Interest rate: Cutting into savings

The Federal Reserve’s most recent rate cut could very well usher in a new era of inflation, said Janice Revell in CNNmoney.com. That is very bad news for your retirement portfolio. “I’m not saying that the Fed’s quarter-point rate cut is going to turn America into Argentina overnight.” But inflation pushes up the price of goods and reduces the purchasing power of savings, which makes saving for retirement that much harder. Resist the urge to escape the volatile stock market by putting everything you own in government bonds or other seemingly safe investments. The risk of inflation “can be just as damaging” to those investments as a volatile market can be to stocks. Instead, make sure your portfolio holds a “smattering of all asset classes,” including small- and large-cap U.S. stocks, international stocks, REITs, and bonds. Conventional wisdom holds that when the Fed lowers rates, savers suffer, said Sandra Block in USA Today. But while average savings rates have slid, you can still earn respectable rates on your cash savings. “Banks are paying above-average rates because they’re hungry for deposits.” Shop around for the best rates. The average oneyear CD rate was recently about 3.6 percent, but Countrywide Bank and E-Trade Bank, for example, are still paying more than 5 percent. For the highest rates for savings accounts, skip the bricks-and-mortar institutions and “look for deals with an Internet-only bank.” Some savers are wary of online banks. Assuming the bank is backed by the Federal Deposit Insurance Corp., however, your money is as safe online as it is anywhere. In light of the Fed’s cut rates, many student- loan borrowers are feeling the pressure to consolidate their loans and lock in a fixed rate, said Jane J. Kim in The Wall Street Journal. But they may be better off waiting. “Recent graduates often opt to consolidate their loans before the end of their six-month grace period to lock in rates at the lower in-school interest rate.” But they might get a better deal if they wait until July, when rates on federal loans reset, according to Mark Kantrowitz of FinAid.org. “To be sure, borrowers who wait until next year are facing the risk that interest rates rise.” That, says Kantrowitz, is not very likely.

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