What is the best safe way to earn most interest of 100k savings? What is the safest way I can maximize my interest income on 100k savings? I want as little risk as possible
Traditional thinking is that risk and return move in the same direction. That is, if you seek a higher return, a higher risk must be assumed. And if you seek lower risks, lower returns will likely follow.
Below I have listed some traditional "investments" in the their order from "least risk/lowest return" to "highest return/risk":
- Saving/checking account (return < 0.5%);
- CDs (certificate deposits) (return < 1.5%);
- Bonds/money market accounts/life insurance (return < 3%);
- Stocks/ETFs (return ~ 8%). Market cagr over last 100 years is 8%;
- Junk bonds (return > 10%);
- Lottery (Did you know: a person is more likely to be struck my lightening twice, back-to-back, than to win the lottery?).
I generally exclusively purchase Dividend Aristocrats, which are companies that have paid, and increased, a dividend per share for at least 25 years. Check out my article 4 Dividend Aristocrats You Should Consider Buying on Seeking Alpha for a more detailed introduction to Dividend Aristocrats.
One thing I would consider doing is investing in dividend paying stocks. For example, some say that ATT (T, 5.2%), Verizon (VZ, 4.5%) are great investments right now, buyer beware.
So say you select 5 stocks with good paying yields. Then you can set tight stop orders, should the stock price falls. This will protect you against downside risk. If the stock climbs adjust your stop.
You could also write calls to increase the yield, but you want to be able to write uncovered calls in the case of a stock price drop that triggers a sell order for the underlying stock. That can get a bit tricky.
However, with a bit of proper structuring, you could easily be in the 12-15% range with upside potential.
If you want NO risk, then your options are savings accounts, CDs, or Treasury Notes.
With savings accounts you get dog spit, with 5-year CDs you get 2.2%, and with 5, 7, and 10-year Treasury Notes you get 1.5%, 2.2%, and 2.7% respectively.
Which, as you pointed out, you're not keeping up with inflation over that time.
For your 5-10 year horizon, you have basically two options:
1) Ride it out. Put that money in a savings account, or in 1-year CDs making 1%, and wait for interest rates to go up. Inflation will erode it somewhat until then, so you're hoping it goes up soon. It sucks, but at least you can't lose any dollars.
2) Invest it in a more balanced, but still conservative way. This is where you find one or more good, solid Conservative Allocation or Moderate Allocation funds. These are funds that invest in both stocks and bonds, with the goals of keeping the risk low while still getting decent return. As a rule of thumb, Conservative Allocation funds will have more bonds than stocks, and Moderate Allocation funds will have more stocks than bonds. The upside to these are that they meet your stated requirements. The downside is that you can, in fact, lose money.
I cannot tell you what you should do, as only you know what your situation and true risk tolerance is. But, I can tell you what I'd do in your spot: I'd go with option #2. Two reasons:
First is that 5-10 years is a long enough time to recover if there's a nasty downswing early on (look at what 2008 did to these funds to see a worst case scenario), or to simply to survive it above water on the re-invested returns if it happens later on.
The second reason is that a portfolio of both stocks and bonds will both do better AND be less risky over the long term than one of purely stocks or purely bonds. In fact, with inflation taken into account, the LEAST risky portfolio is 90% treasury bonds and 10% stocks. The reason why 100% treasuries isn't safer is exactly because of times like now: when inflation is higher than the interest they pay.
Not all funds are created equal, so do your research before investing -- look at their goals and strategy, see if there's been major management changes recently, look at the yearly returns for each year (not averages; averages can hide nasty downswings), imagine getting those returns on your 100K, and how you'd feel about that (especially for the negative years).
Note: I would not invest in a pure bond fund now. Interest rates can't go down much more, but they could go up a lot from here, and bond funds tend to get creamed in that environment.
It is not a popular option; however, an annuity is an option.
Generally speaking, most annuities offer a guaranteed return of 1% and currently offer returns of about 2.25% depending on some factors. They also have an inflation adjusted annuity that guarantees your money will keep up with inflation.
Annuities come in many variants and are usually the product of insurance companies. They are a contractual agreement managed by professionals that can guarantee a monthly payment and safe keeping of principal (although you should check the companies credit rating and perform due diligence).
Deferred Annuities allow you to decide when you would like to take your distribution. Depending on the contract you can usually withdraw 10% annually with no fees and after some time (I.e. 10 years) you can withdraw the entire amount without a surrender fee.
To speak to their downside, because they are not very popular, there is not much competition in the segment. A more competitive market could result in higher guaranteed returns or better terms.
Also, people advise against choosing an annuity that allows the investor to invest their principal in market funds such as the S&P500. The advantage is the annuity can guarantee a minimum rate of return even if the S&P 500 performs poorly. The disadvantage is higher fees paid to the 'middle man' to mitigate the risk.
With that being said, I would not hesitate to suggest an annuity to a healthy individual with a large lump sum of money, a low risk profile and no interest in building a portfolio. The security and guaranteed payments (depending on the contract, possibly guaranteed payments for life) should be appealing.
If annuities could offer guaranteed 1% return, rate of inflation, or .5% over the market, which ever is greater in a given year, they would probably be a lot more popular!