This infographic was designed by Avalaunch Media
How much retirement savings is enough? Why couples may disagree
LOANS
Read More
RELATED CONTENT
Super savers: How much is too much to put in a savings account?
Read More
BANKING
The Wall Street Journal
Bankrate.com
The pros and cons of fixed income investing
Some qualified medical expenses are especially relevant for people with special needs
HEALTH SOLUTIONS THOUGHT LEADERSHIP
Let’s say you decide you are comfortable putting $10,000 in a fixed income investment.
1. Keep your deposit
in cash at your broker
Savers can stash their cash in a brokerage and rack up interest in a money market fund, though it may be minimal these days. Typically brokerages sweep any excess cash into a basic money market fund, allowing you to collect some extra coin.
use your brokerage
You’ll compare interest rates of a range of different products, the timeline for when they’ll pay you and their maturity dates for when you can retrieve your principal.
Do you want to be able to get that original $10,000 back in a year?
Three years?
Or are you looking to stash that money for an even longer period of time?
Throughout that time, how frequently do you want to be paid?
Once you’ve nailed down your specific needs, you’ll invest your money, and you can use those regular interest payments to cover some of your expenses.
Going with an ETF is one way to use funds to make your brokerage account look like a bank account. Another way is buying a money market mutual fund backed by bonds of the federal government. Both accomplish similar goals with similar (very limited) risks. So you might opt for this kind of mutual fund, or otherwise choose it when access to an ETF is not available.
2. Buy an ETF of short-term government bonds
"Typically, U.S. Government bonds are afforded the ‘safest’ label with regard to default risk."
— Elliot Pepper, CPA, financial planner and co-founder at Maryland-based Northbrook Financial.
"Bonds issued by certain corporations with a low credit rating, referred to as ‘junk bonds,’ will carry a higher interest rate, but the risk of default is much higher."
— Elliot Pepper, CPA, financial planner and co-founder at Maryland-based Northbrook Financial.
Money for midterm goals, such as your kid's college fund or a new-home fund, can be stored in medium-term savings vehicles, such as a 529 account (for education) or a brokerage account with a mix of stocks and bonds (the exact balance will depend on your time horizon).
Pros and cons of fixed income investing
PROS
CONS
Lower risks
Steady guaranteed returns
Potential tax benefits
Potentially lower returns
Issues with access to cash
Interest rate risk
If you’re looking to earn the return of a high-yield savings account with the (near-) security of a bank, you have quite a few options to make it work with your brokerage account. Using a brokerage account to do your banking can also help you consolidate your financial life with one provider, and it may offer other benefits in terms of simplicity and convenience.
“The largest downside we typically see in fixed income is interest rate risk,” Pepper says.
The rule in bonds is that when interest rates rise, bond prices fall. So, let’s say you paid $2,000 for a 10-year bond with a 3 percent interest rate. After three years of holding the bond, interest rates on a new 10-year bond are at 4 percent. If you want to sell your bond early, you’re competing against products with a better earning potential, so the bond will be worth less.
Remember that getting the money you have in fixed income investments isn’t as simple as making a withdrawal from your savings account.
For example, if you lock up your money in a
five-year CD and need that deposit two years in, you’re probably going to pay a penalty.
2
3
Interest rate risk
Issues with cash access
"The savings you do earlier in life is so much more valuable than what people in their 50s and 60s do because it has time to grow," Hoglund says.
Age
Certificates of deposit (CDs)
5 ways to
As the line between brokerage accounts and bank accounts continues to blur, it’s important for savers to remember that they don’t have to move their money into bank accounts to get the safety and returns of a bank account. Savers can achieve similar types of low-risk returns offered by traditional banks and banking products without ever leaving their brokerage accounts.
As brokerage accounts and bank accounts begin to look more alike, savers can often do many of the same things in each account. In brokerage accounts, not only can you invest in stocks, bonds and funds, you can often use the account as an omnibus financial account. In other words, you can write checks and pay bills with your account, often while collecting interest, too.
20%
$
For example, TD Ameritrade offers 0.01 percent on balances in a Federal Deposit Insurance Corp. (FDIC)-protected account, meaning your account is protected up to $250,000. Meanwhile, Charles Schwab offers an FDIC account for investors with a 0.05 percent yield.
$1,000
per month
Those options aren’t bad, though they don’t get you a whole lot more interest than a basic checking account at one of the largest banks. But if you look around at the top online savings accounts, you can find some offering a better rate right now.
"That allows you to set aside $12,000 per year," he says. "Of course, this can be scaled up or down depending on someone’s individual situation."
