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Yields on cash ‘well ahead of inflation,’ expert says. How to invest now

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Nopphon Pattanasri | Istock | Getty Images

Investors have been able to get the best returns on cash, as the Federal Reserve raised interest rates to bring down the pace of inflation.

Now that the central bank is lowering rates — with a new quarter point rate cut announced by the Fed on Thursday — experts say having money in cash can still be a competitive strategy.

“The best yields, whether we’re looking at high yield savings accounts, money markets or CDs [certificates of deposit] are well ahead of inflation, and that’s likely to continue for a while,” said Greg McBride, chief financial analyst at Bankrate.

“Rates are coming down, but cash is still a pretty good place to be,” he said.

Yet just how much cash to set aside is a question every individual investor needs to determine.

Earlier this year, Callie Cox, chief market strategist at Ritholtz Wealth Management, warned investors may be holding too much cash. That may still be true today, she said Thursday.

“If you’re sitting in cash because the environment doesn’t feel right, then that’s probably not a good reason to be sitting in cash,” Cox said.

Strive for at least a six-month emergency fund

Most financial advisors recommend having cash set aside so that unexpected expenses don’t blow your budget or cause you to rack up credit card debt.

“The rule of thumb is six months of really necessary expenses,” said Natalie Colley, a certified financial planner and partner and senior lead advisor at Francis Financial in New York.

However, having a year’s worth of expenses set aside may also be reasonable, depending on your household budget, she said.

If your savings are not yet at that six-month or one-year mark, start with a goal of setting aside three months’ expenses and then keep building your cash, Colley said.

If you’re behind on emergency savings, you’re not alone.

Almost two-thirds — 62% — of Americans feel behind on emergency savings, a September Bankrate survey found. For many individuals, inflation and having too many expenses has made finding cash to set aside more difficult.

How to build emergency savings

Pay attention to asset allocation

Savers may be at risk of missing out on today’s higher rates if they have not moved their savings to a high-yield online savings or other account paying a more competitive yield.

Yet even if they’re accessing those higher interest rates on cash, investors may still be missing out.

Whether or not that’s true for investors comes down to a person’s time horizon, experts say.

For longer-term goals, stocks pay the best returns on your money, and can best help ensure you have the money you need for your intended milestones.

“Stocks move higher over time,” Cox said. “If you let your emotions get in the way, you could miss out on a rally that’s crucial to you meeting your financial goals.”

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If you have cash on the sidelines that you want to put into the market, it can make sense to add a fixed portion of that money over time, say every month — a strategy called dollar-cost averaging, Colley said.

Having that fixed schedule can help you avoid trying to time the market, which can be difficult to do effectively, she said. Importantly, investors should try to opt for broadly diversified funds rather than individual stocks.

Having a long-term view can pay off.

If you had invested all of your money before the financial crisis, it would have felt like the worst timing in the entire world, Colley said.

Now, your returns look great, provided you let that money grow for the 15-year run, she said.

Revise your cash strategy as conditions shift

To be sure, there are risks that investors need to keep tabs on when it comes to their cash and other investments.

“Rates are going to come down slower than they went up — much slower,” McBride said.

Consequently, cash investors may enjoy returns that have the potential to outpace inflation for longer, he said.

Still, there are risks for savers to watch.

The policies put in place under the next presidential administration may affect both inflation and interest rates, Cox said.

“If inflation picks back up, it could be hard to earn a beatable yield in cash,” Cox said.

In that case, stocks may provide a better way to beat inflation, though there are no guarantees on prospective returns, she said.

Regardless of whether investors opt for cash or stocks, they need to be asking themselves why they’re making those choices and what they need that money for, she said.

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Personal Finance

Will you have a lower tax rate in retirement? Maybe not, advisors say

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Most Americans will have a lower tax burden in retirement than during their working years.

However, that may not be the case for some retirees, especially for higher earners and big savers, which could have a significant impact on their financial plans, according to financial advisors.

“Substantial evidence” suggests retirees have lower tax rates than during their working years, according to a 2024 paper published by the Center for Retirement Research at Boston College.

There are a few general reasons for this, according to a joint 2017 research paper by the Internal Revenue Service and Investment Company Institute: People who leave the workforce no longer pay payroll taxes. Their household income often drops, generally meaning less income is taxed. And Social Security recipients only pay tax on a portion of their benefits.

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The “overwhelming majority” of people will have a lower tax rate in retirement, “hands down,” said Jeffrey Levine, a certified financial planner and certified public accountant based in St. Louis and chief planning officer at Buckingham Wealth Partners.

