When you put your money into a bank you have every reason to believe that it is safe and secure. The little FDIC signs reassure you that your money is safe- there is no risk.
Unfortunately that is not entirely true. There is a risk that you are taking that few people stop to consider. That is interest rate risk.
In the best of times a bank will barely pay you enough interest to keep pace with inflation. While your money is “growing” in the bank the purchasing power of that money is decreasing.
What is more is that in the current economic environment, a declining interest rate environment, long-term rates are typically worse than short-term rates. Why is this?
Rates are on their way down. This means that when you renew that bank CD you will likely be facing lower and lower rates.
This is interest rate rink. In addition to inflation eating away at your spending power you will also see your rates dropping.
In an environment where interest rates are declining how can you handle interest rate risk? The answer is to diversify.
If ever there were an excellent time to invest some of your money into a Fixed Deferred Annuity now would be the time. Take a portion, probably not more than half, of that CD money and try an annuity.
As rates drop a fixed deferred annuity will guarantee a tax-deferred rate for the long term, usually easily a better rate than a bank CD without even considering that it is tax deferred. After the initial rate guarantee period annuities will offer a minimum guaranteed rate.
This rate guarantee may seem small, often around three percent, but consider that the average CD rates over the past five years have come to just over 2.5 percent according to the Federal Reserve. In 2003 alone the average 6 month CD paid 1.18 percent.
So, an annuity with no more than half, what about the rest? Again, diversify!
Use the rest in a combination of market investments and fixed, FDIC investments. Yes, that means looking at that CD again. Part of your money should be kept close on hand in a bank money market or CD.
Depending on your investment time horizon part of your money should be in the market. In this economic situation the market can seem risky, but the market remains the best chance of really growing your money.
If you are willing to try a few new strategies, even ones that have very little risk like annuities, it is possible to manage your money for growth in a declining rate environment. Diversify your money wisely, and don’t be afraid to ask for help.
Your banker is a great resource for you to start with. Find a banker that is licensed to talk to you about annuities so that they can advice you intelligently.