If I Had A Million Dollars

Bank deposits are the best place to keep money safe and earn good rates of return
By Clark Schultz

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Hey, guess what? You just won the lottery. You paid your taxes and paid off all your debt. You have a million dollars to invest. What would you do?

Same As It Ever Was

The stock market has recovered since the Dow Jones Industrial Average went below 7,000. In fact, the Dow is halfway back to 10,000 and the panic of last year is slowly fading. Brokerage firms continue to beat the drum about buying opportunities, dollar-cost-averaging, historical returns, or anything else that might capture your business and your money.

If you are young and do not want to manage your own money, you can probably find a broker that will diversify your funds and try to outperform broad market indexes. They may even accomplish the task.

Yet, there is a growing segment of the population who want to manage their own money and after recording 40% or 50% declines in their retirement savings, would also like o avoid the volatility that is inherent in owning stocks and mutual funds.

Today, it was pointed out that General Motors (GM) stock is now trading at the same price as it did in 1933. I take that to mean that if you bought $10,000 worth of GM stock, it would be worth the same $10,000 today. So after 75 years you have only earned whatever dividends the stock paid out.

Are we cherrypicking a bad stock to set the example? I don’t think so. Many of the bluest of the blue chip stocks have had the same recent dismal performance. Some people can handle the ups-and-downs of the market. They cite the long-time historical performance numbers and they just ride out the bad years. 

But there are those of us who are emotionally-driven investors. We buy high and sell low because we are following the crowd. This is, of course, a sure-fire way to underfperform market indexes. If this describes you, then you should not be in the market with money that you are not emotionally prepared to lose.

So back to the question. If the you don’t have the temperment to ride out market waves, what should you do with your million dollar windfall? The answer is a few online clicks away.

You Can Bank on Banks

Bank deposits are insured. So right away you know your worse-case scenario if you open a deposit account at a bank under the federal insurance limits. You can count on FDIC insurance protecting your principal. You can also count on banks to pay interest regularly and to honor their interest rate.

In the case of a certificate of deposit this means a fixed interest rate until the maturity date. This is important when you compare bank deposits to some other fixed-income securities like corporate bonds, municipal bonds, or annuities.

These investments can be called early or even default on principal or interest payments. Banks deposit are also easy-to-understand investments. In a day when the intricacies of investments like hedge funds, mortgages securities, and real estate investment trusts are hard to comprehend, simplicity can be important.

Online is Easy

If you do hit that multi-million dollar lottery jackpot and decide to keep the money safe in bank accounts you will need to find more than one bank. FDIC insurance applies only to deposits up to $250,000. So it is very important to use some online resources to find banks outside your local area.

Lucky for you, savers can find dozens of banks on MoneyRates.com offering the very highest rates on money market accounts, CDs, savings accounts, and checking accounts. You don’t even have to leave your house to find the rate that works for you and open an account at a FDIC-insured bank.

Finding the Rates

If you took your fresh million dollars and spread it out among the banks with the best rates listed at MoneyRates.com on money market accounts, CDs, savings accounts, and checking accounts you could rest easy knowing that FDIC insurance will cover any banks that fail and your deposits are safe. This million-dollar portfolio should also have a higher yield than a million dollars in money funds, short-term bond funds, Treasury Bills, and most other fixed-income securities.

While the national average on bank rates may be lower, the highest rates on bank deposits (the banks you see on MoneyRates.com) consistently beat these other savings-oriented instruments. The reason is simple. The rates are not simply pegged to the interest rates set by the Federal Reserve or by the level of Treasury yields. 

Banks consider market conditions, but in the end they can do what they want. That’s why we still see bank rates at 3% or 4%, when other savings products like savings bonds and money funds are earning well below 1%. If all banks reacted only to the Fed, we would not see any good bank deals. We might not even see any rates today over 2%. Lucky for us, many banks do their own thing.

So if you do get that million dollars, consider the simple solution, bank deposit accounts with the best rates you can find. If you only spend the interest you earn, you will always be a millionaire.  

Frequently Asked Questions

Q: If I care more about safety than earning interest, what is the best place to park a million dollars so I can draw $40,000 a year from it?

A: There was a time when the answer to this would have been relatively simple – when interest rates were high enough for you to secure your principal and earn enough income to meet your withdrawal requirements. Now, the answer is a little more complicated.

Since safety is your first priority, one approach would be to put your money into FDIC-insured deposit accounts, spread out enough so that you will remain under the FDIC insurance limit. That limit is $250,000 per depositor, per bank, though you can qualify for more coverage if some of the money is in an IRA or a joint account with your spouse.

In terms of deposit accounts, the right approach could involve some combination of CDs for the highest interest rates, plus savings accounts or money market accounts to meet your liquidity needs. At $40,000 a year, you will be withdrawing 4 percent a year from your account. 5-year CD rates average only 1.63 percent – and even the best CD rates these days won’t get you close to 4 percent – which is why you might need a savings or money market account for liquidity.

Since CD rates, savings account rates, and money market rates are all well below 4 percent, one thing you have to recognize is that while you can keep your principal safe, by withdrawing $40,000 a year you will be drawing that principal down over time. So, you need to plan for how long you need to make that money last – and if you are planning for the long-term, don’t forget to account for what inflation will do to the value of that $40,000 over time.

Q: Where would I find the best bank interest rates for large deposits? By large I mean a million dollars or more.

A: Trying to decide where to deposit a million dollars is a nice problem to have, but the answer is not all that simple.

Under normal circumstances, banks would be quite eager to attract large deposits, but these are not normal circumstances. The persistently sluggish economy has meant a lackluster recovery in the lending business; weak lending means that banks have fewer ways to put deposits to work profitably. So, banks are not making much of an effort to attract deposits.

This is reflected in the low level of interest rates on savings accounts, money market accounts, and CDs in general, and in particular in the diminishing premium banks are willing to pay for large deposits. Two years ago, money market rates for jumbo deposits ($100,000 or greater) were 21 basis points higher than rates for ordinary deposits, according to national averages posted by the Federal Deposit Insurance Corporation (FDIC). Now, that premium for jumbo deposits has been slashed by more than half, to 10 basis points.

So, don’t expect to see any especially enticing offers for large deposits advertised. Your best bet is to shop MoneyRates.com for the best rates you can find for general deposits, and then try to negotiate a little extra based on the size of your deposit.

Chances are this conversation will gain you an invitation to discuss investment products with a bank representative. This may be appropriate for your needs, but be mindful of any step-up in risk these entail, and also remember that investment products, even if offered by a bank, are not covered by FDIC insurance.

Finally, don’t forget that the FDIC insurance limit is $250,000 per depositor, per bank. You may find it best to spread your deposit out among different banks to stay within this limit.

About Author
Clark Schultz
Clark Schultz joins MoneyRates.com as a writer who contributes articles on the topics of personal finance, savings and the economy to major financial websites. His online content has been cited in The New York Times, Wall Street Journal, Barron’s and other major publications as a good resource for savers. He resides in University City, Missouri with his wife and children.