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The Fed plans to keep interest rates low for years — here’s how you should approach your savings strategy now

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Welcome to the era of low interest rates — and the savings challenges that come with it.

Earlier this month, the Federal Reserve changed up its strategy for interest rates, specifying new economic conditions that must be met before it would hike rates higher.

The central bank said it will keep interest rates at or around zero until the end of 2023 most likely. For the Fed to raise rates, the labor market will need to return to “maximum employment” while inflation must increase to 2% and look to be on track to exceed that threshold “for some time.”

When the coronavirus pandemic began, the Federal Reserve moved quickly to bring rates to zero in the face of a massive surge in unemployment caused by economic shutdowns. The move helped usher in ultra-low interest rates — which has been a major boon to home buyers and owners looking to lock in cheap mortgages.

Also see:The Fed might never hike rates again. Here are growth stocks for the long run, according to one strategist

But the Fed’s somewhat vague language is of little comfort to Americans working to build up their savings. In the months since the Fed slashed rates, the yields on checking accounts and savings vehicles have cratered. And for the foreseeable future, Americans will need to make some tough calls to ensure their money is working for them.

“We’ve been hearing this for years — that Americans were going to have to get used to embracing risk if there was an expectation of any return on assets,” said Dennis Nolte, a financial adviser with Seacoast Investment Services in Winter Park, Fla. “Now it’s here.”

Here’s what consumers need to consider when creating a savings strategy:

For emergency savings, stick with online savings accounts or credit unions

Historically, online bank accounts and credit unions have offered more competitive interest rates than large, brick-and-mortar banks like Chase or Bank of America.

The average interest rate for savings accounts across all institutions was just 0.09% as of Sept. 23, according to Bankrate. But online banks like Viobank and CIBC Bank offer rates as high as 0.83%. If you become a member of a credit union, they often pay out dividend rates in line with the annual percentage yields of online banks.

But as with anything, it does pay to shop around. “Larger banks are more aggressive with their special and promotional rates,” said Dan Geller, founder of consulting firm Analyticom. “Hence — compare before you commit.”

Watch out for CD terms

Certificates of deposit, or CDs, are a popular savings tool because they often can have higher yields than a bank account. When you choose a CD, you select a duration. During that time period you cannot withdraw the money without facing a penalty — in many cases, the penalty is losing the interest the money earned.

Longer-term CDs tend to offer higher yields than short-term ones. But that can be a double-edged sword in today’s rate environment. There is a chance rates will go up in the next few years, so choosing a long-term CD would be forgoing the potential boost you could get later on.

Take a ‘laddered’ approach to bonds

For longer-term savings, even a high-yield savings or money market account won’t help you reach your goals. And that was largely true even before the Fed lowered rates. “Even if the saver could earn 2% on a $10,000 deposit, it’s still only $200 a year,” said Matt Bacon, an advisor with Maryland-based investment planning firm Carmichael Hill. “That’s not enough to move the needle between being OK and not being OK.”

As a result, savers will need to branch out into riskier approaches to earn a larger return. But that doesn’t mean you have to throw everything into the stock market. “For the intrepid saver, a laddered approach may get a little more juice,” Bacon said.

A bond ladder is an investment strategy when an investor uses their money to purchase bonds with staggered maturity dates or invests into preferred stocks with a set date at which they’ll revisit their investment. This way their money isn’t tied up in one bond and they can alter their strategy over time based on where the markets go. “The hope is that you liquidate this tranche after meeting a specific return target or are able to hold this tranche if the market sours,” Bacon said.

Another option is a bond mutual fund, according to Michael Simmons, director of financial planning at Transitions Wealth Management in Denver.

“A bond mutual fund can be found that matches the level of safety and the degree of fluctuation an investor is seeking with rates of return commensurate to the risk taken,” Simmons said. A short-term bond fund could function quite similarly to a CD or savings account.

Consider alternatives to traditional bank accounts

In recent years, many companies have looked to compete with traditional banks and credit unions by offering their own cash, savings or checking accounts. A wide range of companies from Google
GOOGL,
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 to T-Mobile
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 have sought to enter the world of banking, and in many cases these companies still offer very attractive yields on these accounts.

Among the companies to take this approach were robo advisers and online trading platforms such as Wealthfront and Robinhood. The benefit to an account like this isn’t just the higher yield on your cash, but the seamless ability to use that money in different ways.

“The robo advisers aren’t any better purely on the rates, but they do make it very convenient to move any excess cash above the emergency fund into investments that do offer the potential for much higher returns,” said Ron Guay, a financial planner and founder of Rivermark Wealth Management in Sunnyvale, Calif.

When evaluating these accounts, it’s important to choose a platform that will help you achieve your investing goals, Guay noted. A company like Wealthfront may be better suited for a novice investor because the platform will help with goal-setting and diversifying one’s portfolio, as opposed to a more straightforward trading platform like Robinhood.



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‘I could live on my Social Security and still save money’: This 66-year-old left Chicago for ‘calming’ Costa Rica — where he now plans to live indefinitely

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Editor’s note: This article was first published in September 2019.

A school break changed 66-year-old Martin Farber’s life forever.

In 2007, his daughter — who at the time was attending Illinois State University — decided she wanted to spend a college holiday volunteering in Costa Rica and staying with a local family, he explains. She came home raving about the experience, so, in 2008, Farber — who at the time was living in Evanston, Ill., just outside Chicago, and selling cars — took his first trip there.

