Question: My parents, aged 87 and 86, just sold their long-time (47 years) home and moved into an apartment. They have approx. $130,000 in proceeds and an environment for secure investment that looks bleak on return opportunities. What are some investments they should consider? We’re still working out their new budget but rent is approx. $1,200 (not including utilities) and monthly social security and pension income is about $2,600. They have other retirement savings. One bank representative suggested an FDIC insured CD product which returns 1/2 of 1% up to 6%. (I’m not yet sure what will determine the actual rate; I’m waiting for details.) Thomas, Frederick, MD
Answer: It’s great that you’re helping your parents out with their budget and finances. At their age you’ll want to keep the money safe so that they can enjoy it and spend it when they need it. Now, I wish there was a safe, high-yielding investment. There isn’t. The price for safety remains a low return.
I would avoid seeking a better return for them through FDIC-insured “structured” certificates of deposit, however. (That seems what is the floating rate CD you’re looking at.) There are all kinds of structured CDs, but the basic idea is the same. The yield on the CD changes off of a reference rate, which may be the consumer price index, an equity index such as the S&P 500, Treasury rates, and so on. Problem is, these CDs are difficult to understand and expensive to own.
Put somewhat differently, structured products are good for the seller, bad for the buyer.
Instead, I would put the money into plain-vanilla short-term CDs from a bank or credit union while you figure out a good overall money strategy for them. Depending on their other retirement assets, it might make sense to place some money into an inflation-adjusted immediate annuity that provides an income they can’t outlive. You can’t go wrong putting some safe money into U.S. Treasury bills, either–at least from a credit standpoint. The yield on the securities is almost zero. Nevertheless, with FDIC-insured deposits and U.S. Treasuries the principal is safe.
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