We've got a problem. Our money has gone lazy on us.
The whole idea of saving money, we've been told, is that someday it will work when you don't. And now, as 77 million baby boomers are thinking seriously about their (possibly involuntary) retirement, those hard-earned savings dollars have turned into worthless malingerers.
What can we do?
Alas, the answer to this question hasn't changed much in several years. Here's a list of tactics. Some are for people still working. Some are for people already retired. Whatever your work status, I can't recall a time when savings have earned so little.
Tactic One: Get Brutal with Debt. If you have any, get rid of it. There is no excuse to pay any interest whatsoever on a credit card. Most people with older mortgages would be better off exchanging some of their savings for a paid off mortgage. The cash flow change can be enormous. Suppose, for instance, you have 10 years and $25,000 outstanding on a home mortgage at 6.5 percent. You get no tax benefit and safe 6.5 percent yields don't exist. To earn the $284 a month payment with a 4 percent savings account you'd need to have $85,160 in the account. Not to mention hunting for the 4 percent yield.
There is no such thing as "convenience credit" if you pay any interest at all.
Tactic Two: Learn About I-Savings Bonds. I-Savings Bonds purchased between now and April 2005 will earn at a 3.67 percent annual rate. That rate is composed of a 1.0 percent real interest rate and a trailing inflation adjustment of 2.66 percent according to the Treasury website. More important, this is better than the recent 3.51 percent yield on 5 year Treasury coupon notes or the 0.95 percent real interest rate (plus inflation adjustment) on 5 year TIPS, Treasury Inflation Protected Securities.
The I-Savings Bonds allow your interest to accumulate tax-deferred and you will suffer a penalty if you redeem them before 5 years, but they provide great flexibility. They are also likely to provide a higher return when the inflation adjustment is reset next spring--- remember, the most recent trailing inflation rate is 3.2 percent.
Like I-Savings Bonds but want to receive regular interest income?
Then create a reserve of the interest income that will be deferred over the next five years and invest the amount that will generate the income in I-Savings Bonds. A $50,000 I-Savings Bond investment would generate about $9,350 in interest over the next 5 years. Put that in an interest bearing savings account and make regular monthly withdrawals. You'll defer taxes for five years, as well.
Tactic Three: Shop Till You Drop. There are still substantial spreads between the average yield on CDs and the highest yield. Recently on
www.banxquote.com, for instance, the average 5-year CD was yielding 3.44 percent--- less than an inflation indexed I Savings Bond--- but the highest yield available was 4.35 percent.
Tactic Four: Diversify Your Home Equity with REITS. Most Americans have most of their net worth in their home equity. So adding REITs to your investments isn't a very good idea as long as home equity dominates your asset portfolio. You can, however, diversify your home equity into a smaller home and some REIT investments that pay good income. You can do this through an Exchange Traded Fund like the iShares Wilshire REIT (ticker: RWR) which yields 5.4 percent or individual REITS.
Suppose you can sell your current home for $200,000 and buy a smaller home for $100,000. The cost of supporting your home will decline by nearly $6,000 a year and you'll have $100,000 to invest. Invested in REITS that earn 5 to 6 percent, your cash income will rise by $5,000 to $6,000 a year. That's an income shift of nearly $12,000.
Tactic Five: Diversify Your Low Yield U.S Stocks with International Stocks. Most Americans have little or no investment overseas, yet foreign stocks are selling at lower valuations and provide somewhat higher yields. As a consequence, you can increase your income slightly while reducing portfolio risk at the same time. An investment in the iShares MSCI Pacific ETF (ticker: EPP) would yield 1.7 percent.
On the web:
Learn about I Savings BondsCheck CD rates
