$100,000 in Cash Quietly Loses About $3,000 a Year to Inflation. Here’s Where Retirees Are Parking It Instead

No matter who you are, or how much money you have, there is always the hope that your traditional savings balance will never drop. It should go without saying that seeing a consistent set of numbers every time you turn on the computer or open an app in the morning provides a certain level of comfort that is hard to ignore.

Consider a 3% inflation rate and $100,000 in cash parked in a near-zero interest account that is losing roughly $3,000 over the course of a year in purchasing power. A retiree might still see a $100,000 every morning, but what they are not seeing is that the groceries they need to buy or the healthcare they need to pay for has gotten more expensive while the balance in their account hasn’t grown.

Over the course of a decade, the loss of value for the dollar can be substantial, and any retiree who is holding $300,000 in a traditional savings account earning a mere 0.5% in interest while losing 3% in inflation is actually losing $7,000 in real purchasing power over the same time period.

Why Retirees Hold Too Much in Low-Yield Accounts

There is no question that trapping cash in one place can be a psychological move, and retirees who have spent decades building up any kind of sizable cash pile will be reluctant to put it anywhere it would immediately be at risk. On the plus side, cash gives you a level of immediate liquidity you can’t find with other investment strategies, which is important to people who have to pay fixed monthly expenses and don’t have a regular paycheck coming through anymore.

Another benefit is that with cash, you don’t feel the negative effects of inflation as much as you would with a market decline. Say you have a portfolio that loses 15% in one year, which is a visible and notable loss that is likely to change and influence spending habits. The same isn’t true for a savings account that loses 3% of its purchasing power while also earning 0.5% in interest, as it would basically look unchanged.

Ultimately, you can see the damage in a bank account, but the reality is that even with minimal damage, it’s still a retirement mistake, as holding too much cash for too long can add up to more noticeable losses over the years.

High-Yield Savings Account

The easiest place to start is with a high-yield savings account and for online banks that have the same kind of brick-and-mortar overhead, they can pass along these savings to customers in the form of more attractive interest rates. The accounts are FDIC-insured up to $250,000, you don’t have any lock-in periods, and you can access your money whenever you need it.

For retirees using a cash bucket to cover the first one to three years of living expenses, a high-yield savings account does exactly the same job as a traditional account, just with a better return. It’s an unfortunate truth that far too many retirees have yet to realize that there is a huge gap between the interest rates of a traditional savings account and how much inflation is eating away at the real value of the dollar.

Let’s say you have $100,000 sitting in cash and it’s earning 0.05% in interest. You could swap this money into a high-yield savings account that’s earning right around 4% in interest, which is a difference of $3,500 every single year. Think about what this money can do including going on vacations, paying bills, and being used for expenses, all without any additional risk.

Money Market Funds

Investors who look at money market funds should do so because they are best for anyone looking at a short-term opportunity to make some gains through things like Treasury bills or short-term agency securities. While they are not FDIC-insured, they are one of the lowest-risk investments a risk-averse investor can make. Better yet, consider a government money market fund, which holds only Treasury securities because the only real risk in this case is the US government itself.

Retirees who are holding cash in a brokerage account might see a money market fund as a smart way to allow their cash to sit idle while earning a small amount. The good news is that brokerage sweep accounts tend to pay well, at least equal to what a money market fund would earn, which should mean that any uninvested cash that is still sitting in a standard brokerage account is underperforming and sort of just sitting there doing nothing.

Short-Term CDs and Treasury Bills

Cash that is not needed immediately but will be required within one to three years is well suited to certificates of deposit or Treasury bills, both of which offer guaranteed rates for a defined period. CDs issued by FDIC-member banks lock in a fixed return for the term of the deposit, typically ranging from three months to several years. Treasury bills are short-term government securities available in terms from four weeks to one year, backed by the US government and exempt from state income tax.

Retirees who identify which portion of their cash will not be needed in the near term benefit from locking in a guaranteed rate, removing the uncertainty of fluctuating yields and ensuring the money is working at full capacity until it is needed as long as they are okay not needing the cash in the short-term.

A lesser-known but still strongly recommended option would be Treasury Inflation-Protected Securities, or TIPS as they are more commonly known. This option provides stronger protection against inflation, as both principal and interest payments are based on the Consumer Price Index, which means that some purchasing power is preserved and isn’t eroded like it would be in a regular checking account.

The Practical Takeaway

If you come away with anything, it should be a reminder that there is no one right answer for where a retiree should hold all of their cash. If a retiree is someone who thinks they might need cash in a hurry, a high-yield savings account is the most obvious answer. On the other hand, if there is cash that won’t be needed for a year or two, dropping it into a CD or Treasury bill with locked rates is an equally smart choice. There are even options for putting it into TIPS, where there won’t be any concerns about it not growing as fast as inflation. The worst-case scenario is to do nothing and just let the cash sit in a regular checking account and let it earn pennies on the dollar, which won’t help in the short term or the long term.

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