This Kiplinger feature on MSN has a number of good ways that we waste money. Slide 12 of this series (these aren't my favorite ways of presenting things, but I see how it generates more ad impressions for MSN!) has the following suggestion:
If you're stashing your cash in a traditional savings account earning next to nothing, you're wasting it. Make sure you're getting the best return on your money. Search for the highest yields on CDs and money-market savings accounts. And consider using a free online checking account that pays interest, such as ones offered by Everbank and ING Direct.
Now, there isn't a thing wrong with these banks. I've used ING Direct for years, and I've had nothing but good experiences with them. I've heard many good reviews of Everbank as well. I guess over the past few years we've had our expectations of “high-interest savings account” lowered a bit. Both ING Direct and Everbank are quoting rates around 1% APY.
One percent per year. And this is supposed to be an alternative to wallowing in a low-interest account?! By most measures, this is wallowing in a low-interest account!
Certainly it's better than earning nothing, but truth be told, it's not a whole lot better than nothing.
It makes me wonder if the whole idea of passive retirement income is out of reach for most people. How much would someone have to have saved up to have a retirement income of $50,000 per year in investments earning 1%? Fifty thousand dollars is one percent of $5 million. And this income is before taxes and the devaluing due to inflation! Even if the return rose to 5% — say, with some very well-chosen dividend stocks — then this still requires $1 million invested.
Five million dollars is a lot of money, and with average retirement savings not even cracking six figures it's not an amount of money that most people have at their disposal. So for most people, there has to be more. There probably has to be some kind of active income earning going on. Things like building up a side business in an area that can be done part-time (or even full-time) in the normal retirement years.
This transition is far easier if the business is already chugging away when the traditional retirement age comes. But this requires planning and consistent effort well before that time occurs.
Are you on top of this? Are you laughing in the face of low-interest passive investments and taking the bull by the horns? I hope so.
Trying to get passive income from CDs is very expensive. You have to take some reaasonable level of risk
What about MLPs, dividend-paying stocks or bonds (even high-yield “junk” bonds).
I help an 85 yearold woman invest and she returns $50,000 per year from $1 million, mostly in MLPs.
Savings accounts aren’t for investing! Unless you’re uber-rich, why would you put $5 mil in a savings account? Savings accounts are for protection. I keep my emergency fund in a savings account. I don’t expect to retire on that 1%, but it’s a nice little bonus for my emergency fund.