Wednesday, December 30, 2009

Don't exceed FDIC limits

One day each week, we answer a question from a reader. We'd love to have your questions. Please post in the comments section.

QUESTION: I am in my 70s and have significant savings of $625,000. I have it all at one bank. Is that dangerous? Should I spread that out? What if the bank fails?

ANSWER from Dan Danford: Dangerous probably isn't the right word. It's not prudent to exceed the FDIC limits because, if the bank fails, you are at risk for losing any amounts over the limit. So, most advisors would recommend that you split this money among several different insured banks. A good advisor could help you do this within one insured brokerage account. We have a number of clients who own multiple FDIC-insured CDs within the same account.

The bigger question, and the one you didn't ask, is whether having significant amounts in bank deposits makes any sense at all. I know what you are gong to say; you are too old to take any risks with your money. My answer to that question is that the biggest risk facing retired folks today is that they'll outlive their savings. Inflation is a continuing force, and bank deposits don't keep pace with inflation. Simply, a new car's worth of money today won't buy a new car ten years from now, even with the banker's interest added in. Or, at least, it never has in the past.

Unless you have health issues I don't know about, you could easily live another fifteen to twenty years. The investment approach you are using leaves you exposed to the biggest risk of all. And the FDIC won't help you with this one.

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