Savers squeezed by low bank, CD, money market rates - Saving is back, but it's hardly paying off; here's how to boost your results

Savers squeezed by low bank, CD, money market rates - Saving is back, but it's hardly paying off; here's how to boost your results
By Tom Petruno
Copyright © 2009, Chicago Tribune
6:18 a.m. CST, November 24, 2009
http://www.chicagotribune.com/business/chi-tc-biz-savings-1123-1124-nov24,0,1293501.story


You'd think that $10 trillion would merit a little more respect.

That's the total sitting in bank savings accounts, savings certificates and money market mutual funds.

And it's earning an extraordinarily tiny return for the American consumers and businesses whose names are on the accounts.

The average yield on a six-month CD is about 0.9 percent, down from 2.2 percent a year ago, according to Informa Research Services. The average money market fund pays an abysmal 0.04 percent annualized yield.

It's clear how we got here: The financial system crashed, taking the economy with it, causing the Federal Reserve to push short-term interest rates to near zero in the hope of avoiding Great Depression II.

The question that every bank saver would dearly love answered: How soon might short-term rates rise enough to at least lessen the feeling that you're having your pocket picked by a grand conspiracy of the Fed, the Treasury and the banks?

Last week, the head of the Fed's St. Louis branch, James Bullard, caused a stir when he suggested that the central bank might wait until 2012 to begin lifting rates.

Bullard didn't say that the Fed would wait that long, but he noted that after the last two recessions (1990-91 and 2001) it took 2 1/2 to three years before policymakers began to tighten credit. If the recession ended this past summer, the timetable would leave the Fed on hold until the first half of 2012.

The ironies of this rock-bottom-rate regime are glaring. It has taken the worst recession in a generation or more to make many people understand that they need to save more. Now that they're trying to do so, they receive a low return.

Here are a few strategies to consider to boost results:

--Rethink the merits of money market mutual funds.

Cash has been pouring out of money funds this year. They can pay out only what they earn on the short-term government and corporate IOUs they own. So investors know there is no hope of fund yields' rising again until the Fed begins to lift its benchmark short-term rate.

The best alternatives to money funds are money market deposit accounts at banks, said Greg McBride, senior analyst at Bankrate.com. On that Web site and other rate-search services, you can find federally insured accounts paying as much as 1.7 percent annualized. It's true that banks can change what they pay at any time. And you also have to be OK with rules governing the number of withdrawals you can make.

But if you've got a sizable sum sitting in a money fund, you can do better at banks.

--If you use CDs, build a ladder.

Because predicting interest rates is a crapshoot, many financial advisers opt to use a laddering strategy with CDs, splitting clients' cash among certificates maturing every three months over the course of a year or two. If rates begin to rise, as maturing CDs come due they can be reinvested at higher rates.

As with bank money market accounts, it pays to shop around for CDs. Some banks want your cash more than others. And federal deposit insurance means your risk of principal loss is nil.

Some services will find CDs for you. Rick Keller at financial advisory outfit Keller Financial Group, uses the CDARS deposit-placement service (cdars.com). Many brokerages also offer CD shopping services.

--Focus on inflation.

Even with short-term rates so low, you still may be able to keep up with or even beat inflation because prices of many goods and services remain subdued in the weak economy. It's your after-inflation return that's important, McBride said.

If inflation begins to revive, and the Fed fails to respond by raising short-term rates, that will be crunch time for savers: At that point, long-term rates probably would begin to surge, which at least would provide better returns for savers looking to make the jump from cash accounts to bonds.

tpetruno@tribune.com