Interest rates are pretty high these days. That’s great for retirees who need their savings to generate income — but don’t assume that just because rates are high you’re automatically getting them. The going rate at many banks and brokerage houses is abysmally low.

The national average interest rate paid on savings is 0.46% (as of April 15, 2024), according to the Federal Deposit Insurance Corporation (FDIC). Considering the Effective Federal Funds Rate is 5.33% (as of May 2024), if you have money in a savings account, there’s a good chance you could be earning a lot more interest somewhere else.

There’s good news: If you’re among those receiving lower interest on your savings, it’s a problem that’s easy to remedy. In most instances, it only takes a few clicks online or a few taps on your phone. It’s easy to secure an interest rate of around 5% these days. Money market funds, certificates of deposit (CDs) and U.S. Treasuries are all low-risk ways of generating a nice return.

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How much you stand to gain by switching

In most instances, your financial institution isn’t going to do it for you. The time invested to move your cash around is well worth it. If you’re earning the national average on $100,000 of savings, you’re being paid $460 a year. By switching to one of the many investments that offer a 5% yield, you could put an extra $4,540 in your pocket this year.

So which instrument should you use? That depends on you and your situation.

Option No. 1: Money market funds

Money market mutual funds (not to be confused with a bank money market account, which is different) are great for providing liquidity, as they should be easy to get in and out of. However, there are new rules that create liquidity fees and redemption gates in place when investors want to cash out during “times of uncertainty.” That’s a vague description to be sure, but you can imagine an instance where we’re in a deep financial crisis and everyone is trying to liquidate their money market funds. Fees and gates mean you could either be charged to access your own money or limited in how much you can withdraw. It’s at the discretion of the fund’s board of directors.

The chances this ever applies to you are slim, but most people aren’t aware of this risk, and you should be if you own a money market fund.

Option No. 2: CDs

CDs don’t have the immediate liquidity of money market funds. In fact, there’s typically a penalty to access your money early. So you’ll want to be thoughtful about how much money you need for expenses and when you’ll need it before buying a CD. However, they come with a wonderful feature that money market funds don’t. CDs (like other deposit accounts) are insured by the FDIC up to $250,000. That means in the event of a bank failure, you’re still covered.

Option No. 3: Treasury bills and notes

Short-term U.S. Treasury bills (issued for terms of four weeks to one year) and notes (issued for terms of two, three, five, seven and 10 years) are also attractive. The U.S. Treasury securities market is the largest and most liquid government securities market in the world. You shouldn’t have any trouble buying or selling your Treasuries whenever you want. And the U.S. government is generally considered an ultra-low-risk debtor. However, the recurring threats of government shutdowns and general political divisiveness do make these a shade riskier than they may have been in the past.

Outlier risks aside, Treasuries, money market funds and CDs are all conservative options to potentially increase what you’re earning on your cash. Cash and cash-like instruments are an essential part of your retirement portfolio. They can be used to cover your expenses and as an emergency fund. But having too much cash on hand comes with its own price. Cash typically lags behind the returns of riskier assets. And the purchasing power of the dollar has steadily eroded over time thanks to inflation.

Cash is an important part of an overall investment allocation. But for many investors, it should be a small part. At SAM, we generate income using a variety of different securities. Short-term Treasuries are our favorite cash proxy. But we’re finding higher cash yields in real estate investment trusts (REITs), closed-end funds, and merger arbitrage opportunities, just to name a few. We also use cash tactically — we like to keep dry powder on hand to deploy opportunistically.

If you haven’t already, you may want to work with a professional to figure out exactly how much cash you should be holding. Then make sure you’re getting paid fairly for the cash you’re sitting on!

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.