How to get high rates to work for you

By Chris Taylor

(Reuters) – There is no doubt that higher interest rates are hard on a many people – especially if you are taking out a loan on a home or a car, or are struggling to catch up with credit-card debt.

But for some, steep interest rates are not actually bad news.

That is because they can finally put their savings to work. In fact, 38% of people say they have benefited from higher interest rates during the past year, according to a new survey from Allianz (ETR:) Life Insurance.

“That’s the dichotomy: Higher interest rates are both crushing some people and benefiting others at the same time,” says Kelly LaVigne, vice president of Consumer Insights for Allianz Life.

“If you are a saver, suddenly you are seeing higher rates on anything from Certificates of Deposit to annuities for the first time in a while.”

It all stems from the U.S. Federal Reserve, which has set its target Fed funds rate at 5-5.25%, in an ongoing effort to tamp down inflation. That key rate then affects other areas of the economy, such as what mortgage lenders or credit-card companies are charging.

While the inflation rate has been cooling of late, the Fed has indicated more rate hikes could still be on the way, potentially another half-point to 5.5-5.75% in 2023.

That means if you have some savings set aside, it is time to think about how to flip this negative of higher interest rates into a positive. A few segments of the population who can benefit from this “new normal”:

BOND INVESTORS 

For years, the fixed income portion of investor portfolios was yielding hardly anything. Not so now.

To be sure, you should still be wary of longer-term bond funds, which could expose you to more risk.

“For the majority of investors, especially given the very high yields on the short end of the yield curve, they would be better off with short-term or intermediate maturities,” says Amy Arnott, a portfolio strategist for fund research firm Morningstar.

The good news is that investors could be looking at “5% or even a little above” in this arena, Arnott says. A few such funds which are highly rated by Morningstar include the Vanguard Short-Term Bond Index (VBIRX) and T. Rowe Price Short Duration Income (TSDLX), as well as Vanguard Ultra-Short-Term Bond (VUSFX) and Baird Ultra Short Bond (BUBSX).

SAVERS 

You don’t even have to reach for exotic products to get decent returns these days. Plain vanilla banking options like high-yield savings, money market accounts and Certificates of Deposit are all offering yields in the region of 4-5%. They are FDIC-insured up to the usual limits of $250,000 per depositor, per bank.

“It’s amazing how many people are sitting still in low-interest savings accounts,” says Jeremy Keil, a financial planner in New Berlin, Wisconsin. Keil says he recently moved more than $7 million of client money into high-yield Treasury Bills and money markets, and he estimates the change will add roughly $300,000 more in interest to client accounts in this year.

A few current examples of high-yield savings accounts from financial information site NerdWallet: 4.95% from CIT Bank, 4.75% from BMO Alto, and 4.5% from Citizens.

ANNUITY PURCHASERS

If you are in the demographic that is nearing retirement and pondering how to create an income stream, annuities could be worth new consideration. In recent years they have typically been overlooked, thanks to paltry offers and high fees.

But now, witness the healthy payouts of some annuities, which essentially transform initial lump sums into monthly checks (either immediate, or deferred until a later date).

A survey of immediate income annuities on the market (as of July 7) shows products offering payout rates on average of 7.92% for a 70-year-old male and 7.52% for a 70-year-old female, according to CANNEX Financial Exchanges, a Toronto-based data firm. With a five-year deferral of payments, these payout rates increase to 11.03% and 10.45%, respectively.

At those rates it could make sense to devote a portion of your retirement savings to such a purchase, to essentially create your own pension and ensure you don’t outlive your cash.

Says George Gagliardi, a financial planner in Lexington, Massachusetts: “If you are looking for lifetime income to augment your Social Security check, now is a great time to consider purchasing an annuity.”