When talking about retirement income, it’s important to know how much of your savings is FDIC insured. Structuring the accounts to optimize the amount of insurance is a useful tool.
Retirees typically keep most of their retirement income diversified in investment products to continue to generate lasting income, but for immediate needs, there is still a necessary portion required for deposit products. That amount is determined by your income needs and based on the overall retirement income plan, everyone’s short-term requirements are different. Knowing these assets are protected is an important part of having peace of mind during retirement.
Why is FDIC insurance so important?
After a loss of $1,300,000,000 and the failure of 9000 banks between 1930 to 1933, the Banking Act of 1933 created the FDIC as a temporary agency, covering deposits up to $2,500, insuring 97% of the bank depositors, and restoring the stability of the banking system. What many thought could not be accomplished, was successfully implemented within a few months of Franklin D. Roosevelt’s presidency. In 1934, there were only 9 banks that failed after the federal deposit insurance took effect.
From the establishment of the FDIC in 1933 through 1980, insurance protection levels had increased six times to accommodate for the change in the economy. True to their word, no depositor has ever lost a penny of insured deposits since the FDIC was established.
During the 2008 financial crisis, the collapsing of the banks, combined with not having enough protection through FDIC insurance became the number one fear of clients holding large assets in a financial institution. Depositors started to go into the banks to take large withdrawals of cash to put in their safe deposit box, transfer to other institutions, or put it in the form of a cashier’s check to wait out the uncertain times.
To avoid a substantial ‘run on the bank’, which would just further destabilize the economy, in 2008, the Federal Deposit Insurance Corporation temporarily raised the insurance protection from $100,000 to $250,000. In 2010, with the passage of the Wall Street Reform and Consumer Protection Act, the protection limit was permanently set at $250,000, easing the fears of the deposit holders.
But what does $250,000 of FDIC insurance mean?
There are many misconceptions of how FDIC insurance works and what that coverage means to them.
Here are some of the facts behind how FDIC protects your assets:
FDIC goes by the depositor and not by account. There is a misunderstanding that the accounts hold the $250,000 in insurance. This is not the case in FDIC. It does not rely on the account, but on the person whose name the account is titled in. One person can hold many accounts under the same title, but the combined total of FDIC for that person, under that title is $250,000.
Accounts owned at different financial institutions carry their own FDIC insurance. The insurance for FDIC is for each financial institution that is insured. If you have multiple accounts at different banks, they would each carry their own insurance.
FDIC covers deposit accounts only, excluding investment accounts. Although many of the financial institutions have a licensed associate on staff to sell investments, not all their products are FDIC insured. Any mutual funds, stocks, bonds, or investment products they offer would not carry FDIC insurance even though their office is in the financial institution.
The insurance is based on the titling of the account, so you can be insured for much more than $250,000 per institution. The insurance does not just cover $250,000 per person, but for each person on each account type.
► An individual is insured for $250,000.
► If you have a joint account, each person under the joint account is insured for $250,000 for the same-titled accounts.
► Trusts (formal or ITF/POD) are insured for the beneficiaries. Each beneficiary is insured for $250,000.
► Your IRA is not included in your individual calculations, so it is covered for $250,000.
Here is a simple example of a couple (John and Jane Doe), without using their children, and how they can maximize their FDIC insurance with one institution:
■ John Doe: $250,000
■ Jane Doe: $250,000
■ John and Jane Doe: $500,000
Trusts: Formal or ITF/POD
■ John Doe ITF Jane Doe: $250,000
■ Jane Doe ITF John Doe: $250,000
■ John Doe IRA: $250,000
■ Jane Doe IRA: $250,000
As you can see, this couple can get $2,000,000 in FDIC insurance at one financial institution based on the structuring of their assets and how their accounts are titled.
By understanding how FDIC works, it can easily dispute the misconception that having deposit accounts in multiple institutions is safer. If you can structure your deposits to manage them in one location, under one online banking sign-on, you are more likely to be able to prevent fraud from occurring, and if it does occur, you will be able to detect it sooner. Many of us have multiple accounts, serving many purposes, but we focus mainly on our most active account, leaving the others susceptible to undetected fraud. Consolidation onto a single, combined statement is key to protecting yourself. But just as importantly, linking them together will save you time to do the things you truly enjoy.
If you are unsure on how much FDIC insurance you have, use the FDIC’s Electronic Deposit Insurance Calculator to find out. Although most people do not maximize their FDIC insurance with their retirement income, every person’s needs are different, so knowing you are protected is the path to having peace of mind during retirement.