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Oct. 3, 2020, 10:05 a.m. EDT

The Fed plans to keep interest rates low for years — here’s how you should approach your savings strategy now

Gone are the days of relying on strong returns for money market accounts and certificates of deposit

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By Jacob Passy


Getty Images/iStockphoto
Whether you’re saving for a new home for a growing family or just for retirement, you’ll need to change up your strategy in the era of low rates.

Welcome to the era of low interest rates — and the savings challenges that come with it.

Earlier this month, the Federal Reserve changed up its strategy for interest rates, specifying new economic conditions that must be met before it would hike rates higher.

The central bank said it will keep interest rates at or around zero until the end of 2023 most likely. For the Fed to raise rates, the labor market will need to return to “maximum employment” while inflation must increase to 2% and look to be on track to exceed that threshold “for some time.”

When the coronavirus pandemic began, the Federal Reserve moved quickly to bring rates to zero in the face of a massive surge in unemployment caused by economic shutdowns. The move helped usher in ultra-low interest rates — which has been a major boon to home buyers and owners looking to lock in cheap mortgages.

Also see: The Fed might never hike rates again. Here are growth stocks for the long run, according to one strategist

But the Fed’s somewhat vague language is of little comfort to Americans working to build up their savings. In the months since the Fed slashed rates, the yields on checking accounts and savings vehicles have cratered. And for the foreseeable future, Americans will need to make some tough calls to ensure their money is working for them.

“We’ve been hearing this for years — that Americans were going to have to get used to embracing risk if there was an expectation of any return on assets,” said Dennis Nolte, a financial adviser with Seacoast Investment Services in Winter Park, Fla. “Now it’s here.”

Here’s what consumers need to consider when creating a savings strategy:

For emergency savings, stick with online savings accounts or credit unions

Historically, online bank accounts and credit unions have offered more competitive interest rates than large, brick-and-mortar banks like Chase or Bank of America.

The average interest rate for savings accounts across all institutions was just 0.09% as of Sept. 23, according to Bankrate. But online banks like Viobank and CIBC Bank offer rates as high as 0.83% . If you become a member of a credit union, they often pay out dividend rates in line with the annual percentage yields of online banks.

But as with anything, it does pay to shop around. “Larger banks are more aggressive with their special and promotional rates,” said Dan Geller, founder of consulting firm Analyticom. “Hence — compare before you commit.”

Watch out for CD terms

Certificates of deposit, or CDs, are a popular savings tool because they often can have higher yields than a bank account. When you choose a CD, you select a duration. During that time period you cannot withdraw the money without facing a penalty — in many cases, the penalty is losing the interest the money earned.

Longer-term CDs tend to offer higher yields than short-term ones. But that can be a double-edged sword in today’s rate environment. There is a chance rates will go up in the next few years, so choosing a long-term CD would be forgoing the potential boost you could get later on.

Take a ‘laddered’ approach to bonds

For longer-term savings, even a high-yield savings or money market account won’t help you reach your goals. And that was largely true even before the Fed lowered rates. “Even if the saver could earn 2% on a $10,000 deposit, it’s still only $200 a year,” said Matt Bacon, an advisor with Maryland-based investment planning firm Carmichael Hill. “That’s not enough to move the needle between being OK and not being OK.”

As a result, savers will need to branch out into riskier approaches to earn a larger return. But that doesn’t mean you have to throw everything into the stock market. “For the intrepid saver, a laddered approach may get a little more juice,” Bacon said.

A bond ladder is an investment strategy when an investor uses their money to purchase bonds with staggered maturity dates or invests into preferred stocks with a set date at which they’ll revisit their investment. This way their money isn’t tied up in one bond and they can alter their strategy over time based on where the markets go. “The hope is that you liquidate this tranche after meeting a specific return target or are able to hold this tranche if the market sours,” Bacon said.

Another option is a bond mutual fund, according to Michael Simmons, director of financial planning at Transitions Wealth Management in Denver.

“A bond mutual fund can be found that matches the level of safety and the degree of fluctuation an investor is seeking with rates of return commensurate to the risk taken,” Simmons said. A short-term bond fund could function quite similarly to a CD or savings account.

Consider alternatives to traditional bank accounts

In recent years, many companies have looked to compete with traditional banks and credit unions by offering their own cash, savings or checking accounts. A wide range of companies from Google /zigman2/quotes/202490156/composite GOOGL +0.92%  to T-Mobile /zigman2/quotes/204659678/composite TMUS +0.93%  have sought to enter the world of banking, and in many cases these companies still offer very attractive yields on these accounts.

Among the companies to take this approach were robo advisers and online trading platforms such as Wealthfront and Robinhood. The benefit to an account like this isn’t just the higher yield on your cash, but the seamless ability to use that money in different ways.

“The robo advisers aren’t any better purely on the rates, but they do make it very convenient to move any excess cash above the emergency fund into investments that do offer the potential for much higher returns,” said Ron Guay, a financial planner and founder of Rivermark Wealth Management in Sunnyvale, Calif.

When evaluating these accounts, it’s important to choose a platform that will help you achieve your investing goals, Guay noted. A company like Wealthfront may be better suited for a novice investor because the platform will help with goal-setting and diversifying one’s portfolio, as opposed to a more straightforward trading platform like Robinhood.

/zigman2/quotes/202490156/composite
US : U.S.: Nasdaq
$ 1,598.88
+14.59 +0.92%
Volume: 1.30M
Oct. 27, 2020 4:00p
P/E Ratio
35.66
Dividend Yield
N/A
Market Cap
$1079.63 billion
Rev. per Employee
$1.39M
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/zigman2/quotes/204659678/composite
US : U.S.: Nasdaq
$ 112.82
+1.04 +0.93%
Volume: 2.63M
Oct. 27, 2020 4:00p
P/E Ratio
36.81
Dividend Yield
N/A
Market Cap
$138.36 billion
Rev. per Employee
$832,885
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Jacob Passy is a personal-finance reporter for MarketWatch and is based in New York.

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