Saturday, February 9, 2008

Don’t Put Your Retirement Savings in One Bank!

Many people assume U.S. bank deposits are safe because they’re FDIC-insured. That is true up to a point, but more people than ever are going beyond that point and I’m afraid that not everyone understands the risks involved.

FDIC insurance for any one bank is limited to a maximum of $100,000 per account owner. That means if your bank goes under and you have less than $100,000 in all your accounts combined, the FDIC will make sure you get your money. If you have your IRA in a bank, it is insured separately up to $250,000. That’s a lot of money, and more than most of us have in the bank on any given day. But it is not nearly enough to live on for the rest of your life, so when you put your retirement savings in the bank, you need to think about it differently than the checking account you use to pay your bills. It is worth the trouble to make sure your life savings is insured.

Bank failures are rare — at least they have been in the United States during the 75 years since the FDIC was created. The mere presence of insurance makes bank failures unlikely because people don’t have to panic at the thought of the bank running out of cash.

Yet banks continue to fail. Two weeks ago, Douglass National Bank in Kansas City, Missouri, was shut down. Read the news about banks, and you may come away with the impression that bank managers are not the brightest people you will ever meet. You can’t count on your fingers the number of large corporations that have had multibillion dollar lines of credit from multiple banks for months after they were effectively bankrupt. Or look at Bank of America, already in distressing financial condition itself because of bad loans, spending an enormous sum last month to buy a failed lender that was thought to have the largest concentration of bad loans in the world. It’s important to remember that there are thousands and thousands of banks, and it’s mainly the banks that get themselves into trouble that get in the news. But as long as banking executives make bad decisions, there will be banks that fail. And in 2008, with the global financial system in crisis, it’s fair to expect that more than one or two banks in the United States will go under.

But you don’t have to lose any money from a bank failure. It’s really very simple to have all your bank deposits fully insured by the FDIC. Put them in more than one bank, making sure that each bank is on the FDIC’s list. This can be as simple as going into five, ten, or fifteen banks, if you have that much money to put in the bank, and buying a $100,000 certificate of deposit at each one.

Everyone should have at least two banks — it lets you continue spending money in the event that the bank has a problem. For most of us, it’s enough to have a checking account at one bank and a credit card issued by another bank. But when your savings start to spill over the $100,000 mark, and it’s money you can’t afford to lose, it’s time to move some of it to a second bank.