retirement

Get the Best Rates on Cash Holdings

Online banks give retirees the most bang for their buck on savings.

Savers trying to earn a decent yield on their cash have faced a long dry spell. The good news is that some banks are starting to open the tap.

As the Federal Reserve raises interest rates, yields on some savings and checking accounts and certificates of deposit are creeping higher. Online savings accounts, for example, now offer top yields of 1.3%, up from 1.05% before the Fed’s December rate hike, and one-year CDs offer yields as high as 1.5%, up from 1.31% in December, according to Bankrate.com.

That’s welcome news for seniors who have been earning next to nothing on their emergency funds and other cash holdings. But if you want to take advantage of rising yields, start shopping for a new account. “If you sit back and wait for your current bank to pass along better deposit yields, you’re going to be disappointed,” says Greg McBride, chief financial analyst at Bankrate.

The reason: Large brick-and-mortar banks generally aren’t feeling much pressure to attract new deposits with higher rates. Savers have been very risk-averse since the recession, and the big banks “have seen a lot of money flow through the doors,” McBride says. Many online banks and credit unions, however, are offering better deals.

If you’re looking for a savings account, check out online banks, where you’ll get “the most bang for your buck,” says Ken Tumin, editor of DepositAccounts.com. DollarSavingsDirect, an online division of Emigrant Bank, offers a savings account with a 1.3% yield, no fees and no minimum balance.

Read the Fine Print

Before opening an online savings account, check the minimum balance required to earn the advertised rate and ask about any monthly fees, Tumin says.

High-yield checking accounts sometimes pay more—but they come with more restrictions, often requiring that you receive electronic statements, use online bill pay or make a monthly direct deposit.

Northpointe Bank’s UltimateAccount offers a 5% yield on balances up to $10,000. To get that rate, you must make 15 or more monthly debit-card purchases, get electronic statements, and set up a direct deposit or automatic withdrawal of $100 or more. Although short-term CD rates are creeping up, the top one-year CD rate of 1.5% “might not sound too appealing when you get 1.3% from a savings account,” Tumin says.

A better CD strategy, Tumin says, is to look for longer-term CDs with mild early-withdrawal penalties. That way, if rates are slow to rise, you get the benefit of a higher rate, and if they climb quickly, you can cash out early with only a moderate penalty. Ally Bank, for example, offers a five-year CD with a 2.25% yield and an early-withdrawal penalty of 150 days of interest. Paying that penalty if you broke the CD after one year would give you an effective yield of about 1.3%—the same as the top rate for online savings accounts. And if you hang on to the CD, Tumin says, “you can keep earning the 2.25%, which is a lot better than 1.3%.”

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