What Would You Do If You Had a Million Dollars?
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?
What About Investing?
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 to 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 cherry-picking 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 surefire way to underperform 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 you don’t have the temperament to ride out market waves, what should you do with your million-dollar windfall? The answer is a few online clicks away.
Which Banks Have the Best CD Rates?
Hundreds of banks offer CDs, and there’s fierce competition among them to offer the best rates. Use our MoneyRates CD rate-finder tool below to sort through the list to find a CD that fits your financial goals.
You Can Bank on Banks
Bank deposits are insured. So right away you know your worst-case scenario if you open a deposit account at a bank under the federal insurance limits. You can count on FDIC insurance to protect 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. Bank deposits are also easy-to-understand investments. In a day when the intricacies of investments like hedge funds, mortgage 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 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 an 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 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) 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
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.