When it comes to an annual savings goal, "I think the best savers are saving at least 20% of gross income annually," says Peter Hoglund, certified financial planner and senior vice president at Wealth Enhancement Group in Warren, New Jersey.
The term "gross income" is important because it means you're saving 20% of your total income, not your take-home pay.
So it may actually feel like you're saving 35% or
even 40% of your paycheck, Hoglund says.
If that amount seems steep, don't despair. There are strategies, such as saving pretax money through a workplace retirement plan, which can make saving 20% of gross income feel less arduous.
Experts note that, even if you can't reach 20% of gross pay, every little bit of savings counts. If you can squirrel away 10% or 15% in your savings or investment accounts, you're still making worthwhile progress. "Rather than focusing on abstract goals or rules of thumb, think about what you want to accomplish in life," Dostal says.
"Something is always better than nothing;
more is always better than less," Ebersole says.
Plus, rules of thumb don't take into account each individual's financial situation. You may have a unique money setup, such as an expected inheritance or the desire to work throughout retirement, which can change the calculus on exactly how much you should have in savings.
1. Automate your savings.
Making the robots save for you, as Hoglund puts it, is a powerful and relatively painless way to save consistently. Set up automatic transfers from your checking to your savings account, or deposit that money directly from your paycheck into a savings account, and arrange automatic transfers from your paycheck to your retirement accounts.
Take advantage of raises and bonuses.
If you earn a pay raise, automatically deposit a percentage of that raise into a savings account. If the money never hits your checking account, you won't miss it or let it contribute to lifestyle inflation. For example, say you earn a 2% pay raise every January. "If you can boost your savings by that increase every year, that's a great way to step your way up to 20%," Hoglund says. Apply the same strategy to year-end bonuses. Earmark some or all of any holiday payout to meet a financial goal such as funding retirement, college or a home down payment or stocking your emergency fund.
BACK
NEXT
2. Take advantage of raises and bonuses.
If you earn a pay raise, automatically deposit a percentage of that raise into a savings account. If the money never hits your checking account, you won't miss it or let it contribute to lifestyle inflation.
For example, say you earn a
2% pay raise every January.
"If you can boost your savings
by that increase every year,
that's a great way to step your
way up to 20%," Hoglund says. Apply the same strategy to year-end bonuses. Earmark some or all of any holiday payout to meet a financial goal such as funding retirement, college or a home down payment or stocking your emergency fund.
BACK
NEXT
3. Review your budget.
Just like you should be automating any savings, aim to "de-automate" your spending, Ebersole says. Review monthly and habitual expenses such as streaming subscriptions, regular purchases or housing
and transportation
costs to identify
where you can cut
back in order to
save more.
BACK
NEXT
3. Buy a money market mutual fund
If you want to get
your whole account
balance working at
an even higher rate,
then you might
consider buying
an exchange-traded
fund (ETF) comprised
of short-term federal
government bonds.
Your long-term retirement savings will likely reside in your 401(k), IRA or another retirement account. Employer 401(k) accounts are one of the first places to look when socking away money for retirement as they are tax-advantaged, and your employer may match up to a certain percentage of funds invested. Your options may be limited by what your company offers, but you should regularly revisit and rebalance to meet your retirement timeline.
401K
IRA
ROTH
4. Buy a brokered CD
Singles with
children
Singles without
children
Couples with
children
Couples without
children
“The biggest downside to fixed income investing is a return most likely under 1 percent for the foreseeable future,” Smith says.
Potentially lower returns.
Outside of the current market, think about those wish-you-could-have-invested opportunities. For example, rewind to 2002. Let’s say you had $2,000. Should you invest it in a fixed income product, or should you buy some $22 shares in that online bookstore people are talking about called Amazon?
That’s one of the challenges with avoiding risk:
Those unsure bets can wind up paying off in a much bigger way than a fixed coupon payment.
1
35–44
$2,132.77
$7,386.58
$17,360.82
$10,196.94
Under 35
$4,595.66
$4,003.39
$5,772.76
$5,142.25
55–64
$12,285.48
$9,564.71
$40,648.59
$25,861.70
45–54
$4,821.67
$8,891.87
$23,523.02
$23,233.69
75 & older
$17,654.36
$18,219.97
$9,307.19
$21,418.24
65–74
$6,469.39
$16,370.75
$20,031.10
$39,162.97
Chart
Data
Chart
Data
Age
Singles with
children
Singles without
children
Couples with
children
Couples without
children
avings
account
like a
How to use a brokerage for your savings needs
These ETFs offer a yield that’s in line with short-term interest rates, and the bonds in the fund are short-term, typically less than a year in duration. The bonds are backed by the federal government, the same entity backstopping the FDIC guarantees on bank accounts.
