Money Man: Living in a Low Interest World

How much do you need to retire? To answer, you have to know how much income you can get for X amount of savings. This is a tough question to answer, because we live in a “low yield” world. That is, the yield – or amount of money paid out as a percentage of your investment, like interest – is very, very low. Ask any retired person.

Those with a traditional pension don’t have to worry about yield. Their employer is responsible to invest the money and is contractually obligated to pay month in, month out, until death. Today, most pensions are governmental, for employees of schools, the military, and local, state and federal governments, and are pretty secure. The rest of us need to save money and then earn something from it in retirement. What are our options then?

As it happens, we have many options, but they are all low paying and the safest pay the least. Here are the most recent national averages, courtesy of (a very helpful site for all things money):

0.08% Checking account

0.10% Savings account

0.25% Money market account

1.00% CD (certificate of deposit, 1 year)

1.39% CD (5 year)

Think these are low? Physical banks pay the lowest, while online banks pay much more because they have lower expenses. On average, though, we “pay” for safety by taking very little yield. If you have $100,000, this is how little you’d earn per year:

$     80 Checking account

$   100 Savings account

$   250 Money market account

$1,000 CD (1 year)

$1,390 CD (5 years)

Yikes! To live in retirement, you either have to save a lot more than $100,000, work, or take greater risk. Faced with a low-yield world, many investors have flocked to the stock market, chasing stock price gains to make up for paltry yields. This brings greater risk.

The most common way to invest in the stock market is through mutual funds or exchange-traded funds (ETFs) that invest in stocks that make up “the market.” Take the Vanguard 500 Index Fund, which buys all the stocks that make up the S&P 500, an index of 500 large stocks, including ones you know well like Apple, Amazon, Facebook, and Microsoft. The S&P 500 weights its stocks by size, so that #1 largest company Apple “counts” way more than the 500th largest. If you buy a share of the Vanguard 500 Index Fund, you own “weighted” pieces of all those 500 stocks. But it pays only 1.87% in dividends, so you are counting on stock gains, which may or may not come and even if they do, take a long time. A mere 1.87% just isn’t enough for the risk that a massive crash could deplete your savings while you are retired (there are exceptions to this, but that’s another column).

Here are some examples of higher yields with lower risk than the overall stock market. They are offered by Vanguard, the company that provides the lowest-cost funds and is the most trusted name in the business:

1.86% Vanguard Short Term Treasury ETF (bonds from the US Treasury, 1-3 year terms)

2.58% Vanguard Long Term Treasury ETF (same, 10+ year terms)

3.47% Vanguard Real Estate ETF (owns companies that own real estate, collect rents, and pay us most of the rent)

(Note: These are not recommendations but are intended to show what’s out there and how little “safe” yield is available.)

The low-yield world looks likely to stay for a while, so we will need to save and invest more. But we do have way better options than a checking or savings account. Check them out.

Tom Jacobs is a partner with Huckleberry Capital Management, a boutique investment advisory firm serving clients in 25 states and 3 foreign countries from offices in Marfa, TX, Silicon Valley, CA, and Asheville, NC. You may contact him at 432-386-0488 and