“Fed to keep rates low until 2014”
   


Previously, the Federal Reserve stated its intent to keep interest rates at current levels through mid 2013.  Following their last meeting in late January, they announced an extension of their low rate policy through 2014 due to continuing economic weakness.

While this announcement was good news for borrowers, retirees and pre-retirees looking for safe, conservative places to put their money to work with CDs or Money Market funds will continue to be subject to meager returns.  With a current average return of 0.67% for one year CDs, the opportunity cost of waiting for interest rates to rise has increased dramatically. 

Despite the historically low rates on fixed annuities, they still represent a viable higher return alternative to the current CD marketplace.  Take a look at our current Eleos MVA (5 Year) product compared to current CDs and look at the cost of waiting.

Year

Annuity Rate

CD Rate

1

3.00 %

0.67 %

2

2.00 %

0.67 %

3

2.00 %

3.20 %

4

2.00 %

3.20 %

5

2.00 %

3.20 %

Over a five year horizon the chart above shows that, should rates remain the same for the next two years, a CD buyer would have to earn 3.20% during years 3-5 to match the total return of the Eleos MVA over the next 5 years (assuming base rate renewals.)  Furthermore, the likelihood of one year CD rates trending from under 1% to in excess of 3% in the third year, while possible, may not be a realistic assumption.  The longer the Fed continues their policy of low rates to stimulate economic activity, the higher the opportunity cost of CDs relative to the Eleos MVA.

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© Reliance Standard Life Insurance Co., 2012