Q: Do you know a good bank that will give me 3 or 4 percent interest? When I ask people they tell me that savings accounts pay less than 1 percent now. I just got a million dollars, and would love to live on interest of 3 or 4 percent. Thanks for your help -- I'm new to this.
A: Unfortunately, the days of earning 3 to 4 percent interest on a guaranteed deposit account are behind us. If you find a deposit rate that high, it is likely to be part of some special promotion that won't last very long. Actually, the first thing to do if you see a rate that high is to check if the bank is listed among the insured banks on the FDIC website. Often, when you see a rate that is much higher than the national average, it is likely to be a type of account that involves more risk, or even might be an out-and-out scam. In your eagerness to earn a higher rate, don't confuse guaranteed and non-guaranteed accounts.
Within the realm of guaranteed accounts, probably the best thing you could do right now is to look for a five-year CD with a competitive rate. Since you mention wanting to live off income rather than principal, it shouldn't be a problem for you to lock up the money in a CD, and long-term CDs pay more than savings or money market rates. According the FDIC, the national average for five-year CD rates recently dropped below 1 percent, but if you shop around you should be able to find one with a rate almost twice as high.
As a way to hedge your CD selection, try to find a five-year CD with a relatively mild penalty for early withdrawal. That way you won't have to stay locked into today's low rates for the full five years if rates start to rise in the next few years.
Before you commit the full million dollars, there is one more thing you need to think about, and that's inflation. A CD won't do anything to keep you ahead of inflation if you are spending the income - and at today's low rates, it wouldn't be much help against inflation even if you weren't. If you plan on living off of this money for a long period of time -- say, more than 10 years -- you might consider diversifying by putting a small portion of it into stocks. This would give you a growth component to help fight against inflation. This would mean accepting the risk of possible losses in that portion of the portfolio, but then again, losing out to inflation is also a form of risk.
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