Ask an Advisor: As Interest Rates Fall, Is There a Better Way to Invest My $250K That's '100% Safe?’

I am 66 years old and I still intend to work into my 70s. I have over $250,000 in an IRA (100% no risk, based on interest rates). But as interest rates go down, so does the money it makes. Is there a better solution that is 100% safe?

– Ed

I take your use of “safe” to mean confidence that your account balance won’t decline. That’s typically what people mean when they talk about safety with savings and investments. In that sense, interest-bearing investments are the safest option. The tradeoff, of course, is that your returns are tied to prevailing interest rates. So in that regard, there isn’t really a better alternative.

A financial advisor can help you evaluate your tolerance and capacity for risk and then align your investment portfolio accordingly. Connect with an advisor for free.

However, I’ll give you some thoughts on that tradeoff and some minor tips for how to approach it. I also want to take a moment to discuss risk in broader terms as well. I think that additional perspective might help you consider other approaches that could provide you with a better outcome.

Safety vs. Growth

First, let’s make sure that we have the right framework for thinking about your question. When you invest, there’s a tradeoff between the amount of risk you take and the rate at which you can expect your money to grow.

You should generally expect a higher rate of return from more risky investments over the long term. Of course, the risk aspect means there may be periods when your return lags or turns negative.

Safer investments grow more slowly, but with less volatility. If you invest very conservatively, your account value may hardly fluctuate at all, but over time you’ll likely end up with less than if you had invested more aggressively.

What you’re observing is the tradeoff of choosing the safest assets: lower returns. As you noted, these returns are tied to prevailing interest rates. Rates declined in 2024 and could fall further, which would reduce the yield you earn as well.

(And if you need additional help assessing the potential risk and return of investments, consider working with a financial advisor.)

Responding to Falling Interest Rates

If maintaining complete safety of principal is your priority, you really have two choices. First, you can accept lower interest when rates decline. This is an outcome that understandably feels unsatisfying, since that’s the concern you’re raising. Alternatively, you can invest in longer-term instruments, which typically offer higher yields but require locking in your money for a longer period.

I’m not sure exactly what you have now, but I’m guessing it’s CDs or something similar. For illustrative purposes let’s assume you typically invest in three-year CDs. When these mature, you’re left with reinvesting that money into new CDs at whatever the interest rate happens to be at the time.

Buying a CD with a longer term, such as 10 years, allows you to lock in a given interest rate for longer. This provides some protection from the chance that rates fall over the CD term. Of course, there’s also a chance that interest rates rise and you miss out. Again, there’s always a tradeoff.

(A financial advisor can help you respond to interest rate fluctuations and the impact they have on markets.)

What About Other Risks?

Principal fluctuation isn’t the only risk investors face. In some cases, it may not even be the most significant, particularly if it’s managed with a diversified portfolio and an asset allocation aligned with your risk tolerance.

Some of those other risks that specifically affect interest-bearing investments include:

Reinvestment risk: As we just discussed, if rates fall you’ll have to invest into lower yielding securities.
Interest rate risk: This relates to the way that some fixed-interest securities may fluctuate in price when interest rates move. For example, although the original principal is guaranteed to be repaid at maturity, the price of a fixed-rate bond rises when interest rates fall, but falls when interest rates rise.
Inflation: Over time, inflation erodes purchasing power. Your investments need to keep up with inflation or the real value of your money will fall, even if the nominal value increases. For example, if you invested $1,000 in a CD paying 4% you would have $1,040 a year later. If inflation was 5% over that same period, you’d have to spend $1,050 in order to buy what the $1,000 would have bought the previous year. You lost $10 of purchasing power even though your money grew.

These risks and others are present even if you invest in “safe” instruments.

I point this out because these risks can sometimes do more damage than the volatility you might face in a slightly more aggressive, diversified portfolio. Many retirees would struggle to sustain income through retirement if they invested only in assets with no risk. If you haven’t yet assessed whether your plan can support that approach, making this evaluation should be your next step.

Am I telling you to go out and buy a bunch of stocks? Absolutely not. I don’t know you, your situation, goals, timeline, risk tolerance or any other information I would need to make that recommendation. But I do think it would be worthwhile to explore how you could reframe your approach to investing to get a better outcome. Even a small nudge to a slightly more aggressive (but still very conservative) asset allocation could make a big difference.

(And for a more in-depth analysis of your investment portfolio and overall financial situation, speak with a fiduciary advisor.)

Bottom Line

I’m assuming that you are a very conservative and risk-averse investor. If so, that’s perfectly fine. It’s better to be honest with yourself and invest in a way that fits your personal preferences rather than taking on more risk than you’re comfortable with. The tradeoff, however, is that your returns will depend heavily on the interest rates available at the time. If you can accept a bit of volatility, a conservative but diversified mix of investments may offer stronger long-term results

Tips for Investing

A financial advisor can help you invest according to your goals, including retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Markets rise and fall, sometimes sharply, but letting fear or excitement drive investment decisions often leads to selling low and buying high. Staying disciplined means following a long-term plan even during volatility. Many investors find it helpful to set rules, including only rebalancing at scheduled intervals, so they aren’t tempted to react impulsively. Patience and consistency generally work better than chasing short-term gains or fleeing after losses.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.