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Retirement Savings: How Much Should I Save Each Month?Useful Tips and Links from Money Article
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POSTED
ON BY Ken Tumin
The latest Money Magazine has an article titled 'Triple the Return on Your Savings! No Risk!'; I liked the way it described the best choices for individuals based on their circumstances. I also liked some of the links it gave which included this blog! The other bank-related links included the Bankrate.com along with its Safe and Sound database and Fatwallet Finance. I feel lucky to be included. There are several other good banking resources for finding the best deals. Refer to my finding deals post for these. The article is in the April 2006 edition of Money Magazine. It doesn't seem to be available at Money's website
The article listed the best risk-free savings choices for 4 types of people:
There were some good tips, but I thought it left out some things. Below is my summary and critique of the article's recommendations:
If you're just starting to save
Online Savings Accounts were considered the best choice for the first category for those just starting to save. It mentioned the concern of many about dealing with an online bank. In addition to Bankrate.com, it should also have mentioned using FDIC's database to investigate an online bank. For credit unions, the NCUA has a similar database. You can use this to confirm that the web address of the bank or credit union is legit.
If you have lots of idle cash
For second category (those with lots of idle cash), the best choice was money-market funds. One reason the article gave for money-market funds over bank online savings and money market accounts was that money funds are likely to win out if the Fed continues to hike its target federal funds rate. This may have been true in the past, but with the online competition, I'm not sure if this is true now. But money funds have one advantage that savings account don't have and that is tax-free versions. Money funds based on municipal bonds can be free of federal income tax. However, these tend not to rise as quickly as the taxable money funds when rates rise. To find the highest rates for money-market funds, the article mentioned the site iMoneyNet. I also recommend BestCashCow's Money Market Funds page.
Some of the advantages the article listed for money market funds are minimums as low as $1,000 and the ability to write checks (although amounts generally must be for at least $250). It did mention bank online money market accounts as another alternative. Unlike money funds, bank money market accounts are FDIC insured (although this isn't that important since money funds are so safe). Like money funds, bank money market accounts usually have minimum balance requirements along with limited checking writing privileges. The article mentioned HSBC's online savings account which has ATM access but no check writing. It should also have mentioned some other good money market account choices such as GMAC Bank which has a great 4.65% APY, only a $500 minimum, and check writing and ATM cards. For those who want a smaller minimum requirement, Capital One's Money Market Account's minimum is only $100, and it has a decent yield of 4.25% APY.
If you need your cash at a specific time
Money's best choice for the third category (if you need your cash at a specific time) was short-term certificates of deposit. The article recommended sticking with CDs with terms no longer than 6 months. With so many 6-month CDs offering around 5% or better it's hard to argue with this when most long-term CDs have yields no better than the low 5% range. Some banks which are offering 6-month CDs of 5% and over include World Savings which currently has a 5.26% APY special (see post). Meadows Credit Union is still offering its special 5.01% APY 6-month CD with only a $1K minimum (see post). In addition to a great money market account, GMAC Bank also has some nice CD rates. Its 6-month CD is currently very close to 5% at 4.95% APY. In addition to these national CD deals, there are also many local bank and credit union CD deals. This is one area in which I try to report on.
If your low-risk savings are devoted to long-term goals
For the last category (if your low-risks savings are devoted to long-term goals) Money's best choice was short-term bond funds. They were considered better than money-market funds since they can better take advantage of a likely upswing in the yield curve (when long term rates finally start moving up). The article also mentioned stable-value funds which are usually only available in an employer-sponsored retirement plan. These are a hybrid of bond funds and money market funds that are designed to guard your principal from drops in bond prices. For more info on Stable-Value funds, refer to the website Stable Value Investment Association.
Cash investments to avoid
The article also gave some recommendations of cash investments to avoid. These included Treasure Inflation-Protected Security Funds, EE Bonds and I Bonds. Since the Treasury has changed the EE Bonds to have a fixed rate which is now a low 3.2%, I agree with staying away from these. For I Bonds, the article mentioned the same concerns that I described in this post. I Bonds rates will likely go way down when rates reset in May. However, if the fixed-rate component of the I Bond goes up significantly, in my opinion, it may be worthwhile to consider later this year. Refer to the government's TreasuryDirect website for more info on these. The article left out short term Treasury Bills. These have nice rates, can be bought easily from TreasuryDirect and are free of state and local income taxes. Refer to this FW Thread for the latest discussion about these.
