Certificate of Deposit Investment Alternatives

With interest rates still close to all-time lows, conservative investors are realizing that traditional forms of low-risk investments are not keeping up with inflation. According to Bankrate.com, the average 5-year bank CD is 2.13%, and the average bank money market is 0.12% APY.

Considering the inflation is historically 3%, that discrepancy between return on investment and rising prices can be detrimental to a retirement plan. Look at it this way: If your investments are returning 1% per year, and inflation is 3% per year, you actually lost 2% in value on your money that year. That might not seem like a big deal, but when you like at the increasing life expectancy in the United States, that does become an issue. Currently, the average life expectancy is around 85 years old. Assuming that life expectancy does not increase over your lifetime, a 60-year-old retiree could be retired for 25–40 years.

So, let’s do some simple math:

1% Interest — 3% Inflation = -2% purchasing power

-2% purchasing power x 25 years = -50% purchasing power

-2% purchasing power x 40 years = -80% purchasing power

From my experience, people who invest in CD’s, Money Markets, and other low-paying interest rates, usually do so because of 3 reasons:

1) It’s how they’ve always invested and so they just continue with what they’re comfortable with

2) They’re worried that all other investments will involve risk

3) They don’t know all of their options

If you’re in that first category, then you might want to consider staying in those types of investments. Sometimes a better return on investment isn’t as important as being comfortable with your investments. 

If you fall into the second two, then I’ll give you some investment options that are fixed, will typically keep up with inflation, and don’t have any investment risk, but which are offered by insurance companies instead of banks:

Multi-Year Guaranteed Annuity (aka MYGA)

How does it work? 

This is the closest investment to a Certificate of Deposit. They give you a fixed interest rate for a set period of time and it will not change over that time frame. As I write this article, there are 5-year MYGA’s that are currently paying a guaranteed* 3.15% yield to surrender.

For those guarantees, the insurance company will ask for the money to stay there for that specific time period, just like CD’s. The difference between CD’s and MYGA’s are that typically with MYGA’s the insurance company will allow you to take out up to 10% without losing any of your interest, and the interest grows and compounds tax-deferred.

Who should use it? 

Someone who doesn’t want any surprises. If you want to know exactly how much interest you will make over a certain time frame, regardless of market performance or future interest rates.

Fixed Indexed Annuities (FIA’s)

How does it work? 

This investment vehicle’s interest rate is based on a designated market index. There are many different market indexes you can choose from including S&P 500, Gold, Real Estate, Foreign Markets, and much more. What makes these accounts fixed is that they have a minimum guaranteed interest rate, or floor, where if the market index decreases in value, your account will not decrease in value with it.

In return for that safety, the issuing insurance company will typically ask for a time commitment anywhere from 5 years or more, and the insurance company will cap how much you can make or will only give you a percentage of the market index returns. Current caps are around 5.25% as I write this article.

Who should use it? 

This investment is good for anyone who doesn’t mind fluctuation in their annual interest rate but doesn’t want any negatives in their investments. Also, people who need growth and safety — FIA’s traditionally return some of the highest returns out of any fixed investments.

Return of Premium Life Insurance

How it works: 

As many of you are aware, there are many different types of life insurance, and some of the newer policies have a “Return of Premium” provision if you’d ever like to cancel the contract and get your money back. These newer policies can have a wide range of features from enhanced (tax-free) death benefits to Long-Term Care nursing home riders

Who should use it? 

Anyone who is healthy and doesn’t plan on using that money for normal expenses. If you’re only planning on leaving the money to beneficiaries or to use it for Long-Term care, then the insurance company will give you 50% to 400%+ more (based on age and health) on your investment for those specific things, and if you’d like to cancel the contract they just give you your principal back.

These investments definitely aren’t for everyone, but I wanted to write this article to give people education on alternative low-risk investments out there. If you think one of these alternative options is a good fit for you, please contact a trusted financial professional and see if they recommend them for your investment portfolio.

*Guarantees are backed by the financial strength and claims-paying ability of the issuing company.

Don Anders offers Securities and advisory services offered through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC, and a Registered Investment Advisor.