Kyle Rolek, Retirement Planning Specialist
Savings Account Interest Rates: Shopping Around is Starting to Pay Off
According to bankrate.com, the national average savings account interest rate is still only 0.1% as of June 2022.
However, Federal Reserve interest rate increases have started nudging saving account interest rates higher, particularly at some of the most well-known online banks.
Before continuing, some caveats.
This article will use well-known online banks as examples to compare their savings account interest rates vs. average rates at the big national branch-network banks.
Three specific online banks are mentioned and linked at the end of this article primarily due to their competitive offerings and brand recognition. There are many other options to choose from too.
However, because the role of the savings account within overall retirement planning is safety of principal and easy access for ongoing expenses, it's generally best to only use banks that are FDIC-insured, large, experienced, and have good reputations. Basically, don't go for the no-name bank that pays a higher interest rate. Too-good-to-be-true often is. If the rate is a lot higher than Ally, Capital One, or Marcus, there's likely either more risk with whatever the bank is doing with your deposit to pay that higher rate, or there's some other catch.
Second, online banks aren't the only banks currently paying 1% or higher. While well-known online banks are used as examples in this article, you may find similar offers through your local bank or credit union. The odds of this increases if you have a long-standing relationship and use several banking products.
The primary point of this article isn't to suggest online banks are better than big branch-network banks, it's to encourage the following steps:
1 - Check your savings account statement to see if your savings account is still paying 0.01% or close. (checking accounts for day-to-day use may be expected to pay little or no interest, but savings accounts kept aside as an "emergency fund" that aren't needed for day-to-day expenses should earn higher interest).
2 - If your savings account is paying 0.01% or close, consider shopping around for better options (some useful links below at the end of the article).
3 - You can use Ally, Capital One, or Marcus (and others) to benchmark what your savings account should be paying. Unlike many big branch-network banks, these banks transparently publish interest rates on very user-friendly websites. If for nothing else, you can use their websites to see if your current bank is giving you a reasonable deal.
Big Branch-Network Banks
Many of the largest, most well-known national banks with branch networks throughout the country still pay interest rates on savings account of 0.01% or less.
Because these banks often have long-standing, deep client relationships involving multiple products such as checking accounts, credit cards, and mortgages, their deposit base tends to be very sticky.
As a result, they've historically increased interest rates much slower than online competitors whose value proposition is focused primarily on the interest rate itself.
FDIC-insured, well-known online banks such as Ally, Capital One, and Marcus are currently paying interest rates on fully-liquid savings accounts of 1% or higher with no minimums, no fees, and FDIC-insurance for up to $250k per account registration type.
At least currently, a primary way these online banks attract new customers is by offering higher-interest savings account options than big branch-network banks. Because higher interest rates are the majority of their value proposition, these banks are generally much quicker to raise interest rates than big branch-network banks.
As a result, as the federal reserve continues raising interest rates this year, the interest rates paid on savings account at the online banks mentioned above may continue to increase while the big branch-network banks keep rates close to 0.01% for as long as possible.
At 1%, $10,000 in a savings account would earn $100 for the year. Over a 30-year period, the interest earned would be about $3,000 (omitting compounding due to deposits and withdrawals). Yes, very low and will likely lose significant value to inflation over time. But better than 0.01%, very possible to increase, and long-term growth isn't the purpose of the savings account within the comprehensive retirement plan.
At 0.01%, $10,000 in a savings account would earn $1 for the year. Over a 30-year period, the interest earned would be about $30. 1% isn't good, 0.01% is even worse.
Some may be asking if the difference between 1% vs. 0.1% is really worth the effort to make any updates. Understandable.
As rates go up though, the gap between competitive savings account interest rates vs. big branch-network bank rates may continue to grow.
Today as of June 2022, the gap is only about 1% (typical FDIC-insured online bank) vs. 0.01% (typical big branch-network bank). As the federal reserve continues raising interest rates this year, it's possible the gap will grow to 2% or 3% (typical online bank) vs. 0.01% (typical branch-network bank). If rates go up, once you have the savings account, you'll automatically receive the higher rate.
Depending on how long it takes inflation to cool or how long it takes the Fed to begin prioritizing recession risk over inflation and either discontinuing or reversing rate hikes as a result, the interest rate gap between savings accounts paying competitive interest vs. big branch-network banks could grow larger than the approximately 1% it sits at today.
Over a long-time period, the difference in interest paid by savings accounts paying competitive interest vs. big branch-network banks can add up to be meaningful.
If you divide the projected increase in interest earned over a long time period by the time it takes to setup a higher interest savings account (usually minutes), you'll likely find it's a good investment of time.
Below are links to the websites for three specific online banks mentioned in this article. There are many other options to choose from too, potentially including local banks. It's starting to pay again to shop around for savings account interest rates.
As stated at the beginning, because the role of the savings account within overall retirement planning is stability and liquidity for expenses that pop-up, it's generally best to only use banks that are FDIC-insured, large, experienced, and have good reputations. Avoid the no-name bank that pays a higher interest rate because there's probably a catch either in liquidity or risk.
Ally Bank: https://www.ally.com/bank/online-savings-account/
Capital One: https://www.capitalone.com/bank/savings-accounts/online-performance-savings-account/
Marcus by Goldman Sachs: https://www.marcus.com/us/en/savings/high-yield-savings#rate
Want To Discuss This Individually?
1 - For clients: Call or email me any time as always.
2 - For non-clients: Complete the form on the website to request a retirement planning consultation: www.rolekretirement.com
This is article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor. See other disclosure here: Disclosures