If you are trying to live off income from a savings account and have been waiting for bank rates to recover, then 2013 has been a frustrating year. While mortgage rates and some other types of interest rates showed some signs of life in 2013, savings account and money market rates remained mired at or near all-time lows. Worse, economic setbacks in the second half of the year seem to indicate that bank rates won't get off to a better start in 2014.
For some, it may be time to consider alternative income strategies. Here are three options that might suit you if you are investing for long-term income, meaning you aren't dependent on immediate principal liquidity and can ride out some market value fluctuations.
1. 20-year Treasury bonds
As mentioned above, not all interest rates have been completely dead in the water in 2013. In particular, long-term interest rates have moved higher. This has widened the spread between long-term and short-term rates, making long rates worth considering.
Look at the specifics: At the beginning of the year, 20-year Treasuries were yielding 2.47 percent and one-year Treasuries were yielding 0.16 percent, for a spread of 2.31 percentage points. By the end of the third quarter, 20-year Treasury yields had climbed to 3.53 percent while one-year yields had slipped to 0.12 percent, widening the spread to 3.41 percentage points. This is much wider than the 2 percentage point spread these yields have averaged over the past 20 years, making longer-term Treasuries more attractive to income-oriented investors.The downside to this is that if interest rates rise, the value of long bonds will fall. However, if you are trying to stabilize income rather than market value and the idea of earning 3.5 percent per year is appealing, then this might be a good time to look at 20-year Treasuries. Why the 20-year maturity point? Moving out from 10 years to 20 years picks you up 72 basis points worth of yield right now. Moving out another 10 years to 30-year bonds only picks you up an additional 26 basis points. That makes 20 years seem like a sweet spot on the yield curve.