If you’re interested in this kind of investment, you can purchase it just as you would a stock or other security, by placing an order with your broker using the fund’s ticker symbol. You’ll pay a fee called an expense ratio based on how much you have invested in the fund.
For example, one such fund is the Goldman Sachs Access Treasury 0-1 Year ETF (GBIL). The fund tracks short-term interest rates, so as they rise and fall, the return on the fund does as well. About three-quarters of the fund’s bonds mature in less than six months, and since they’re U.S. bonds, they’re considered as safe as an investment gets.
The downside is that currently the fund’s expense ratio of 0.12 – or about $12 annually for every $10,000 invested – is more than the interest you’ll earn on the assets, at about 0.06 percent. And this fund is generally reasonably priced, but interest rates simply aren’t high enough now.
A fund is a better option when rates are higher than they are today. You can transform your ETF into cash on any day the market is open, so it’s ready money.
Like the ETF bond fund, this kind
of money market mutual fund
invests in very short-term bonds
of the federal government,
typically with an average maturity
of 30 to 60 days. So the fund tracks
short-term rates, and as they rise
and fall, the fund’s yield will change
as well. Again, these bonds are
backed by the federal government,
so these are as risk-free as bonds get.
One example of a money market mutual fund is the Vanguard Federal Money Market Fund (VMFXX). As of July 2021, it offered a yield of 0.01 percent, and the average maturity of a holding was just 39 days.
The fund charges an expense ratio of 0.11 percent, or a cost of $11 annually for every $10,000 invested.
Like those short-term ETFs, the expense ratio may be higher than the interest rate today, making this a better choice when rates are higher. But you can transform this fund into money any day the market is open.
If you’re interested in this kind of investment, you can purchase it as you would any mutual fund. That means there’s typically a minimum investment for the initial purchase – the Vanguard fund has an initial minimum of $3,000, for example – but then you can add to your position incrementally. Again, look for a low expense ratio so that you can keep more of that interest in your own pocket.
If you’re looking for a high-yield
savings option from within your
brokerage, consider turning to a
certificate of deposit.
Yes, you can buy a brokered CD
from your brokerage account.
A brokered CD is like a bank CD
in that it pays a contractually
guaranteed rate of interest. In other respects, a brokered CD differs from a bank CD, especially in how it is bought and sold.
A brokered CD has several key differences that any prospective investor should know. Brokered CDs can be purchased as a new issue through an online brokerage, and will usually have a small commission charge. They’re typically available with a minimum investment of $1,000 and are available in $1,000 increments. Some brokered CD products may not offer FDIC protection, so it pays to check first before buying.
If you need to close the CD for some reason, you’ll have to sell it into the market, like you would with a bond or stock. Therefore, you may not receive the full value for the CD, if interest rates have risen. On the other hand, if rates have fallen, you may realize a higher-than-expected gain.
But if you hold to maturity, you’ll receive the contractually agreed on payments and full value. Those buying a brokered CD will want to look at the commissions in order to minimize costs.
A brokered CD has several key differences that any prospective investor should know. Brokered CDs can be purchased as a new issue through an online brokerage, and will usually have a small commission charge. They’re typically available with a minimum investment of $1,000 and are available in $1,000 increments. Some brokered CD products may not offer FDIC protection, so it pays to check first before buying.
If you need to close the CD for some reason, you’ll have to sell it into the market, like you would with a bond or stock. Therefore, you may not receive the full value for the CD, if interest rates have risen. On the other hand, if rates have fallen, you may realize a higher-than-expected gain.
5. Set up a cash management account at a robo-advisor
If you already have a robo-advisor account or are looking for a high-yield cash management account, then turning to a robo-advisor could be a great option. Two of the largest independent robo-advisors – Wealthfront and Betterment – have both been clamoring for new deposits and offer better-than-average yields.
As of July 2021, Wealthfront is offering 0.10 percent on cash balances, while Betterment is paying 0.30 percent. Those compare to the national average of 0.06 percent. Plus, with either robo-advisor you won’t pay an advisory fee on the cash and will get FDIC coverage on up to $1 million in cash deposits.
You can get an account set up quickly,
and easily move money around to
different accounts. Then if you’re
ready to invest with the robo-advisor,
you can move money to a fee-charging
investment account and get started.
A robo-advisor is an excellent choice
for cash savings.
Bottom line
YOU MAY ALSO LIKE...
How to open a brokerage account for your kids
Read More
BANKING
Pros and cons of 401(k) brokerage options
Fidelity Health Solutions Thought Leadership
Fidelity Health Solutions Thought Leadership
Read More
LOANS
