Good Read from USAToday
Ask Matt: Is there a safe investment yielding 5%?
Q: Is there a secure investment that would provide a minimum of a 5% return during my retirement? If so which one?
A: Low interest rates may help spur investment and growth. But one thing they don't do is make savers richer.
With the Federal Reserve planning to keep short-term interest rates low for the foreseeable future, you can almost hear the grumble from retirees. Treasury rates are the benchmark for relatively safe investments. And when the rates of Treasuries are kept low, ripple effects are sent through the entire financial community.
Believe it or not, but what the Fed does has a direct influence on your question. Currently, the 10-year Treasury is yielding 2.2%. That means, if you're looking for an investment that will at least keep you relatively secure from the risk of default, you can only expect a 2.2% annual return.
That means if you're looking for a return closer to 5% a year, you will need to dramatically increase your risk exposure. For instance, you might opt for bonds issued by the U.S. companies with the highest credit ratings. That would get you to a roughly 4.2% current yield. It's not the 5% you're seeking, but it's closer. Meanwhile, large U.S. companies with top credit ratings can default, but that's a fairly unusual event, at least in the short term.
Investors willing to take on dramatically more risk, and buy U.S. companies with the lowest "junk' credit ratings, currently are getting 8.5% annual yields. That's a greater return than you're seeking, but also, the level of risk goes up by quite a bit and junk bonds are not appropriate for retirees looking for stable investments for their retirement money.
For investors in high tax brackets, municipal bonds might be worth looking at. But these yields will be nowhere near 5%. The Pimco Intermediate Muni Bond ETF, for instance, is yielding 2.2%. Even adjusted for their tax shield, it's still not enough to get you to 5%.
The bottom line is that you're not going to find a secure 5% yield. Short-term interest rates are just too low. And it gets worse. Not only are 10-year Treasuries yielding just 2.2%, but even that return is at risk if there's measurable inflation in the future.
Investors need to compare their need for safety with their need for income to come up with the correct balance for them. If you're willing to stray from security for higher returns, there are some investments you can consider.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at firstname.lastname@example.org. Follow Matt on Twitter at: twitter.com/mattkrantz