By Alex Albert, CFP®

Highlights

• Interest for high-yield savings accounts and CDs are on the rise
• Bonds and treasuries are worth close consideration

Estimated read time: 3 mins

The Federal Reserve is fighting tirelessly to control inflation by aggressively raising the Fed Funds (short term) interest rate, and letting longer-term rates rise as it pivots from being a buyer of bonds to letting its portfolio shrink.

With these actions, interest rates on consumer and commercial loans of all types have risen sharply, including new mortgages recently topping over 7%. In contrast to borrowers, interest paid to savers and investors of fixed-income securities and products have risen everywhere– except in your bank account. While inflation in the U.S. was 8% year-over-year at the end of August, according to Bankrate.com, the average annual savings rate was only 0.14%.

Savings Accounts and CDs are Increasingly Attractive

When looking to invest short-term cash, three key factors to consider are safety, liquidity, and yield. For most, having short-term cash readily available is necessary, and we recommend keeping at least 6 months’ worth of expenses liquid to cover unforeseen expenses.

As of this writing, high-yield savings accounts have increased their interest rates to over 2%. Note that rates fluctuate, and each banking institution sets its own rules to consider, such as account minimums, limits on withdrawals, and fees, but most are backed by FDIC insurance up to $250,000 per depositor account.

Rates on Certificates of Deposit (CD’s) have become more attractive and are readily available through banks and brokerage firms. CDs by qualifying institutions have FDIC insurance and, in return for paying higher interest rates, CD funds must not be withdrawn for a certain period without penalties or loss of interest. CDs are best used when you marry a predetermined expense with a corresponding date and dollar amount.

Bonds and Treasuries Look Even Better

Series I Savings Bonds (I-Bonds) are a safe and attractive place to invest a limited amount of funds. Currently yielding over 9.6% annually, these U.S. Government-issued securities have yields fluctuate with the inflation rate, which the Federal Reserve is actively working to lower down to 2%, and there is a maximum investment of $10,000 per year per person. After 12 months, you can cash in your I-Bonds; however, if cashed in before year 5, you lose the last 3 months of interest.

Another attractive option is direct Treasury paper, which is backed by the full faith and credit of the U.S. Government. Treasuries range from Treasury bills (T-Bills), which mature in 1-year or less, Treasury notes (2-10 years), and Treasury bonds, which have maturities of 20 to 30 years. The interest from Treasuries is state income tax exempt.

Yields on a 1-year Treasury as of October 7, 2022, was 4.24%, and 3.89% on a 10-year, both of which have not been this high in over 12 years. Treasuries can be bought and sold without penalty; however, their prices fluctuate daily and selling prior to maturity may result in a loss.

Final Thought

While stocks remain our asset class of choice for dividend income, growth of income, and long-term capital appreciation, current interest rates on fixed-income securities (bonds) are a welcome sight for holders of cash and those seeking decent returns without risk of capital.

As always, feel free to contact us should you have any questions or need assistance in any manner.

About the Author

Alex Albert is a Certified Financial Planner for East Greenwich-based Lincoln Capital, a financial planning and wealth management firm. He is a graduate of the University of Rhode Island and earned CFP® certification from Bryant University.

Estimated read time: 2 mins

When we give thought to our personal wealth, we naturally think about how to spend and grow our money, but neglect protecting our assets from lawsuits, creditors and, in certain situations, our own family members. Doctors, corporate executives, and those in other litigation-prone professions are not the only ones who need to be on guard, as there are many circumstances in which assets can be attached or garnished━bankruptcy, divorce, or lose a civil lawsuit.

Retirement Accounts Are Mostly Shielded

We often advise clients to take advantage of their retirement plans and IRAs, as they allow you to exclude contributions from taxable income and provide tax sheltered growth. Another benefit is the legal protection they provide. The Bankruptcy Abuse Prevention and Consumer Protection Act, passed in 2005, allows Roth and Traditional IRAs to have an inflation adjusted protection cap of more than $1 million (currently more than $1.3 million) against bankruptcy proceedings.

Other types of retirement plans – SEP, SIMPLE, and assets rolled over from qualified plans to IRA’s – have an unlimited cap on the amount of the protection. ERISA plans, such as employer sponsored 401(k) and 403(b) plans, have had this protection in place for years prior, and may also provide an additional layer of protection against other court cases with two notable exceptions: 1). Divorce, where a qualified domestic relations order (QDRO) can award retirement assets to your former spouse, and 2). tax levies from the IRS.

Home Equity is Protected in Some States

Some states provide a homestead exemption, which allows homeowners to declare a certain amount of equity in their home as exempt from creditors. These exemptions are not available in every state, and the amount in each state also differs. Rhode Island currently provides a generous exemption of $500,000, so paying your mortgage balance down sooner to build equity not only eliminates debt but can provide further asset protection.

An Asset Protection Trust

While a revocable living trust allows the grantor (the owner of the assets) to designate the terms of how their assets will flow to the trust beneficiaries and avoids probate court, it does not provide protection from creditors or lawsuits against your estate. An asset protection trust, which is not available in all states, is an irrevocable trust that allows the grantor to name themselves the beneficiary. Even though the grantor no longer owns the trust assets, they may (at the discretion of an independent trustee) provide distributions to the grantor and, given that these assets are no longer owned by the grantor, they are out of reach by creditors. Whether the asset protection trust is a Domestic or Foreign (offshore) trust, the services of an experienced estate planning attorney is highly recommended.

Other Forms of Protection

Other considerations include purchasing an umbrella insurance policy, which is a type of personal liability insurance, that can help protect your assets in excess of what your homeowners, auto, or other insurance policies cover. Business owners are often advised to separate personal assets from business assets by establishing the business as a corporation, a limited liability corporation (LLC), or limited partnership which, if a lawsuit goes against you personally or the business, the assets of the other will be excluded from liability.

Final Thought

Remember, asset protection measures like those mentioned do not work if you are already in trouble. So plan ahead and consider Lincoln Capital as a resource. Feel free to contact us for assistance with any financial matter.

About The Author

Alex Albert is a Certified Financial Planner for East Greenwich-based Lincoln Capital, a financial planning and wealth management firm. He is a graduate of the University of Rhode Island and earned CFP® certification from Bryant University.