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3 options for earning more interest on ‘chicken money’

Updated: May 3, 2013 12:14PM

Originally published: July 3, 2003

It’s not just because of the Fourth of July that U.S. Savings Bonds are a good investment. It’s because Series I bonds are currently paying 4.66 percent! So whether for patriotism or profit, Savings Bonds should be part of your “chicken money” investment portfolio.

Some $6.6 trillion in savings are now searching for higher yields. The average return on a money market fund is now 0.48 percent, and six-month bank CDs don’t pay much more.

Remember the chicken money mantra: “I’m not so concerned about the return on my money, as I am about the return of my money.”

That said, here are a couple alternatives you might want to consider--investments that offer slightly higher yields, although they may have slightly less liquidity.

Series I Savings Bonds. In addition to the Series EE savings bonds, which currently pay 2.66 percent, for the last few years the government has sold Series I bonds, which are currently paying 4.66 percent. The rates on these bonds change every May and November, based on a two-part formula.

There is a base rate--currently 1.1 percent--that is guaranteed for the 30-year life of the savings bond. But on top of that base rate, there is an inflation adjustment factor--currently 3.54 percent--that is added to the base rate every six months. That’s how you get the current rate of 4.66 percent, a rate likely to drop in November.

Series I bonds can be purchased through your bank with a minimum $50 investment. But if you buy them online at, there is a $25 minimum. In the next few years, all savings bond purchases will be paperless, online transactions. Maximum annual purchase is $30,000 of each type of savings bond.

One consideration: You must plan to hold your savings bond investment for at least five years, or face a penalty loss of three months’ interest if you cash them in earlier. So Series I savings bonds are not completely liquid, but they are completely safe--and they will keep up with inflation.

Fixed-rate annuities. There are so many high-commission ripoffs in the area of fixed-rate annuities that I hesitate to recommend them. But there are a few, from top-rated companies, that currently offer higher guaranteed rates, although with important liquidity restrictions.

For example, AIG’s Future Freedom Annuity is paying 4.03 percent guaranteed for the first year, and a minimum guaranteed rate of 3 percent for the following five years.

That’s attractive, but you should understand the restrictions. First, these annuities are for people over age 591/2, because any money withdrawn from an annuity by younger people faces a 10 percent federal tax penalty. Second, there are steep surrender charges for withdrawals made in the first six years.

But the saving grace is that the Future Freedom annuity allows you to withdraw 10 percent of your account value every year, without paying surrender charges. You can even have a monthly check sent to your bank account.

There’s no guarantee that the annual rate renewals will rise if the general level of interest rates rise in the next six years. But at least you’ll get the minimum of 3 percent. So if you have some money that you know you can invest for at least six years with limited withdrawals, go to for more information.

Short-term muni bond funds. If you’re willing to take a bit more interest rate risk, you might consider a short-term municipal bond mutual fund. The interest paid out is tax-free. For example, the U.S. Global Near Term Bond Fund (800-US-FUNDS) is currently paying 1.72 percent. That doesn’t sound like much unless you’re in the 35 percent tax bracket. Then it’s equivalent to a 2.65 percent yield.

Like all bond funds, if rates move higher you could lose a small portion of your principal. But since the fund’s investments are for maturities of about three years, and it buys bonds rated AA on average, the risk is minimal.

The bottom line is very skimpy these days if you’re trying to live off your interest. But I think it’s better to dig into principal a bit to support your lifestyle instead of risking your entire nest egg to get higher yields. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of directors of the Chicago Mercantile Exchange and McDonald’s Corp. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.

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