Money Watch: How to earn more as CD matures

Key Points

• If safety means FDIC-insured, you’ll have to accept lower interest rates
• Increase yield by staggering CD maturities, using different investment vehicles
• Rates online may be a bit higher than your local bank

Money Watch, a personal finance column that runs every Saturday, features a financial planner from the National Association of Personal Financial Advisors answering reader questions about saving, protecting and growing your money. To submit a question, e-mail USA TODAY personal finance reporter Christine Dugas at: cdugas@usatoday.com

Q: I have a five-year CD for $100,000 that has earned a 5.25% interest rate. When it matures this year at my credit union, is there any way I can get the same rate? If not, what are some safe investments that offer a decent return? Should I divide the money into two or three different reliable investment options?

A: You’re not alone in looking for the higher yields of days gone by! You also want safety. In today’s environment, you simply can’t have both. You have to make some choices with tradeoffs.

If safety means FDIC-insured accounts and a guarantee that you’ll get your principal back, you’ll have to accept lower interest rates. And, although your principal may be repaid, it will likely not purchase as much if interest rates lag inflation once your CD matures.

Your idea to divide the money into two or three different investment options is a good one. You can increase your yield by staggering maturities and using different kinds of investment vehicles.

If you want your $100,000 to remain intact, you can buy CDs. Check your local newspaper or go to bankrate.com.

The rates you find online for savings accounts, money market funds and CDs are generally higher than those offered by local banks. But they’re still not stellar.

You could also take some risk of losing principal with Treasury bills, notes, bonds, Treasury Inflation-Protected Securities (TIPS) or Separate Trading of Registered Interest and Principal of Securities (STRIPS). They are backed by the full faith and credit of the U.S. government. You can learn how they work and buy them online at Treasury Direct.

Buying at a premium (above $100,000) means that if inflation takes off, the value of your bond will drop below $100,000 and you could lose principal. You may have more safety with U.S.government backing, but since these securities have been in high demand, the returns are poor. Some are even negative or have rates less than current inflation.

To achieve a higher return, you would have to accept some risk of loss of principal. Consider investing in mutual funds. They are professionally managed portfolios of stocks and bonds that are convenient to invest in. Look for no-load mutual funds with low expense ratios.

Before jumping into mutual funds, take some time to gain a fundamental understanding of the benefits and risks of mutual fund investing and what may be appropriate for your age and goals.

In general, the younger you are the more risk you can afford to take, assuming you have an adequate emergency cash reserve and are not heavily in debt. (If you have no cash reserve or a good deal of debt, you might want to take care of that before investing.)

Consider diversifying your $100,000 among money market (for your cash reserve), high-quality bond, balanced, and large-cap stock mutual funds. Historically, index funds generally outpaced the performance of actively managed funds. They also have lower expense ratios. Be sure not to put any money you may need to withdraw in the next two years in volatile funds. You don’t want to be forced to sell a stock fund at a depressed price.

If you are near or in retirement, you obviously can’t afford as much risk. Consider a mix of money market, short- and intermediate-term high-quality bond funds, and some dividend-paying large-cap stock mutual funds. Your portfolio should be less volatile, and you would receive income generated from the various funds. If interest rates spike, your bond mutual funds may temporarily lose value until the mutual fund managers replace the holdings. Be sure to keep an eye on them.

Among your resources:

* The Certified Financial Planners Board of Standards provides consumer information and online tools.

* The wisdom of Great Investors, written in plain English, explains seven key investing principles to help you make sound choices. Available online, the information relies on many of the most successful investors,such as Warren Buffett.

* The Alliance of Investor Education has useful tips under the “Best Resources” section of their website.

Constance Stone, NAPFA-Registered Financial Advisor

Stepping Stone Financial, Chagrin Falls,OH

Read previous Money Watch columns:

Avoid tax penalties with 401k withdrawals