But that’s not always the case.

Required minimum distributions may be large

Those who’ve built up a sizable nest egg, perhaps with disciplined saving in a 401(k) plan or individual retirement accounts, may have large required minimum distributions, Levine said.

For example, the IRS requires that older investors take minimum withdrawals annually from “traditional” (i.e., pre-tax) retirement accounts when they reach a certain age. (It’s age 73 for those who turned 72 after Dec. 31, 2022.)

The total amount is based on an IRS formula. A bigger nest egg generally corresponds to a larger RMD.

This matters because RMDs from pre-tax accounts add to a household’s taxable income, thereby raising its total tax bill. By contrast, distributions from Roth accounts aren’t taxable, with some exceptions.

Investors held $11.4 trillion in traditional IRAs in 2023, about eight times more than the $1.4 trillion in Roth IRAs, according to the Investment Company Institute.

Additionally, investors who inherited a retirement account, perhaps from a parent, may have to empty the account within 10 years of the owner’s death, Levine said. Such withdrawals from a pre-tax account would further add to taxable income.  

Retirees may not want to shrink their lifestyle

What Financial Advising Looks Like Now

“Most clients we sit down with today don’t want to see a diminished amount of income when they retire,” Jenkin said. “They still want to take the same level of trips, level of going out to concerts and dining, taking care of grandchildren, and many are still carrying a mortgage into retirement.”

In the first three to five years of retirement, Jenkin actually finds clients generally spend more than they do during their working years due to what he calls “a period of jubilation.”

“A lot of people just don’t want to shrink their lifestyle,” he said.

Consider your income tax assumptions

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Personal Finance

Higher capital gains taxes unlikely under Trump, Republican Congress

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Former U.S. President and Republican presidential candidate Donald Trump speaks during an election night event at the West Palm Beach Convention Center on Nov. 6, 2024.

Jim Watson | Afp | Getty Images

President-elect Donald Trump‘s victory means higher individual taxes, including levies on investments, are less likely for top earners, experts say.

Vice President Kamala Harris proposed higher long-term capital gains tax rates during her campaign — raising the top rate to 28% from 20% — for those making more than $1 million annually. Long-term capital gains rates apply to assets owned for more than one year.

Harris’ plan veered from President Joe Biden‘s 2025 fiscal year budget, which called for 39.6% long-term capital gains taxes on the same top earners. 

Higher capital gains tax rates, however, are “entirely off the table,” under a Trump presidency and Republican-controlled Congress, said Erica York, senior economist and research manager with the Tax Foundation’s Center for Federal Tax Policy. 

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Republicans secured control of the Senate on Tuesday and could maintain a narrow majority in the House of Representatives, which creates a “trifecta” in the White House and both chambers of Congress.

Even with partial Republican control, “it’s most likely that capital gains tax policy just stays put where it is,” York explained.

For 2024, investors pay long-term capital gains rates of 0%, 15% or 20%, depending on taxable income. Assets owned for one year or less are subject to regular income taxes.

You calculate taxable income by subtracting the greater of the standard or itemized deductions from your adjusted gross income. The taxable income thresholds will increase in 2025.

Changes to ‘net investment income tax’

Preventing election anxiety from driving your financial decisions

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Personal Finance

Federal Reserve cuts rates after election. What that means for you

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The Federal Reserve Building in Washington, D.C.

Joshua Roberts | Reuters

The Federal Reserve announced it will lower its benchmark rate by a quarter point, or 25 basis points, days after President-elect Donald Trump won the 2024 election.

Economic uncertainty was a prevailing mood heading into Election Day after a prolonged period of high inflation left many Americans struggling to afford the cost of living.

But recent economic data indicates that inflation is falling back toward the Fed’s 2% target, which paved the way for the central bank to trim rates this fall. Thursday’s cut is the second, following a half point reduction on Sept. 18.

The federal funds rate sets overnight borrowing costs for banks but also influences consumer borrowing costs.

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Since the central bank last met, the personal consumption expenditures price index — the Fed’s preferred inflation gauge — showed a rise of just 2.1% year over year

Even though the central bank operates independently of the White House, Trump has been lobbying for the Fed to bring rates down.

For consumers struggling under the weight of high borrowing costs after a string of 11 rate increases between March 2022 and July 2023, this move comes as good news — although it may still be a while before lower rates noticeably impact household budgets.

