The Real Cost of Safe Money

Altoona, PA – A fellow Investor Coach shared a story about a Senior Citizen on a radio talk show the other day, lamenting about the ultra-low CD rates the banks are now paying. He had recently spent an entire afternoon visiting one bank after another, trying to eke out a few extra pennies to help with his retirement. As you can imagine, he wasn’t very happy about this, and unfortunately, he didn’t know where else to turn. Such is the dilemma of many Senior Citizens today. So, I decided to do a little research and was absolutely shocked at what I found out. It was “the Bank’s Dirty Little Secret.”  According to Market Rates Insight, a research firm, the national average that banks paid to savers in 2015 was just 16 cents for each dollar of total interest that the banks earned. This was the lowest pay-out rate recorded since records were kept.

Now, let’s see how this affects savers in the real world:

Suppose you have $250,000 that you want to rollover from your 401(k) to a bank CD. Like the radio caller above, you want the highest CD rate you can find. Well, a check of bank rates online this week revealed that, nationally, current 5-year CD rates ranged from 1.00% to 1.80% APY. The national average was listed as 1.14%.
So, let’s say that you found and locked into that “high” 1.8% five-year CD with your $250,000 rollover. Your annual interest was going to be $4,500. Not great, but at least your money was “safe.”

Remember though, that on average last year, banks paid just 16 cents out of each $1 of interest that they earned. If you do the math, that means that, while the bank pays you your $4,500, the bank itself pockets $23,625. But remember also, your money is “safe.”
Of course, when you receive your quarterly bank statement, that $23,625 is disclosed to you right there on the first page, right? Wait a minute…you don’t see it? Maybe it was on page 2…not there? How about in the small print on the last page of your statement…not there either? You know what? You won’t see the bank’s take of $23,625 BECAUSE IT IS NEVER DISCLOSED and, unless the laws change, it never will be. This is not an indictment on banks. Many folks never really consider the repercussions on their choices, the cost of safety in this example has a real impact on the bottom line.
Financial Abundance consciously and deliberately registered as a Registered Investment Advisor (fee-only), because we believe the financial industry should disclose (all) fees regularly and directly to clients. You will always find our fees displayed prominently on your quarterly investment statements.