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The best safe investments thus are those that beat the rate of inflation.  Otherwise, you lose buying power!

Most people think a "safe investment" is one where you get your money back.  In times of low inflation, this is a good rule of thumb.  But when inflation is high, the "best" safe investments are those that give you your money back AND allow you to buy more good and services than when you invested.  You need to beat the rate of inflation for an investment to be truly "safe." 

#1 1-year cerficates of deposit with FDIC or NCUA insurance.  The term is short engough that you can reinvest if rates go up. The current FDIC and NCUA insurance limit is $250,000.  Joint and individual accounts with a POD (Payable on Death) beneficiary are insured up to $500,000.  A married couple, for example, could put away six million dollarsfully insured by the US Government in CDs by putting $500,000 in a dozen different banks.
($6,000,000 = $12 x $500,000 per institution)

=> Ladder: 
If you have $120,000 to invest, you can build a "ladder" of 1-year $10,000 CDs that you buy one per month.  If you need the cash, you are never more than 1 month away from  a $10,000 CD maturing.  The ladder allows you to you get much better rates with 1-year CDs compared to shorter terms such as insured "on demand" savings and checking accounts.  If inflation jumps, the new CDs you buy going forward will get the higher interest rate.

#2 Individual - Treasury Inflation-Protected Securities, also called TIPS, are US Treasury bonds that pay a base rate plus they adjust the principal every six moths based on the rate of inflation over the period.  If there is no inflation, you are paid the base rate wich typically runs between 0.5 and 3.0% for the 10-year TIP.  If you buy a TIP with a 2.0% base rate and inflation for the 6 month period is a whopping 10%, then you get 11%, half the base rate plus the 10% inflation!  These can also be "laddered" to stagger maturity.  More information about TIPS

#3 Series I Bonds. 
Interest accrues monthly and compounds semiannually. The earnings rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the life of the bond, and the semiannual inflation rate.  Thes are such a good deal the US government now limits investors to $5,000 a year.  These can also be "laddered" to stagger maturity.  For more information, see I Bonds Explained

#4 1-Year US Treasury Bills.  These are safe but they do not adjust with inflation and rates are usually lower than what insured certificates of deposit (CDs) pay.  The advantages of Treasuries are:
  • Investors can buy billions with full backing of the US Government.  You do not have to worry about FDIC and NCUA insurance limits.
  • Interest earned is exempt from state and local taxes which is a large advantage in high tax states like California and Vermont (See Individual Tax Rates by State for 2008)
  • These can also be "laddered" to stagger maturity. 
According to our "Highest CD Rate Survey" you can get a CD paying 2.80% while the 1-Year US Treasury is only paying 0.46%. 

There are loads of other investments considered "safe" by many, such as insured checking and savings accounts, but they usually don't pay enough interest to make up for inflation.  Stick to the foure investments above using "ladders" and you should do fine.

Your bank makes a lot of money on fees selling annuities which we do not recommend.  Make sure you read the article: Beware of Annuities

Make sure you read the article: Beware of Annuities

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