“It was a big surprise to me — bumpy roads, dogs barking in the streets,” he says. “I wasn’t enamored at first.”

But as his daughter began traveling there more and eventually moved there for a year, he took additional trips to Costa Rica. It quickly grew on him — in particular, the people. “The Costa Rican people are warm, open and friendly. I felt less invisible in a strange country in a strange town where I didn’t speak the language than I did in Evanston.”

And the more time he spent there, the more it impacted him: “On one of my trips there, I thought: My daughter’s life makes more sense than mine,” he says. “There was nothing wrong with my life, but I felt that my life was out of context with who I’d become. … I would have bills and make money to pay them, but that had ceased to be satisfying,” he recalls. “I knew I needed to change my life — there was no more joy in what I was doing.”

What’s more, when he’d return from his Costa Rica trips, people noticed. “I would come back, and my friends and therapist would say: You seem better after you go,” he says with a laugh.

A view from the hot springs near Martin Farber’s home in Costa Rica.


Martin Farber

So in 2014, he packed up and moved to Orosi — a picturesque, lush small town with waterfalls and hot springs a little over an hour’s drive from San Jose — promising himself he’d stay for two years. It’s been five, and he now plans to stay in Costa Rica indefinitely. (Though Farber notes that, to him, “it’s not a retirement; it’s a chance to lead a new and different life.”)

Here’s what his life is like, from costs to health care to residency to everyday life:

The cost: While many expats spend way more living in Costa Rica, Farber says: “I could live on my Social Security and still save money.” He says “a person can live on $1,200 per month, two people on $2,000.” The key, he says, is to live more like he does and as the Costa Ricans do — in a modest home, eating local food and purchasing local goods.

Indeed, Farber himself spends just $300 a month for rent (he rents a home from a friend who moved recently and gave him a good deal), roughly $225 a month on groceries and just $50 a month total on water and electricity (the temperate climate in Orosi means you rarely need heat or air conditioning). The veteran Volkswagen
VOW,
+0.96%

 
VLKAF,
+0.98%

salesman saves money by not owning a car (those over 65 ride municipal buses for free), which can be a significant expense in Costa Rica; for his cellphone, “I pay as I go … roughly $10 may last me a couple weeks or more,” he says, adding that “many people handle there their cellphones this way. You can get them recharged anywhere.”

His major expense is travel: He goes back to the U.S. to visit his mother in Florida several times a year and lately has spent part of the summer in Chicago helping out a friend with a dealership there. He also spends a good amount of money on health care. He says that while flights can be had for as little as $350 roundtrip during offseasons, the cost can be much higher the rest of the year.

In the saddle.


Martin Farber

Health care: Farber, who has permanent resident status in Costa Rica, says he pays about $90 per month to participate in the country’s health-care system — adding that the health care he’s received has been very good. (A 2018 study of health-care quality and access in more than 190 nations ranked Costa Rica No. 62.)

When he developed a detached retina, though, he paid for the procedure out of pocket so that he didn’t have to wait for the required surgery, he says — adding that the entire procedure cost him about $5,000. “I would have had to have waited four days,” he says, if he had not paid to expedite matters. “That might have been fine, but it might not.” And he adds that the quality of care depends on where you get it in the country.

Lifestyle: Though Farber says that he “moved here with no goals and no agenda,” he’s found plenty to do. “I take Spanish lessons two days a week for two hours a day. It’s been great. I never thought I would acquire a usable language in my 60s,” he says. He also rides his bike all around the area, does some writing and belongs to a community group that undertakes projects to improve the area.

And he often simply takes in nature, which he says has been an essential part of why he feels calmer and more relaxed in Costa Rica than in the U.S. “I live at 3,000 feet but in a valley surrounded by coffee fields and lime trees and water. At night, if I open the windows, I can hear the river rushing by,” he says. “It is very calming … hundreds of trees everywhere … you know the Earth is alive.”

The historic Iglesia de San José de Orosi.


iStock

Cons: “I don’t want to overglorify. It’s not without its problems,” Farber says of Costa Rica. “There are social problems and downsides.” He notes that crime and petty theft can be a problem (“I am cautious,” he says of his approach) and seem to have increased since he moved there, and adds that he misses out on some cultural things because of where he lives. And, he says with a laugh, “I can’t order Thai food at 9 at night.” But, he adds: “These are trade-offs — in the afternoon, I get to walk in the coffee fields and see flocks of parrots.”

Residency: To qualify for Costa Rica’s pensionado visa, expats must prove that they have a pension of at least $1,000 coming in each month. (Here are the details of that program.) Once you have lived in Costa Rica for three years, you can apply for permanent residency. Farber used a lawyer to help him figure out the ins and outs of residency options; his entire path to permanent residency took about a year, he says.

The bottom line: “After five years I am still amazed and surprised that I made the decision to lead a life I never thought I would,” he says. And while he may not stay in Orosi forever — “the town doesn’t have an ambulance, [and] I don’t know what it will be like to be 80 there,” he says — he does plan to stay in Costa Rica in no small part because of the people and sense of community. “I have the feeling that life is good here,” he says. “It’s hard sometimes, but we are all in it together.”



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Mutual Funds Weekly: These money and investing tips can help you read the market’s signs and stay on your path

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