Best Ways to Save in a Low-Interest Market

How to grow your savings when interest rates drop

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Best Ways to Save in a Low-Interest Market

From building a safety net to planning ahead, growing your savings can be a great way to create financial security. But with interest rates declining and market volatility on the rise, it can be challenging to know which savings vehicles offer the best returns. The good news is that even in a low-interest market, choosing the right vehicle can help you grow your money and keep you protected from market swings. So what are the best options to choose from? Following a few simple steps can help you determine which savings option is right for you. 

Understand the different savings vehicles

From high-yield savings accounts to CDs to deferred fixed annuities, savings vehicles are designed to provide a buffer from market volatility. Yet despite their similarities, they do have some key differences, so knowing the main features is crucial when it comes to selecting an option that aligns with your needs. While high-yield savings accounts offer the most liquidity, they also tend to have the lowest annual returns, currently ranging from 1.9% to 2.2%. This makes them a low-risk option but one that also offers limited potential for growth. If you’re looking for options with higher annual yields—and you have a longer investment horizon—CDs or deferred annuities could be better options. These savings vehicles tend to have higher annual returns, with CDs currently ranging from 2.05% to 2.45% and many annuities ranging from 3.5% to 4%, depending on the contract duration. In addition to higher interest rates, deferred annuities also have the benefit of tax-deferred growth, which can allow for higher returns over time.

Determine your savings needs

Depending on your financial goals, having a clear sense of your savings needs can help you determine which type of savings vehicle is right for you. If you need regular access to your savings and aren’t as interested in long-term growth, a high-yield savings account could be a good option. On the other hand, if you’re looking to grow your savings and are less interested in liquidity, a CD or deferred annuity could be a better fit for your needs.  

The main thing to keep in mind when deciding between a CD and a deferred annuity is that deferred annuities often require investment horizons of three to 10 years, while CDs generally have investment horizons of six to 18 months. However, deferred annuities offer higher overall returns. It’s also worth noting that CDs generally need to reach full maturity before they can be liquidated while deferred annuities often allow you to withdraw up to 10% of your funds each year after the first contract year without a penalty. Another consideration is age. If you’re younger than 59½ and you withdraw funds from your deferred annuity, the IRS may charge you an additional 10% tax on interest earned, so it’s important to factor in those costs when determining which option is right for you. 

Align your choice with your financial priorities

The key to selecting the right savings vehicle is to determine which option aligns most closely with your needs and your overall financial goals. In addition to considering your investment horizon, your age and your current tax considerations should also factor into your decision. While different savings vehicles may be right for different phases of your life, if tax-deferred growth and higher returns are a priority, a deferred annuity could be right for you.