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When it comes to saving for retirement, most women (71%) express some confidence in their ability to save cash, according to a new Vanguard survey.
But experts say many of them may also want to evaluate where they keep that money.
According to a nationally representative Vanguard survey of 1,007 adult women conducted in April, nearly half (51%) of women hold their retirement funds in traditional checking and savings accounts or in cash.
Almost half of cash savers, 46%, have most of their money in accounts with returns of less than 3%, and those accounts are currently below the rate of inflation. Another 26% don’t know the interest rate they’re getting.
“People are often inert and don’t have their money in the right places,” says certified financial planner Carolyn McClanahan, founder of Life Planning Partners in Jacksonville, Fla., and a member of the CNBC Financial Advisors Council.
“They might just put the money in a checking account and transfer it to a savings account at the same (bank), but the interest rate is lower,” McClanahan said.
Inflation rate is running at 3.3% per year
The Consumer Price Index, a major inflation indicator, rose 3.3% year-on-year in March, mainly due to soaring energy prices as a result of the Iran war that began on February 28th. Its annual inflation rate rose from 2.4% in February.
Inflation is a normal part of the economy and is currently well below the pandemic-era peak of 9.1% in June 2022, but current inflation is above the Federal Reserve’s target of 2% a year.
Generally, money in an account that earns less than the inflation rate loses purchasing power over time. Cash provides liquidity, but where you store it can make a big difference in whether it helps you deal with the effects of inflation.
“Cash has never kept up with purchasing power,” McClanahan said. “What you want to do is make sure you get the best interest rate for that type of (savings).”
For short-term funds, that is, funds that are likely to be needed within the next few years, you should not try to take too many risks.
High-yield savings and money market accounts are also an option.
For example, McClanahan said a high-yield savings account is an option.
Some of these high-yield accounts currently pay around 4% annually, according to recent data from Bankrate. This compares to the national average savings account annual yield of 0.59%.
Rather than simply using a traditional savings account at a bank where you also have a checking account, “you can take it a step further and just find a high-yield savings account that pays higher interest and link it to your checking account,” McClanahan said.
Additionally, CFP Lazetta Rainey Braxton, founder and managing principal of crypto firm The Real Wealth Coterie, said some money market accounts pay interest comparable to high-yield savings accounts. She is also a member of the CNBC Financial Advisor Council.
Money market accounts often also include the ability to write checks and access debit cards. However, they may require a higher minimum balance than a savings account.
Other safe options may be less liquid
In addition to these accounts, you may also consider certificates of deposit (CDs) or U.S. Treasury bonds if you don’t need immediate access to your funds.
“Money markets and high-yield savings accounts provide additional liquidity,” Braxton said. “But some people make the trade-off of not having immediate access to additional revenue.”
CDs have terms ranging from a few months to more than five years. At maturity, the bank returns the principal and guaranteed interest. However, this makes it less liquid. If you cash out early, you usually end up paying a penalty.
According to Bankrate, the national average annual yield on one-year CDs is 1.92%, but you may be able to find some that yield more than 4%.
Government bonds are also a relatively safe place to park your cash, but their liquidity and interest payments vary. For example, three-month U.S. Treasuries currently yield about 3.6%.
The U.S. Treasury also issues savings bonds. For example, a Series I bond purchased between May 1 and October 31 would have a payout rate of 4.26%. This rate is up from the 4.03% yield that was in place until April 30th. The interest rate paid is adjusted semi-annually by the Treasury and fluctuates in line with inflation.
However, if you buy an I bond, you won’t have access to your funds for at least a year, and if you cash out before five years, you’ll lose three months of interest. For electronic purchases, minimum purchase amount is $25 and maximum purchase amount is $10,000 per person per calendar year. You must also purchase through Treasury Direct. This means setting up an account on that website.
