Most seniors rely on Social Security and possibly a company pension for their basic retirement income. If they were disciplined and fortunate enough to have other retirement savings, they were able lo rely on them to supply some extra interest income, which may have allowed them to enjoy a few extra luxuries. If they had part of their nest egg invested in the stock market or mutual funds, they may have lost a substantial portion of their retirement savings due to the the current recession. Hopefully they had some safe investments such as bank certificates of deposit or CDs. Due to the recession, interest rates paid on savings are very low, so extra effort is needed to obtain the highest interest rate which can be obtained safely.
An individual’s deposits in a bank were previously insured against loss by the Federal Deposit Insurance Corporation for a total of $100,000 in each bank. According to the FDIC website, the limit has recently been raised to $250,000, which was designed to raise the public level of confidence in the banking system.
Some People Don’t Trust the Government or the Banks
Of course, there are people who don’t trust the federal government or the banks to safeguard their money. To these people, I say, what other logical choice do you have? If you keep your money at home, it could be stolen or destroyed by fire. Burying it in the backyard is even more risky. With the FDIC, your money is “backed by the full faith and credit of the United States Government.” In the event of a total collapse of the government, your money would be worthless anyway, so I choose to place my faith in the government, and receive as much interest as I can in deposits insured by FDIC.
FDIC Article is Very Informative to Prospective CD Buyers
Before buying bank CDs, it would be helpful to read the FDIC article, “Certificates of Deposits: Tips for Savers.” It details important information you need to know.
Some banks are not insured by FDIC. Quoting the FDIC webpage, “That is why you should verify that the institution is FDIC-insured. You can use our Bank Find service at www2.fdic.gov/idasp/main_bankfind.asp or by calling the FDIC toll-free at 1(877) 275-3342; for the hearing impaired call 1(800) 925-4618 (8 a.m. to 8 p.m. Eastern Time, Monday through Friday).”
If You Hesitate to Buy Long Term CDs, You May Need to Rethink Your Position
Some people hesitate to buy CDs. They don’t wish to tie up their money for long periods, but you can still have access to all your money if you are willing to accept an interest penalty. Unless there is a good prospect of much higher interest rates soon, I feel the best policy is to buy the CD paying the highest rate of interest, which would probably be a 5 year CD.
Even if higher interest rates are anticipated, 5 year CDs could still be sensible. Quite often, CDs can be purchased which allow 1 or 2 interest rate ‘bumps’ during the term of the CD. A ‘bump’ allows the interest rate to be adjusted upward by the CD owner, to match a new higher rate. The early withdrawal penalty on a 5 year CD is usually 6 months interest. Therefore, if the annual interest rate is 2.5% and you withdraw the money in one year; that would be the equivalent of drawing 1.25% for the year. Even with the penalty, 1.25% interest is 2 1/2 times the current usual interest of .50% paid on a 1 year CD.
You may be leery of buying a 5 year CD because interest rates may rise. If the new rate was considerably higher, It could be profitable to accept the 6 month penalty, withdraw the funds and buy a new CD at the higher rate of interest. In the meantime, you would have received a higher rate on the 5 year CD than you would have on the 1 year CD, which would reduce the effect of the penalty.
If You Withdraw Funds from a 5 Year CD in Less Than 6 Months You May Forfeit Part of the Principal.
It is not advisable to put money in a CD that you anticipate needing in less than a year. If the early withdrawal penalty is 6 months interest and you withdraw the principal in less than 6 months, the bank will penalize you the full 6 months interest and you will forfeit enough of the principal to make up the difference.
Today, October 20, 2010, a 1 year CD at Chase Bank, pays .50% annual interest. A 5 year CD pays 1.75% interest. A lot of people do not receive the highest available interest, which can often be found at a small local bank. A small bank in my hometown is paying 2.50% interest for a 5 year CD. Some people may be afraid to invest in CDs from a bank that pays higher than average interest because that might be an indication the bank is in a weakened financial condition. My philosophy is, what does it matter as long as you do not exceed the $250,000 FDIC limit. Evidently a lot of people are willing to accept the lower rate of interest offered by the larger banks. Be sure to check the FDIC rules regarding the deposit insurance.
Banks are Now Calling .60% a High Rate of Interest
I was really amused by by the advertising hyperbole in a Bank of America ad. Quoting the ad, “Take advantage of this special offer and earn a high interest rate on your funds.” They are describing a 12 month CD with a minimum balance of $10,000. The so-called “high interest rate” is .60% annual interest. It appears advertising copy writers are not easily embarrassed. As a child during the 1930s, I remember a bank savings account paid a full 1% interest, even during the ‘great depression.’
Even in these days of low interest rates, you may be able to improve your interest return considerably by revising your investment strategy.
Disclaimer: I am not an investment counselor or financial adviser. This article is not meant to be taken as professional advice. It is written for informational purposes only and is correct to the best of my knowledge, but I cannot guarantee the accuracy. I do not accept any responsibility for the results of actions on your part, taken or not taken as a result of reading this article. All actions are taken at your own risk. I am just relating my own opinions and experiences and my opinions could be wrong.
Chase Bank/”Certificates of Deposit”/Chase Bank
FDIC/’Certificates of Deposit: Tips for Savers”/Federal Deposit Insurance Corporation
Bank of America/”Savings and CD Accounts”/Bank of America