May 04, 2023
As I explain in detail in The Ultimate Retirement Guide for 50+, once you are living off retirement income, my recommendation is to keep three to five years of living expenses in a money market account or a high-yielding savings account. That ensures that when we go through rocky times—bear markets, recessions, or unsure periods such as the current congressional disagreement over raising the debt ceiling—you can live off that money rather than make withdrawals from stock or bonds that may have lost value.
For those of you who have IRAs or regular taxable accounts at a brokerage firm, I want you to know that you have easy access to a type of savings account that can pay you high yields right now. I am talking about money market mutual funds (MMMFs) that are offered at every large brokerage. Many MMMFs currently yield 4% or more. You can own an MMMF in an IRA or any type of account. But I only want you to consider buying a specific type of MMMF.
Here's what you need to know to safely earn more on your cash savings.
Money markets invest in super short-term debt. Money markets come in two forms: money market deposit accounts (MMDAs) and money market mutual funds. Both are a form of “cash” holding. They are designed to never lose any value. That makes them a viable home for your emergency retirement savings.
Money market mutual funds are not the same as money market deposit accounts. A money market mutual fund is available at brokerages. A money market deposit account is sold at banks and credit unions.
Money market deposit accounts are insured under FDIC or NCUA. MMDAs are sold only at banks and credit unions. These insurance programs assure that you have at least $250,000 of protection per bank. (It can be even more than that. I explained all the rules in a recent blog.)
Money market mutual funds are not federally insured. There is no such insurance program for an MMMF. I imagine right now you are wondering if I have lost it. Why would I tell you to put your emergency savings somewhere that doesn’t have this important protection? Keep reading.
Money market mutual funds that invest in federal government debt are safe. There are different types of MMMFs that own different types of securities. Some own debt that is backed by corporations. Some only own debt from the federal government. Some own a combination of government and corporate debt.
I recommend you stick with an MMMF that solely owns federal government debt. These funds have names like Federal Money Market. Or Government Money Market. While there is no insurance fund protecting that investment, you have the backstop of knowing that the money is backed by the full faith and credit of the federal government.
An MMMF that only owns government debt is safer than owning an MMMF that owns corporate debt. (That said, I want to stress that the risk of losing even 1% on an MMMF that invests in high-quality corporate debt—in the event of a bankruptcy by one of the holdings—is extremely remote.)
I am aware we’re in the midst of another round of “debt ceiling” saber-rattling in Washington where the topic of the government defaulting on its debt gets threatened. That wouldn’t only undo our economy, it would destabilize the global economy. I think “the full faith and credit” of the U.S. government will continue to be a national priority.
Consider being a diversified saver. While federal/government money market funds are safe, I won’t argue that bank and credit union savings accounts with their insurance backing can feel even safer. This is not a matter of doing either/or. You could move some of your savings into a higher-yielding government MMMF and keep some at your bank/credit union. That way you’ll earn a higher yield than if you kept all the money in the lower-yielding account, but with the extra safety of knowing you have an explicit government guarantee that you will not lose a penny on deposits at a bank or credit union.