The Federal Reserve has kept interest rates near zero since December 2008, hurting savers who have become accustomed to savings accounts paying next to nothing. Speculation is rampant over when the Federal Reserve might raise rates again: later this year? 2016?
For seniors and others dependent on fixed income, this low interest rate environment has left them with few choices: spend less, work longer, or take more risk with their investments, none of which is an ideal solution.
There is one other option that does not require the Fed to raise rates: a charitable gift annuity.
A charitable gift annuity (CGA) is a contractual arrangement between a donor and a charity. The donor makes a gift to the charity – generally cash or appreciated stock – and, in return, the charity promises an income stream to the donor for life. The donor gets a charitable income tax deduction and, depending on the asset used to fund the CGA, a portion of the income stream may be favorably taxed. When the donor passes away, the income stream ends, and the charity gets to use whatever is left for its mission.
Most charities that issue CGAs follow a uniform table of annuity rates published by the American Council on Gift Annuities. The older you are, the higher your annuity rate.
And that’s why CGAs can help seniors increase their income. Let’s take the example of a 72-year old who has cash savings at the bank of $50,000 earning 0.05%. After one year, that savings account will have paid a measly $25 interest.
Compare that with a charitable gift annuity currently paying a rate of 5.4% for someone age 72. Income for that gift annuity is $2,700 per year – over 100 times more income than the bank savings account.
As with any charitable gift arrangement, there are trade-offs. Once you establish the gift annuity, your decision is irrevocable and you lose access to the principal amount, unlike with the savings account. Also, the income does not increase over time to keep pace with inflation.
Still, for those caught in the low-income stranglehold of today’s interest rates, a charitable gift annuity is one way to raise rates yourself without having to wait for the Fed to do it for you.
And you get to make a difference in the world at the same time.
Questions or comments? Contact me on Twitter @juanros.