“The Fed raised rates from the equivalent of the ground floor to the 53rd floor of a skyscraper, now they are on the 47th floor and another rate cut will take us to the 45th floor — the view is not a whole lot different,” said Greg McBride, chief financial analyst at Bankrate.com.

From credit cards and mortgage rates to auto loans and savings accounts, here’s a look at how a Fed rate cut could begin to impact your finances in the months ahead.

Credit cards

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. Because of the central bank’s rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to more than 20% today — near an all-time high.

Annual percentage rates have already started to come down with the Fed’s first rate cut, but not by much.

“Still, these are sky-high rates,” said Matt Schulz, LendingTree’s credit analyst. “While they’ll almost certainly continue to fall in coming months, no one should expect dramatically reduced credit card bills anytime soon.”

Rather than wait for small APR adjustments in the months ahead, the best move for those with credit card debt is to shop around for a better rate, ask your issuer for a lower rate on your current card or snag to a 0% balance transfer offer, he said.

“Another rate cut doesn’t change the fact that the best thing people can do to lower interest rates is to take matters into their own hands.”

On the campaign trail, Trump proposed capping credit card interest rates at 10%, but that type of measure would also have to get through Congress and survive challenges from the banking industry.

Auto loans

Even though auto loans are fixed, higher vehicle prices and high borrowing costs have become “increasingly difficult to manage,” according to Jessica Caldwell, Edmunds’ head of insights.

“Amid this economic strain, it’s clear that President Trump’s promises of financial relief resonated with voters across the country,” she said.

The average rate on a five-year new car loan is now around 7%, up from 4% when the Fed started raising rates, according to Edmunds. However, rate cuts from the Fed will take some of the edge off the rising cost of financing a car — likely bringing rates below 7% — helped in part by competition between lenders and more incentives in the market.

“As Americans seek a reprieve from the relentless pressures on their wallets, even a modest federal rate cut would be seen as a positive step in the right direction,” Caldwell said.

Trump has supported making the interest paid on car loans fully tax deductible, which would also have to go through Congress.

Mortgage rates

Housing affordability has been a major issue due in part to a sharp rise in mortgage rates since the pandemic.

Trump has said he’ll bring down mortgage rates — even though 15- and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy. Trump’s victory even spurred a rise in in the U.S. 10-year Treasury yield, sending mortgage rates higher.

Cuts in the Fed’s target interest rate could, however, provide some downward pressure.

“Continued rate cuts could begin to drive down mortgage rates which have remained stubbornly high,” said Michele Raneri, vice president of U.S. research and consulting at TransUnion. As of the week ending Nov. 1, the average rate for a 30-year, fixed-rate mortgage is 6.81%, according to the Mortgage Bankers Association.

Mortgage rates are unlikely to fall significantly, given the current climate, explained Jacob Channel, senior economist at LendingTree.

“As long as investors remain worried about what the future may bring, Treasury yields, and, by extension, mortgage rates are going to have a tough time falling and staying down,” Channel said.

Student loans

Student loan borrowers will get less relief from rate cuts. Federal student loan rates are fixed, so most borrowers won’t be immediately affected. (Efforts to forgive student debt are now likely off the table.)

However, if you have a private loan, those loans may be fixed or have a variable rate tied to the Treasury bill or other rates. As the Fed cuts interest rates, the rates on those private student loans will come down over a one- or three-month period, depending on the benchmark, according to higher education expert Mark Kantrowitz.

Still, a quarter-point cut will only cut monthly payments on variable-rate loans by “about $1 to $1.25 a month for each $10,000 in debt,” Kantrowitz calculated.

Eventually, borrowers with existing variable-rate private student loans may be able to refinance into a less expensive fixed-rate loan, he said. But refinancing a federal loan into a private student loan will forgo the safety nets that come with federal loans, such as deferments, forbearances, income-driven repayment and loan forgiveness and discharge options.

Additionally, extending the term of the loan means you ultimately will pay more interest on the balance.

Savings rates

While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.

As a result of Fed rate hikes, top-yielding online savings account rates have made significant moves and are still paying more than 5% — the most savers have been able to earn in nearly two decades — up from around 1% in 2022, according to Bankrate.

“Yes, interest earnings on savings accounts, money markets, and certificates of deposit will come down, but the most competitive yields still handily outpace inflation,” McBride said.

One-year CDs are now averaging 1.76% but top-yielding CD rates pay more than 4.5%, according to Bankrate, nearly as good as a high-yield savings account.

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