The article listed the best risk-free savings choices for 4 types of people:
- If you're just starting to save
- If you have lots of idle cash
- If you need your cash at a specific time
- If your low-risk savings are devoted to long-term goals
There were some good tips, but I thought it left out some things. Below is my summary and critique of the article's recommendations:
If you're just starting to save
Online Savings Accounts were considered the best choice for the first category for those just starting to save. It mentioned the concern of many about dealing with an online bank. In addition to Bankrate.com, it should also have mentioned using FDIC's database to investigate an online bank. For credit unions, the NCUA has a similar database. You can use this to confirm that the web address of the bank or credit union is legit.
If you have lots of idle cash
For second category (those with lots of idle cash), the best choice was money-market funds. One reason the article gave for money-market funds over bank online savings and money market accounts was that money funds are likely to win out if the Fed continues to hike its target federal funds rate. This may have been true in the past, but with the online competition, I'm not sure if this is true now. But money funds have one advantage that savings account don't have and that is tax-free versions. Money funds based on municipal bonds can be free of federal income tax. However, these tend not to rise as quickly as the taxable money funds when rates rise. To find the highest rates for money-market funds, the article mentioned the site iMoneyNet. I also recommend BestCashCow's Money Market Funds page.
Some of the advantages the article listed for money market funds are minimums as low as $1,000 and the ability to write checks (although amounts generally must be for at least $250). It did mention bank online money market accounts as another alternative. Unlike money funds, bank money market accounts are FDIC insured (although this isn't that important since money funds are so safe). Like money funds, bank money market accounts usually have minimum balance requirements along with limited checking writing privileges. The article mentioned HSBC's online savings account which has ATM access but no check writing. It should also have mentioned some other good money market account choices such as GMAC Bank which has a great 4.65% APY, only a $500 minimum, and check writing and ATM cards. For those who want a smaller minimum requirement, Capital One's Money Market Account's minimum is only $100, and it has a decent yield of 4.25% APY.
If you need your cash at a specific time
Money's best choice for the third category (if you need your cash at a specific time) was short-term certificates of deposit. The article recommended sticking with CDs with terms no longer than 6 months. With so many 6-month CDs offering around 5% or better it's hard to argue with this when most long-term CDs have yields no better than the low 5% range. Some banks which are offering 6-month CDs of 5% and over include World Savings which currently has a 5.26% APY special (see post). Meadows Credit Union is still offering its special 5.01% APY 6-month CD with only a $1K minimum (see post). In addition to a great money market account, GMAC Bank also has some nice CD rates. Its 6-month CD is currently very close to 5% at 4.95% APY. In addition to these national CD deals, there are also many local bank and credit union CD deals. This is one area in which I try to report on.
If your low-risk savings are devoted to long-term goals
For the last category (if your low-risks savings are devoted to long-term goals) Money's best choice was short-term bond funds. They were considered better than money-market funds since they can better take advantage of a likely upswing in the yield curve (when long term rates finally start moving up). The article also mentioned stable-value funds which are usually only available in an employer-sponsored retirement plan. These are a hybrid of bond funds and money market funds that are designed to guard your principal from drops in bond prices. For more info on Stable-Value funds, refer to the website Stable Value Investment Association.
Cash investments to avoid
The article also gave some recommendations of cash investments to avoid. These included Treasure Inflation-Protected Security Funds, EE Bonds and I Bonds. Since the Treasury has changed the EE Bonds to have a fixed rate which is now a low 3.2%, I agree with staying away from these. For I Bonds, the article mentioned the same concerns that I described in this post. I Bonds rates will likely go way down when rates reset in May. However, if the fixed-rate component of the I Bond goes up significantly, in my opinion, it may be worthwhile to consider later this year. Refer to the government's TreasuryDirect website for more info on these. The article left out short term Treasury Bills. These have nice rates, can be bought easily from TreasuryDirect and are free of state and local income taxes. Refer to this FW Thread for the latest discussion about these.