assess their retirement documents, such as bank statements for checking accounts, savings accounts, money market accounts and CD accounts.

What you should do

Women reading this can take steps on their own, including these two:

  1. Contribute to your own IRA or other savings accounts. AARP recommends this because your husband's IRA may not be enough or could become depleted because of a long illness.
  2. Invest with purpose. While your investments should become less risky the closer you get to retirement, women should still seek out advice for higher-yield investments, including stocks and mutual funds.

In addition to educating themselves about the best cd rates and money market accounts, women should also take advantage of the advice available to them from organizations like AARP. An increasing number of these groups help women increase their retirement planning and overall financial literacy.

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Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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