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Ask The Expert

About Richard Barrington, CFA & MoneyRates.com Senior Financial Analyst
Richard Barrington

Richard Barrington, CFA, is the primary spokesperson and personal finance expert for MoneyRates. He is a 20-year veteran of the financial industry, including having served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. He earned his Chartered Financial Analyst designation in 1991 with the Association for Investment Management and Research (AIMR). Richard has written extensively on investment topics, including investments, money market accounts, certificates of deposit, and personal finance as it relates to retirement.

Richard has been quoted by numerous media publications such as The New York Times, The Wall Street Journal, and Pensions & Investments magazine.[...] Read more Richard can discuss economic and market history in detail and is well respected for his ability to relate to a broad audience from a personal financial standpoint. Richard approaches financial topics with an understanding that fresh perspectives are often more valuable than mainstream consensus. He has written for over 50 financial Web sites, such as Investopedia, Yahoo, MSN, Allbusiness, and Encarta, and is most sought after by members of the media for his niche expertise in these topics: Certificates of Deposit, Money Market and Savings Accounts, Saving for Retirement, Housing and Mortgage Meltdown, Interest rates, Investments, Macro Economic and Government Policy Issues, Historical Financial Events, Discerning Long Term Implications

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Are foreign currencies good retirement investments?

August 7, 2017

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: What determines the strength of a currency relative to the U.S. dollar? It seems odd the dollar is worth over 100 Japanese yen but only about 20 Ethiopian birr, when obviously Japan has a much stronger economy than Ethiopia. Would trying to exploit these differences be a good form of retirement investment?

A: That's an interesting question which needs to be taken in two parts: First, to address some basics of how currencies work, and then to comment on their appropriateness for retirement investing.

What determines currency exchange rates?

At the time of this writing, one Ethiopian birr equaled about 5 Japanese yen. As you point out, on the surface this seems odd given that Japan's economy is much larger and stronger than Ethiopia's.

However, while currency movements relative to one another are determined by shifting economic conditions, the absolute value of exchange rates is somewhat arbitrary. Different countries set their currencies at denominations that seem convenient, based on what they can purchase and how their populations are used to dealing with money. Occasionally, those levels can be reset to adjust to changing times.

For example, there are more than 100 yen to the U.S. dollar. To think of this differently though, suppose we valued things purely in terms of cents not dollars. One yen would be fairly close to equaling one cent. The size of the units can change, without changing the underlying value the currencies.

Whatever the absolute exchange rate, that rate moves based on interest rates, political policies, economic growth, military threats, etc. This brings up the question of whether those changes create a good opportunity for retirement investing.

Are currencies good retirement investments?

In its purest form, currency trading would be a highly risky form of investing for retirement savings for three reasons:

1. Changes are based on very complex sets of economic conditions

This kind of analysis isn't for everybody. It's tough enough to analyze an individual company or industry. Trying to account for all the geopolitical and economic factors that drive currency movements requires highly sophisticated resources.

2. It can be a highly-leveraged form of trading

If you invest in currencies through vehicles like futures or options, you incur the possibility of large, permanent losses, as opposed to the normal up-and-down fluctuations associated with more mainstream retirement investments.

3. Returns are highly unpredictable

Since retirement planning is usually based around some sort of return assumptions, this unpredictability makes it more difficult to figure out how much you need to save and what your asset mix should be.

While foreign exchange investing may not be for the average investor, there is a strong case to be made for international diversification. Investing in the stock markets of other countries gives you some participation in the currencies of those countries, along with their underlying economic conditions.

For starters, see what international investing options your 401(k) retirement savings plan has. It may have broadly-diversified international funds, or even funds that let you choose specific country participation. Incorporating some international investments into a broader asset mix can give you a moderate amount of participation in foreign currencies and markets. This can happen without you having to wake up in the middle of the night to find out where the Japanese yen or the Ethiopian birr closed at the end of their trading days.

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Should I take my retirement benefits in a lump sum or monthly payment?

July 31, 2017

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: I have an opportunity to take early retirement, and I have the choice between taking a lump sum from my employer or a series of monthly payments. Which would you recommend?

A: This is a tough question, because it depends partly on the specific numbers involved, and partly on the circumstances beyond those numbers. What follows is a discussion of three major questions you should consider in making this decision.

How much would the monthly payments be worth over time?

Comparing a lump sum to a stream of future payments is never an exact science, but you can get some sense of how they stack up if you are willing to set up a spreadsheet to do some calculations.

Here are some steps to those calculations:

1. Start with estimated life expectancy

Based on your life expectancy, calculate how much your monthly payments are likely to add up to over time.

