For many years, clients stopped asking how much they would earn on their money market accounts because for quite a while, money market accounts weren’t paying any interest at all. However, with the Federal Reserve raising interest rates over the past year, our clients can now earn north of 2 percent on their money market accounts.
While it’s great to earn a little bit of interest on your short-term cash reserves, it’s still not wise to park excess funds in cash for extended periods of time, because even at 2 percent interest your money is still losing buying power over time due to inflation. Even for conservative investors, it’s not ideal to avoid investment risk only to be clobbered by inflation risk and longevity risk.
One of our favorite strategies for conservative investors who don’t want market risk or interest rate risk are liquid modified endowment contracts. These vehicles, which are issued by insurance companies, typically grow between 4 percent and 5 percent per year. The full account value is accessible at all times and no tax is due unless the gains are withdrawn. Additionally, these contracts provide a substantial tax-free death benefit for one’s heirs and can also can potentially provide a tax-free, long-term care benefit as well.
This is important because for many people who are still in good health, a substantial long-term care expense is the one thing that could derail their financial plan. Modified endowment contracts have a beneficiary designation that will avoid probate, and under Florida law these accounts are exempt from claims of creditors. So, while it’s nice to make interest again in the bank or a brokerage account, other safer alternatives exist that not only have much higher expected growth potential but significant tax, retirement, health care, and estate planning benefits as well.
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