How to Lock In High Yields Now Before Interest Rates Come Down
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What is the main topic discussed in this episode?
Here's your Money Briefing for Monday, March 4th. I'm J.R. Whelan for The Wall Street Journal. The Federal Reserve has been raising interest rates over the past two years, and that's pushed yields on investments like savings accounts and CDs to, in some cases, around 5%. But the Fed has signaled it could begin lowering rates later this year.
If the Fed cuts rates, the high yields people have been enjoying will start to fall.
When could the Federal Reserve start cutting interest rates this year?
Those yields rose pretty swiftly when rates were rising, but they can fall just as fast.
We'll talk to Wall Street Journal contributor Debbie Carlson about investment moves you can make now to capitalize on high yields after the break.
You can get ahead of expected interest rate cuts and collect higher yields on your investments. Wall Street Journal contributor Debbie Carlson wrote about ways to do it, and she joins me. First of all, Debbie, help us connect the dots here. What kind of timetable has the Fed signaled regarding when it could begin lowering interest rates?
How would Fed rate cuts affect yields on bank money-market accounts and savings?
The Fed has been pretty consistent by saying it will look to economic conditions and inflation data. And last week, the Fed's favorite inflation gauge, the Personal Consumption Expenditures Price Index, came out as about expected with prices up 2.8% from a year ago. But we've heard that individual Fed governors have signaled that interest rate cuts could be coming later this year.
So if they do cut rates, how would that impact the yields that people get on many of their investments?
If the Fed cuts rates, the high yields people have been enjoying will start to fall. That's especially true in those bank money market accounts. Those yields rose pretty swiftly when rates were rising, but they can fall just as fast.
Let's talk about ways people can lock in higher yields before rates potentially come down. Financial professionals you spoke with suggested that people could look into annuities. What are the benefits of them?
Yes.
What are multi-year guaranteed annuities (MIGAs) and how can they lock in higher yields?
So a few advisors have said that they're using a specific type of annuity called a multi-year guaranteed annuity. And what's interesting about these annuities that are known as MIGAs, they can be good options for investors. savers who are looking for something similar to a bank cd but with higher rates unlike other annuity products buyers can invest as little as 2500 in these and one other nice thing about these annuities is they're not taxed until the money is taken out so that's another bonus a lot of these migas have yields that are about a half a percent to a percent higher than similar bank cds
Okay, so there are some options there, but don't annuities carry risk?
Yes, annuities do carry risk. First and foremost, they are not FDIC insured the way bank CDs are. However, insurers are regulated by the states. And many of the annuities that financial advisors are using come from insurers with some of the highest ratings. And you could look at an insurer's ratings through your state or through an agency like AMBUS. Second, annuities have high fees if you want your money out before the term ends. So if you have a five-year annuity and you want your money out after four years, you could pay a pretty hefty fee for that. That could be maybe 5%, 6%, 7%, 8% of your principal. And that's part of the reasons why annuities have these higher rates is because you're locking up your money for a guaranteed rate of time.
What other investments could people consider that pay out income like annuities?
One thing you could look at is a defined maturity ETF. And these are a good way to what they call ladder an investment. And you've probably heard of bond laddering or CD laddering, where you buy
What risks and fees should you know before buying an annuity?
cd or bond that matures in one year two year three years well the nice thing about these defined maturity etfs is they have the beauty of a bond ladder but they trade like an etf so instead of needing to hold it for the entire time you can trade them so your money is very liquid There's two main companies that issue these, Invesco and BlackRock. And Invesco has a brand called the BulletShares and BlackRock has a brand called iBonds.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:03–0:31
2
When could the Federal Reserve start cutting interest rates this year?
0:31–1:17
3
How would Fed rate cuts affect yields on bank money-market accounts and savings?
1:17–2:14
4
What are multi-year guaranteed annuities (MIGAs) and how can they lock in higher yields?
2:14–4:15
5
What risks and fees should you know before buying an annuity?
4:15–5:56
6
How do defined-maturity ETFs work and how can they help ladder income?
5:56–7:44
7
What yield opportunities do preferred stocks and baby bonds offer stock investors?
7:44–8:38
8
What common pitfalls should investors watch for when chasing high yields now?
8:38–8:41
Speakers
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