2. Calculate rate of return

Using a conservative rate of return (and these days that would be about 2 or 3 percent), project how much you would earn by investing the lump sum amount over that same period of time.

Note: Assume that you have to spend an amount equivalent to the monthly payments, so steadily subtract that from the amount you have available for investment. These subtractions should still be considered in the long-term value of the lump sum, but subtracting them steadily accounts for the fact that they would stop earning a return once the money is spent.

3. Compare the two totals

When you do this, you will get some indication of how the economic value of the lump sum stacks up to the stream of payments.

Again though, this is not an exact science. This kind of comparison depends heavily on assumptions about your lifespan and the rate of return you can earn. However, it is a good starting point to see if the advantage is heavily weighted towards either the lump sum or the stream of monthly payments.

To make saving for retirement easier, consider using a retirement savings calculator to determine how your current savings will grow.

How secure are your employer's finances?

If you take the lump sum, you don't have to worry about what happens to your employer in the future. If you sign up to get monthly payments for the rest of your life, you are depending on that employer being able to continue to make those payments.

The ability to make such payments depends partly on how well-funded the retirement plan is currently, and how reliable the employer's revenue stream will be going forward.

Do you care more about stable payments or control over your finances?

Some people would rather take control out of the employer's hands by having a lump sum to invest for themselves. Others prefer not to have that responsibility, and would rather just receive a predictable monthly amount. Your preference should be a factor in how you choose to receive your retirement benefits.

As you can see, there is no universal answer to whether a lump sum is better than a stream of monthly payments. The right answer depends on case-by-case circumstances. Considering the issues above will help you make an informed decision about your situation.

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How do I get the best savings account rate on $40,000 while keeping liquidity?

July 20, 2017

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: How do I get the best interest rate on $40,000 while keeping liquidity?

A: You have a few options. The major themes in answering your question are determining how exactly you need to define liquidity, and how you shop for the best provider no matter what vehicle you choose.

3 savings account options and levels of liquidity

It is important to figure out precisely what you mean when you say you want to keep the money liquid. Is the liquidity need a short-term certainty, or just a possibility that could occur sometime in the next few years? Will your liquidity need apply to all $40,000, or just a portion of it?

Depending on your answers, here are some options:

1. Savings account or money market account

If you need full liquidity at any time, a savings account or money market account with FDIC insurance coverage is the most appropriate option. These allow immediate access without penalty, do not fluctuate in value, and offer the security of FDIC insurance limits up to $250,000 per deposit, per covered institution for deposits.

2. A CD with a moderate early withdrawal penalty

The trade-off with certificates of deposit is that they typically offer higher interest rates than savings or money market accounts, in exchange for locking your money up for a specified period of time. If your liquidity need is at least several months in the future, and/or is only a slight possibility rather than a high probability, the extra yield you can earn on a CD might be worth risking the early-withdrawal penalty, especially if you can find a CD offering a relatively mild penalty.

3. A CD ladder

If your need for liquidity applies to only a portion of your $40,000, you might consider investing just that portion in a savings or money market account, while putting the remainder in long term CDs. If you anticipate a series of liquidity needs in the months or years to come, a corresponding series of CD terms with a CD ladder might give you the best combination of yield and liquidity.

Shopping for the best savings account rates

Having figured out which type of vehicle best fits your liquidity needs, you can shop around for the best terms on that type of vehicle. Use online tools such as the MoneyRates.com savings account, money market account and CD rate pages to compare products.

Compare the best CD rates

As you do so, remember to compare like against like. For example, don't compare the yield on a 3-year CD at one bank with the yield on a 2-year CD at another bank - longer CDs will generally offer higher rates.

Also, whether you are depositing the full $40,000 in one vehicle or spreading it among multiple accounts, make sure you are comparing rates that apply to the size of your deposit.

Pay attention to early withdrawal penalties

Finally, if you are looking at CDs, remember that in addition to comparing rates you should also take into account the severity of their early withdrawal penalties.

Congratulations on looking to make the wisest move with your money. As low as interest rates may be these days, $40,000 is a significant enough sum of money that shopping for the best terms possible can make a meaningful difference in the amount of interest you earn.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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How much interest can I earn on $1 million in 1 year?

June 12, 2017

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: If one were to deposit $1 million into a savings account paying 5 percent, how much money would one expect to receive in a year?

A: That's an easy question to answer, though it should be pointed out up front that the answer is purely hypothetical. Savings accounts yielding 5 percent were a victim of the financial crisis eight years ago, and current bank rates are nowhere close to that.

Compound interest for $1 million in a savings account

To start with the theoretical answer, a $1 million savings account paying 5 percent would earn $50,000 a year. The nice thing about the way interest compounds is that if you left that interest in the account, it would then earn interest the following year, so that the account would produce $52,500 the following year.

