Ask Bankrate is a recurring feature where Bankrate’s experts answer your financial questions. Visit this page for more information on how to submit your question. Click on a question here to jump straight to it. This week’s questions were answered by Greg McBride, CFA, Bankrate chief financial analyst.


Q1: How can savers stay ahead of inflation?

Given the increasing volatility over the past four decades of personal finance “rules of the road,” is equity investment the only way that savers can stay ahead of inflation … especially considering Jerome Powell’s highly risky plan to encourage inflation? (As an example of one of the rules of the road, “invest and forget” for small investors.) Where does this leave the increasing number of baby boomer retirees who live on fixed incomes if equities happen to crash? Isn’t that asking for trouble?

— Keith K.

I agree with your assessment of the Fed’s new framework as it pertains to inflation as “highly risky.” To me that is the bigger risk for boomer retirees living on a fixed income — that inflation picks up and their buying power is further eroded with each passing year.

While the stock market isn’t the only way investors can stay ahead of inflation (real estate, precious metals and commodities have often done so as well) investors will no doubt put more of their eggs into the equity basket in pursuit of higher returns. Some of this would be appropriate — quality dividend paying stocks, for example — but the risk of a sharp market downturn on the eve of retirement throwing a wrench in one’s plans is definitely valid. Nothing will shorten the lifespan of a portfolio faster than withdrawing funds in a down market, or bailing out at that point altogether.

Retirees have to walk the razor’s edge of accumulating sufficient cash reserves and conservative investments to cover their first few years’ of retirement withdrawals while maintaining enough of an exposure to equities to sustain their lifestyle and maintain buying power well into the future. If inflation picks up, that job just got that much harder.

Q2: Are bonds or bond funds a good investment?

Should we invest in bonds or bond funds with interest rates so low?

— Randy J.

Bonds and bond funds still serve a purpose in an overall asset allocation by diversifying away some of the risk of equities. If the stock market plunges 10 to 15 percent in a short period of time, bonds will be the stability to offset the volatility of stocks. However, they’re not going to generate much in the way of income at these levels.

And finally, there is the risk that prices of bonds, and bond funds especially, would fall should interest rates rise. With bonds you can just hold the bond to maturity and get the face value, barring default. But with a bond fund there is no such thing as holding to maturity since new bonds are constantly replacing maturing bonds so the interest rate risk is ever present.

Interest rate risk is higher for longer-term bonds and smaller for shorter-term bonds, so keep that in mind if your desire is to hold bonds for stability rather than income.

Q3: What are some good investments in today’s market?

I have a small 401(k) from a former employer, and as I’m not contributing to it, it’s just going up and down with the stock market. What real world investing opportunities in today’s market might you recommend?

— Jerry W.

If you wish, you can roll over that 401(k) into your current employer’s 401(k) plan (if they accept incoming rollovers) or roll it over into an IRA. In either case, you would be preserving the tax-advantaged nature of that money, which is important.

As for how to invest the money, regardless of which account it is in, that is impossible to say without knowing how far you are from retirement, what your current asset allocation looks like, what lifestyle and sources of retirement income you expect to have when the time comes, etc. If you’re a long way from retirement, or have an investment allocation that is otherwise tilted more conservatively, then having that account invested in the stock market is entirely appropriate. If you’re closer to retirement, or have a portfolio that is heavily invested in stocks, then a more conservative approach with that money would be more suitable.

Regardless of how it is invested, keep it in its tax-advantaged “protective bubble” of a 401(k) or IRA rather than cashing it out. The tax advantaged nature acts to boost your returns over time.

Q4: Where should I stash short-term investments?

As CD and savings account rates have dropped to almost nothing, what are good one- to two-year investment options for amounts on money ranging from $25K to $100K? As an example, I have a $15K CD at 2 percent coming due in November, but the best I can find at max is 1 percent. That is really, really sad.

— Jerry W.

You’re right, the yields on federally insured CDs top out at about 1 percent for a two-year maturity, and that is “really, really sad.” Interest rates are dreadfully low, and there is no way around that without taking on more risk — which over a one- to two-year horizon you can ill afford to do.

One consideration for part of your money, if it works for you, are what are known as rewards checking accounts. These are accounts that pay higher yields, say, 2 percent or 2.5 percent, are federally insured and fully liquid. But to earn those yields you must meet certain requirements on a monthly basis; for example, getting direct deposit, using online bill pay and swiping your debit card 10 times. And that great yield is only paid up to a certain amount, rarely more than $25,000.

If those are monthly requirements you can swing without even thinking about it, then this is a slam-dunk for you. But if not, the yield you’ll earn is otherwise very pedestrian. Look to smaller community banks and credit unions for this type of account offering.