Obtaining Credit In A Bad Economy


How to Retire in a Low Interest Rate Environment

For Americans hoping for bigger yields out of their savings accounts and CDs, the wait continues. Faced with anemic economic growth, the Federal Reserve has kept rates near zero so far this year. And even when Janet Yellen and company loosen up monetary policy, experts say it could be years before yields reach anything close to their historic norms.

Low interest rates have been great for consumers looking to take out mortgages or car loans, but they have been less appealing for those who want to park their cash somewhere safe. The typical rate on savings accounts is now just 0.54%, according to BankRate.com at press time, and the return on a one-year CD is a paltry 1.09%.

That is a particular problem for people in (or close to) retirement. Rates like we've been seeing can make it feel like saving is not a virtue, tdespite what we've all been taught – at least saving in the traditional places retirees have been advised to save. But those are not your only choices.

Short Term vs. Long Term

If you’re looking short term, not necessarily. For any assets you may need to access within a couple of years, an FDIC-insured account – whether it’s an account at your local bank or a certificate of deposit – is still your best bet. That goes for your emergency fund, which experts say should equal three to nine months’ worth of living expenses.

Keep in mind, though, that you can often do a little better with an online bank account than one at a traditional brick-and-mortar operation. Ally Bank, one of the leaders in this space, is currently offering a 1% yield on savings accounts, with no monthly maintenance fees. 

When it comes to money you won’t need for a few years, your possibilities increase. There are a number of investments that offer the possibility for considerably better yields, albeit with slightly higher risk.


One of your primary options, of course, is the bond market. Unless you have a long time horizon, think in terms of safe, highly rated debt instruments. Exchange-traded funds (ETFs) that focus on investment-grade corporate debt are a prime example. (For more, see XLF vs. KRE: Which Interest Rate Performs Better in Low Interest Rate Environment?)

In the current environment diversification becomes more important than ever. That’s because investors become susceptible to something called “rate risk.” When interest rates inevitably rise, the price of bonds will go down. This becomes less of a problem when you own a mix of bond funds with different maturities. Those funds may take a hit on their longer-term bonds, but they can reinvest in new bonds that now offer a higher yield.


Another alternative for intermediate-term needs are real estate investment trusts (REITs). These dividend-paying instruments own or provide financing for a portfolio of commercial properties. The value of REITs can fluctuate in the short term, but because a lot of their income is generated through existing leases, REITs are usually considered a safer play than growth stocks, for example. (For more, see REITs: Still a Viable Investment?)

The conventional wisdom is that interest rate hikes tend to hurt the performance of REITs, at least in the short run. The reality, however, is that any rate increases are likely to be gradual, which mitigates the risk of any significant devaluation. REIT ETFs provide an easy way to diversify your real estate holdings and increase your liquidity. Over the past year the Vanguard REIT Index Fund (VNQ), which tracks the broader REIT market, yielded a respectable 3.87% return.

Dividend-Paying Stocks

When your time horizon is only a few years out, investing in tech startups probably isn’t your wisest move. Stocks that have a record of paying a stable dividend, however, are a different story. For instance, this past year Coca-Cola (KO) offered a dividend yield of 3.14%, and utility giant Consolidated Edison (ED) provided investors with a 3.66% yield. Compared to what you’d be getting from a CD or T-Bond, those numbers look pretty attractive right now. (For more, see The Top Dividend-Paying Stocks of 2016 (GIS, JNJ, MSFT).

The Bottom Line

Saving is still a virtue to ensure that you have both emergency money and funds to invest in other places. For money you may need to tap in the short run, you’re better off living with sluggish interest rates in order to enjoy the security of an FDIC-insured account.

Nevertheless, if you’re looking out a few years, a carefully assembled portfolio of bonds and other dividend-paying vehicles might give you a bigger payout. Even if you're approaching or in retirement, it makes sense to expand your safe-investment options.




Related Articles
  1. Retirement

    Getting A Loan Without Your Parents

    Use the 5 "W"s to finance your dreams without banking on a second signature.
  2. Personal Finance

    Student Loans: Private Loans

    While federal loans should always be your first borrowing choice, they may not cover your full tuition – never mind lab fees, books, and room and board. That's where private loans come ...
  3. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  4. Personal Finance

    Personal Loans: To Lend Or Not To Lend?

    Attempting to help a loved one with a cash loan can put a strain on your relationship - and your bank account.
  5. Personal Finance

    Lending From A Loan Officer's Perspective

    Learn how a loan officer thinks, so that you can get the best and safest loan.
  6. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  7. Personal Finance

    6 Tips to Get Approved For a Mortgage

    You can change your bank's answer to a loan request from 'No' to 'Yes'. Find out how.
  8. Managing Wealth

    Before you Buy that Home: Shop for the Best Loan

    Before even starting to search for a home, the first thing you need to do is get pre-qualified for a home mortgage.
  9. Managing Wealth

    How To Get A Business Loan If You Have Bad Credit

    Your business' credit standing may be less than stellar, but you can still get financing. We show you how.
  10. Investing

    Home-Equity Loans: A How-To Guide

    Looking for a home-equity loan? The rules are the same as for any other purchase: First, educate yourself, then shop for the best deal.
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center