Money in the Bank 2024: Why Deferred Accounts Are Better

As 2024 unfolds, concerns about inflation, market volatility, and interest rates are leading many to reconsider where they store their money for long-term security. Traditionally, keeping “money in the bank” has been considered one of the safest strategies. But in today’s economic environment, that approach may not be as beneficial as it once was. While banks offer convenience and liquidity, they may fall short in providing optimal protection and growth, especially when compared to alternatives like deferred retirement accounts offered by insurance companies.

This article will explore why some individuals are rethinking how much money they keep in traditional savings accounts and why deferred retirement accounts—such as annuities and other insurance-backed products—are becoming an attractive alternative. We’ll also compare the guarantees offered by banks and insurance companies and evaluate how current economic conditions impact these choices.

Why People Keep Money in the Bank

For many, keeping money in a bank offers peace of mind. Banks provide convenience, easy access to funds, and FDIC insurance, which guarantees deposits up to $250,000 per depositor, per insured bank. This gives depositors a sense of security, knowing that even if their bank faces financial difficulty, their funds are protected.

Banks also play an essential role in day-to-day financial management. Checking and savings accounts, along with services like loans and credit cards, make it easier to handle short-term expenses. However, when it comes to long-term savings and retirement planning, relying heavily on bank savings accounts may not be the best approach, especially given the current economic environment.

The Economic Environment in 2024

The financial landscape of 2024 presents several challenges for those managing savings and investments. These challenges include persistent inflation, volatile interest rates, and market uncertainty, all of which influence today’s financial decisions.

1. Persistent Inflation Rates

As of mid-2024, inflation has moderated from its 2022 peak but remains a concern, particularly for retirees and long-term savers. The U.S. inflation rate is currently hovering around 2.9% to 3.0%, down from the extreme highs of over 8% experienced during 2022. While this is an improvement, inflation continues to erode the purchasing power of savings, especially for those holding large balances in traditional bank accounts​.

For retirees, this is particularly problematic. According to the Schroders 2024 U.S. Retirement Survey, 89% of retirees are concerned about inflation diminishing the value of their savings. Healthcare costs, which often rise faster than the general inflation rate, add to the burden, with the average retiree spending about 14% of their monthly income on healthcare expenses​.

Even with interest rates on some high-yield savings accounts reaching 4.5%, inflation can still chip away at real returns. In an environment where inflation is 3%, a 4.5% interest rate offers only a modest real return, leaving savers with minimal growth. This makes keeping a large portion of your wealth in a bank less advantageous.

2. Fluctuating Interest Rates

Interest rates in 2024 are a topic of ongoing fluctuation. After a series of aggressive rate hikes between 2022 and 2023, the Federal Reserve has slowed its pace of increases, with current rates sitting between 5.25% and 5.50%. These higher rates benefit savers by increasing returns on certain savings accounts and short-term bonds.

However, there is speculation that the Federal Reserve could begin cutting rates later in 2024 if signs of economic slowdown or recession materialize. When that happens, the yields on high-yield savings accounts and CDs could drop, leaving savers with lower returns​.

This unpredictability makes bank accounts less reliable for long-term growth, especially compared to fixed-rate financial products like fixed annuities, which offer guaranteed returns even in periods of interest rate cuts.

3. Market Uncertainty and Volatility

The stock market in 2024 remains volatile, influenced by global uncertainties such as geopolitical tensions and ongoing supply chain disruptions. For risk-averse savers, this market volatility makes investing in equities less appealing. As a result, many people seek “safe havens” for their savings, traditionally relying on bank accounts or government bonds for stability​.

However, while bank accounts provide liquidity and FDIC insurance, they do not offer the growth potential needed for long-term security, especially when inflation continues to erode savings. Deferred retirement accounts, such as fixed annuities, offer a more secure option, balancing safety with growth potential. These products provide stable returns and reduce exposure to market volatility.

Deferred Retirement Accounts: A Stronger Guarantee for Your Future

Deferred retirement accounts, especially those offered by insurance companies, are becoming an increasingly attractive alternative for long-term savers. Products like fixed annuities, deferred income annuities, and Indexed Universal Life (IUL) insurance policies provide stronger guarantees than traditional bank savings.

1. Stronger Guarantees from Insurance Companies

While bank accounts are insured by the FDIC, insurance companies offer their own set of guarantees, typically backed by the insurer’s financial strength. Many insurance products, like annuities, come with guaranteed returns or lifetime income, offering a level of security that banks cannot match.

In the event of an insurer’s failure, state guaranty associations often step in to cover claims, with limits that vary by state but are often higher than FDIC coverage. For example, annuity holders may be protected for amounts between $250,000 and $500,000, depending on the state, making insurance-backed products a more secure choice for long-term savers​.

2. Tax Advantages of Deferred Accounts

Deferred retirement accounts also offer significant tax advantages. Unlike bank savings accounts, which are subject to annual income taxes on interest earned, deferred annuities and other insurance-backed products allow your investments to grow tax-deferred. You only pay taxes when you begin to withdraw funds, typically during retirement.

This tax-deferred growth can lead to more substantial long-term savings, especially when compounded over decades. For example, a fixed deferred annuity allows your money to grow at a guaranteed rate without immediate tax obligations, maximizing compounding potential.

3. Lifetime Income Options

One of the key benefits of deferred retirement accounts is the option to secure lifetime income. Products like deferred income annuities provide a guaranteed paycheck for life, addressing the risk of outliving your savings—a growing concern as life expectancy increases. By contrast, keeping money in the bank does not offer protection against longevity risk.

Why Banks Fall Short for Long-Term Growth

Banks play an essential role in managing short-term liquidity, but they often fall short when it comes to long-term growth. As of 2024, inflation remains a persistent threat, and bank savings accounts, even high-yield ones, rarely offer enough return to outpace inflation over time. With interest rate fluctuations and market volatility complicating investment strategies, deferred retirement accounts provide a more stable and secure alternative.

Conclusion: Time to Rethink “Money in the Bank”

As 2024 progresses, it’s clear that keeping large sums of money in the bank may not be the best strategy for long-term financial security, particularly for those nearing or in retirement. While banks offer convenience and liquidity, they lack the growth potential and protection that deferred retirement accounts provide.

Insurance-backed products like annuities offer stronger guarantees, tax-deferred growth, and the potential for lifetime income, making them a smarter choice for those seeking to protect and grow their wealth. Given the uncertain economic landscape, it may be the perfect time to shift some of your savings from the bank into more secure, growth-oriented options that can provide both safety and long-term benefits.

By exploring these alternatives, you can ensure that your money works harder for you—even in a challenging economic environment.

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Authored by Brent Meyer, founder and president of SafeMoney.com, with over 20 years of experience in retirement planning and annuities.

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