Unfortunately, the reality is that while 5 percent savings accounts used to be commonplace, they are nothing more than a pipe dream today. The most recent MoneyRates.com America's Best Rates survey found that the average rate on savings accounts is 0.224 percent.

Using a compound interest calculator, this savings account rate would produce just $2,243 in annual interest on $1 million dollars. Money market rates averaged 0.182 percent, which would produce even less interest.

The America's Best Rates survey found that the best high yield savings accounts are paying about 1 percent, which would yield $10,000 on $1 million. That is more than four times better than the average savings account, but still well short of the $50,000 that a 5 percent yield would produce.

Alternatives to low-yield savings accounts

Today's low yields have many savers scrambling for alternatives. There are ways of potentially earning more interest, but each comes at a price. Here are some examples:

1. Certificates of deposit

If you were willing to commit your money for five years and search for the best CD rates, you could probably earn about 2 percent. Be advised, though, that you would probably also face a penalty if you wanted to access any of your money before the end of the CD's term.

2. US government bonds

30-year Treasury bonds are currently yielding about 3 percent. That is higher than even the best CD rates, but the catch is that the price of the bond may fluctuate widely between now and the maturity date 30 years in the future.

3. Corporate bonds

Debt securities issued by corporations pay a variety of yields that will be higher than the yields on Treasury securities of the same length. However, the higher the yield, the more risk the marketplace perceives that the corporation won't be able to meet the interest and principal obligations of the bond.

4. Foreign bonds

These carry the default risk of corporate securities, and also introduce an element of currency risk that can wipe out any yield advantage.

The above are all legitimate alternatives for earning a higher yield than current savings accounts. But as you can see, each also carries some degree of additional risk. If anyone offers you a guaranteed yield of 5 percent these days, you should be very wary - it is likely such a scheme goes beyond risky, and is an out-and-out scam.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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Will millennials ever be wealthier than their parents?

February 23, 2017

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

It's part of the American Dream that has started to seem more like a cruel joke: the idea that each generation would do a little better than the one that preceded it.

With a job market and economy that is especially unwelcoming to young people, millennials may seem to have the deck more stacked against them. However, they also have some advantages over the previous generation, in part by having the opportunity not to repeat their parents' financial mistakes. Here's a look at some of Generation Y's disadvantages and advantages when asking whether millennials will be wealthier than their parents:

Money challenges millennials have to overcome

Here are three of the main challenges facing the current generation coming out of school:

1. Student loan debt

Concern over student loan burdens is not just youthful angst - the problem is very real. Student loan debt outstanding has doubled in just seven years, so young adults today are starting out in a bigger hole than previous generations.

Still, since most of this debt is government-backed, many of these borrowers can avail themselves of programs that limit the percentage of income they are required to pay. There is also the chance to forgive a portion of the debt after a specified period through this particular payment plan.

2. A tough job market

The headlines say that employment has improved, but that's just not what many young adults are experiencing. They aren't imagining the problem. Unemployment for people aged 20 to 24 is more than twice the unemployment rate for people 25 and over. To overcome this, young workers need to be flexible. Be willing to get your foot in the door where you can, rather than holding out for your dream job. Also, employment varies greatly from state to state, so be willing to relocate if necessary.

3. Slow wage growth

Even once they obtain a job, slow wage growth would seem to limit wealth potential for millennials. Even so, learn prudent money habits for making the best of what you are earning, rather than overspending the way many of your parents did. Consider putting money in a high interest savings account to build your finances.

Financial advantages millennials have over previous generations

On the other hand, here are four financial advantages young adults have over their parents:

1. Low interest rates

Since younger people have not had a chance to accumulate savings, low interest rates work to their advantage by making their debt more affordable, while older savers have seen their income plunge as a result.

2. No long-term debt addiction

Student loan debt may be a problem, but auto loan debt is also a growing issue, with outstanding loans crossing $1 trillion for the first time in 2015, according to the Federal Reserve. Student loans are a single hurdle to overcome. The older generation has built itself multiple debt hurdles.

3. Up-to-date skills

Many middle-aged workers have found the job market has passed them by. Younger people have fresher skills. As they start to gain a little experience, this will make them more competitive in the job market.

4. Time

By failing to have adequate retirement savings, the older generation has squandered much of the time it takes to accumulate wealth. Young people have the opportunity not to repeat this mistake.

In the end, building wealth depends only partly on how much money you make. Ultimately, it comes down to how much they can save and grow. The parents of millennials have largely done a lousy job of preserving their financial resources, meaning that the next generation has a very good shot at being wealthier, if they can just be smarter with their money.

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