Where Should Retirees Park Their Cash? Safety + High Interest
With all that is going on in the world, there is some good news: You can finally earn interest on your cash savings!
Today, we are going to discuss where you can park your safe money to earn more substantial interest and what you need to avoid.
Where Should Retirees Park Their Cash?
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SPEAKERS
Alex Okugawa 0:00
With all that is going on in the world, there is finally some good news, you can earn some interest on your cash in the bank. Today we’re going to discuss where you can park your cash to earn more substantial interest. And what you need to avoid. Stay tuned.
Hey there, it’s Alex and Anthony from One Degree Advisors, we are certified financial planners that help folks with all things tax retirement and investment-related Anthony for many years, you couldn’t earn anything on your cash in the bank. So what that meant is, it really didn’t matter where you kept your cash. But now more than ever, it does matter. And so today we’re going to talk about the different types of cash vehicles available for people we’re going to talk about, specifically, what is cash savings for it needs to have a specific purpose. And then the last thing here is things to avoid, because I know it sounds great cash in the bank, it’s earning a rate risk-free, awesome. But people need to be aware of specific things
Anthony Saffer 1:00
That’s right and sitting by idly because times have changed and interest is higher. And that’s a good thing. But just sitting and waiting and the current account that you’re in may not be the right choice, I equated a lot to like the price of gasoline. It’s like when oil goes up, gas stations are quick to increase that price. However, when it goes in the other direction and oil prices come down. A lot of gas stations are very slow to decrease it, we see that with banks where some are paying good interest. But a lot of them are very slow to increase
Alex Okugawa 1:28
and rapidly increasing interest rates have hurt the stock and bond market so far this year. So based on the current environment, you might as well take advantage of some of these characteristics, and have your cash savings working for you. So let’s look at where to make your cash savings work for you and the things you need to avoid. So let’s talk about what types of cash vehicles, at least most of them are available for folks and the things that they should be aware of.
Anthony Saffer 1:54
So let’s first look at just a typical savings account. Right. And in some cases, they’re called high-yield savings accounts. There are the banks that are out there, like recent research, I looked at Bank of America’s website, still point zero 1%, a lot of the big banks are very slow to increase. However, there are high-yield savings accounts out there, especially with some of the online banks like the Ally’s and Capital One. Ally, the last check that I looked at was 2.35%. So if you have $10,000 in savings, the difference is $1 at Bank of America and interest over a year versus $235 at Ally
Alex Okugawa 2:30
Some local credit unions seem to have better rates than traditional big banks. But even then you still have to look at their rates in usually you can see if they’ve been keeping up with rising interest rates or not.
Anthony Saffer 2:44
That’s right. And so the next thing we’ll look at are certificates of deposit. And this is generally where there’s a term that’s associated with saving that money, it could be six months, up to five years, potentially, they’re often at higher interest rate because you are committing that money over to the bank for a certain period of time. So knowing your timeline can be really important. And the thing
Alex Okugawa 3:07
is with CDs is I know some people get the concern of well, you know if I put money in a CD, it’ll be locked up for a period of time. And in some cases, that is true. But that doesn’t mean you can’t necessarily get that money out, you can you just may pay a little bit of a penalty. And given that we’ve been in such a historically low-interest rate environment and you haven’t earned anything on your cash in a really long time. Even if you put your money in a CD, and let’s say you had to pull it back out and you paid a little bit of a penalty on that interest, it may not be the end of the world, right, it’s still better than just leaving it in something that’s earning point zero 1%
Anthony Saffer 3:45
You would want to check the penalty to see and obviously, you don’t want to go in like with the intention of withholding it exactly. And there are penalty-free CD so if you really do need more flexibility, you can get one generally at a little bit of a lower rate but it does give you that flexibility to take the money out. And the other benefit of that is if interest rates go up with a penalty-free CD you can take it out reinvest it and
Alex Okugawa 4:09
I’ve been asked a lot this year about I bonds because those rates are so high again there are things to know about I bonds there’s like that the base there’s the base rate plus the inflation rate, there are things to know about I bonds specifically how that rate is calculated when it’s adjusted, how long you should realistically plan to hold I bonds we recently posted a video which we’ll post above has some great information in there for folks
Anthony Saffer 4:33
that’s right and probably the biggest thing to remember is that there’s a one-year minimum holding period on I bonds and they can work quite well also talking about just treasury bonds so you can get very good yields on even a one-year treasury bond which is issued by the US government so it’s considered very safe because it’s backed by the credit risk of the government. Get that good rate you can buy it through Treasury direct just like I bonds or you can even buy them through bro Okay,
Alex Okugawa 5:00
so there are a lot of options out there, right? The savings account money, market, CDs, treasuries, I bonds, all those good things. But I think it’s important for us to just quickly go over, like, what is cash savings for there needs to be a purpose for it.
Anthony Saffer 5:15
That’s right. This is not a substitute for your growth investments, you know, your stocks or even bonds that that play towards you like your retirement accounts, cash savings, you want to be purposeful with it, what’s it for an emergency reserve is a purpose. So having that, you know, three to six months of expenses, whatever you detain, whatever you deem to be important, is a purpose in itself. Knowing Okay, when do I need to access it potentially, and what for that’s going to determine where that money is going to go? You know, working with some clients, they may have a goal of like, hey, I need this money in a year for a kitchen remodel. Okay, well, now that timeframe plays into where you’re going to invest the money. Yeah, exactly.
Alex Okugawa 5:54
And there can be different building blocks of this, right? So you can have like your cash, and then like your second layer of cash reserves, and then you can have your growth investments and knowing where your expenses fit in all these different building blocks. And the time horizon is really important. So the last thing here is, again, what to avoid. So again, it sounds great cash in the bank, no risk, and finally earning something. But there are things that people need to be aware of, and things to avoid.
Anthony Saffer 6:20
Number one is just that no interest trap. So it’s a lot of those big banks that are really paying nothing. People have their money sitting there, that’s where they do their banking, and understanding the convenience of in the relationship that you may have with that bank can be great. But maybe siphoning off a good chunk of your savings to a bank that pays a higher yield. Being proactive with that can be very important. And then establishing a connection where you can transfer money back and forth, can be great. Number two would just be the lockups, you know. So if you’re looking at a certain term for CDs, that can make sense as long as it fits your timeframe, and your objectives. But going into something that maybe is like an annuity, a fixed annuity that’s paying now at a decent rate of time, but it locks up your money for five years, and has a substantial penalty, that would be something you’d want to avoid if it doesn’t meet your objective. And then number three would just be using cash as a substitute for your stocks, bonds, real estate, those growth type of investments that are really meant for the long term, it’s easy to get frustrated and say stocks are down, even bonds are down. So I’m gonna go in, I’m gonna get that safe 4% or whatever it may be, but we have to understand what the purpose is for and we published a video on keep saving, keep contributing, don’t stop buying, don’t stop buying. We’ll post that as well. So you want to know what the objective is? Absolutely.
Alex Okugawa 7:41
And now let us know what you think. Are you paying attention to your cash in the bank? And do you know what you’re earning on your idle cash? Let us know your thoughts in the comments down below. And if you enjoyed today’s video, please like and subscribe for more. Thanks for watching.
Transcribed by https://otter.ai
The One Degree Blog
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This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures: https://onedegreeadvisors.com/solutions/#disclosures
