Updated: May 3, 2013 12:14PM
Originally published: April 3, 2003
Although the Fed hasn’t cut interest rates in the last few months, rates paid to savers continue to decline. People with “chicken money” are now searching desperately for higher yields--and sometimes shouldering more risk than they understand. So here’s an update on a few ways to earn a bit more interest on your nest egg, without adding to risk.
First, though, remember that the definition of “chicken money” is very simple: money you can’t afford to lose. As such, it belongs in short-term, liquid, safe investments such as CDs, money market accounts, and Treasury bills. But those investments are yielding only around 1 percent these days, and major local banks are actually paying below 1 percent on money market accounts.
Those low yields tempt savers to stretch for income by purchasing longer-term notes and bonds. But even the highest-rated securities from the U.S. government will lose principal value when interest rates start to rise again someday. Then if you have to sell before maturity, you could take a loss. Or be stuck earning lower than market rates.
Other savers are buying less secure bonds, “junk” or “high income” bonds, which pay higher rates because they’re riskier. Those might be perfectly appropriate alternatives for part of your investment portfolio. But they do not qualify as “chicken money” choices.
Even in this low-rate environment, you can sometimes find better-than-average, safe and liquid choices. Here are two that might be of interest.
* TIAA-CREF Personal Select Annuity: 3 percent for one year
I’ve written before about this unusual tax-deferred annuity. It’s unusual because it is completely liquid. You can take all or part of your money out at any time with no surrender charges for money withdrawn. (If you’re under age 591/2, there is a 10 percent penalty on withdrawals, so this is for seniors.) This is not an insured CD, but TIAA-CREF is one of the few triple-A rated insurance companies. Minimum investment is $250.
When I first wrote about this annuity two years ago, it was paying 5.1 percent! Every year the rate changes on April 1, and it has just dropped to 3 percent until April 1, 2004--the lowest it can go, no matter what happens to rates.
How can TIAA-CREF afford to pay these higher yields? Because its portfolio is backed by longer-term government securities, and TIAA-CREF managers say they can ride out this period of lower rates.
There’s a complete and updated article describing this annuity highlighted on my Web site, www.TerrySavage.com.
You need to know the details, so contact TIAA-CREF at (800) 223-1200.
**Fifth Third Bank (Buffalo Grove) 3.25 percent checking account; 90 days
My second “chicken money” suggestion is a promotional offering by Fifth Third Bank. Fifth Third is trying to attract deposits to its Buffalo Grove branch, so the bank is offering to pay 3.25 percent on new money deposited in a checking account. There is no fee for the account or the checks. Minimum deposit is $10,000. The account is insured by the FDIC.
This promotion is similar to one offered by Fifth Third for its Lake Forest branch in the first quarter of the year. The rate at that branch dropped to 2 percent on April 1--still well above what most banks are paying on any type of liquid, short-term account. The rate at the Buffalo Grove branch is guaranteed only for 90 days from the date of your deposit. For more information call (847) 465-4820.
Balancing risk and reward
Well, those are two short-term alternatives to slightly increase your interest income without taking on additional risk.
As with all chicken money choices, you won’t get rich--but at least you won’t get poor, either. And when you’re tempted to riskier, higher-yielding investments, remember the mantra of the chicken money investor:
“I’m not so concerned about the return on my money, as I am about the return of my money!” That’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.