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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
Retirement investing
Dear Dr. Don,
We're both retired. We have our life savings invested in money market
funds. Obviously you know the return is incredibly low these days.
Just how safe are our funds? What advice can you offer us, and what
can you recommend as a possible alternate plan.
DeEtta
Dear DeEtta,
Money market mutual funds aren't insured. The industry over the
years has done a very good job of protecting the buck, meaning that
the funds have preserved a price of $1 per share for each dollar
invested. Money market fund managers take protecting the buck very
seriously because investors losing money in a money fund would decimate
the fund and rattle the industry.
A money market account, on the other hand, can be
an FDIC-insured account. For a more detailed description of money
market mutual fund and money market accounts, read "What
is the difference between a money market mutual fund and a money
market account?"
In retirement you can't afford to take on as much
risk in your portfolio as someone investing to prepare for retirement
because you don't have many rebuilding years left in your portfolio.
You want to protect your principal while preserving
your purchasing power. The money market funds are protecting your
principal, but they aren't doing anything about preserving your
purchasing power.
We're near the end of an easing cycle by the
Federal Reserve. Taking this moment in time to go from short-term
investment to a series of longer-term investments isn't likely to
be your best move.
On the other hand, the average taxable money market
fund is yielding about 1.35 percent. After considering inflation
and income taxes, you're losing purchasing power. (You didn't say
if these investments were in tax-advantaged retirement accounts,
but you will at some point owe income taxes.)
Take a look at insured CD products by shopping
rates in your area on Bankrate. Instead of creating a laddered
CD portfolio, think about building a step-laddered CD portfolio,
meaning that you stay in shorter maturities initially.
You can also buy Treasury notes and bills using the
Treasury
Direct program. Another safe alternative is to invest in U.S.
Savings Bonds. Series
I savings bonds are indexed for inflation and are currently
paying 2.57 percent interest.
Series I savings bonds are a good choice for money
that you can tie up for the next five years. They have an early
withdrawal penalty of three months interest if you redeem them within
five years of purchase, and they can't be cashed in over the first
six months. With these savings bonds, principal is protected along
with purchasing power. The earnings are also exempt from state and
local income taxes.
All of these options are worth considering for a portion
of your savings. It should allow you to pick up additional interest
income while keeping your principal safe. (Treasury securities held
to maturity will be worth the face value of the note or bill. Investment
losses are possible when selling Treasury securities prior to maturity.)
-- Posted: May 7, 2002
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