If it's the last week of the month, odds are Alison Southwick and Robert Brokamp are going to amble over to the Motley Fool Answers mailbag to find out what it is their listeners really want to know. And for added gravitas and expertise, they've brought in reinforcements: Naima Barnes, a financial planner with Motley Fool Wealth Management, a sister company of The Motley Fool.
In this segment of the podcast, they're on the hunt for safe but liquid assets. Stormy's mother can live comfortably in retirement from her other income sources, but that doesn't mean she should leave her $100,000 emergency fund sitting in a low-interest savings account. The Fools discuss options.
Naima Barnes is an employee of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The information provided is intended to be educational only, and should not be construed as individualized advice. For individualized advice, please consult a financial professional.
A full transcript follows the video.
This video was recorded on May 29, 2018.
Alison Southwick: The next question comes from Stormy. "My mother is 73 and retired. Her house is paid for and she has money coming from Social Security, an annuity, and an IRA. She has enough money for regular, day-to-day stuff plus a little extra. She also has about $100,000 sitting in a bank account earning 0.4% interest, which is nothing. This money is a buffer if an unexpected expense comes up. I want her to get this money into an account that would keep up with inflation; otherwise, she's losing money every year. She's onboard with that.
This is money that should be liquid and not volatile. I don't want to invest in stocks. Bonds are an option, but I'm not finding a bond fund that would keep up with inflation. The bank wants to put her into an annuity. I'm not excited about that either. She's OK with a 12-month CD, but I'm not seeing good rates either. Do you have any suggestions?"
Robert Brokamp: First of all, interest rates have risen significantly over the last year, so there is absolutely no reason to be just earning 0.4% at a bank. If you go to the Motley Fool Banking Center, you'll see that there are savings accounts that are yielding 1.7%. One-year CDs 2.4-2.5%. There's just no reason to be sitting there in that type of a situation.
I do agree with you that stocks are not a good place for this money. I also agree with you that bond funds are not the best place, either, because bond funds can go down in value. In fact, the total bond market index from Vanguard is down about 2.5% this year because interest rates have gone up, so cash is definitely the place to be.
You will find better rates through online banks, which does make some people uncomfortable, but if that makes your mother uncomfortable, maybe with that $100,000 keep $25,000 at the local bank but do the rest with an online bank.
In a previous mailbag we also talked about iBonds, since you brought up something that keeps up with inflation. It's a mix. iBonds are offered through the U.S. government, so they're very safe. They have a fixed rate plus a rate that varies according to inflation. The current rate on iBonds is 2.5%, so it's pretty good. They're not as liquid, though. You can't touch them within 12 months, and if you take them within five years, you lose three months' worth of interest, but for a portion of your money that's probably a good place, too.
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