Where Retirees Keep Cash: Savings Accounts, CDs, and Treasuries Compared

The three main places retirees park cash

When you stop working, the money you need to live on has to come from somewhere — and not all of it comes from Social Security or a pension. Most retirees keep a portion of their money in accounts they can access quickly, rather than invested in stocks. The three most common places are savings accounts (including money market accounts), certificates of deposit (CDs), and Treasury securities (T-bills, T-notes, and T-bonds). Each one works differently, pays a different rate, and locks up your money for a different length of time.

The choice between them depends on how soon you need the money, how much interest you want to earn, and how much risk you're willing to take. None of them are risky in the way stocks are — you won't lose your principal — but they do trade off against each other in ways that matter for your daily life.

Key Takeaways

• Savings accounts and money market accounts let you withdraw money whenever you need it, but currently pay between 4 and 5 percent annually, depending on the bank.
• CDs lock your money away for a set period (three months to five years) in exchange for a higher interest rate, usually between 4.5 and 5.5 percent, but charge a penalty if you withdraw early.
• Treasury securities are issued directly by the U.S. government and are extremely safe, but require a minimum investment of $100 and can take time to sell if you need cash suddenly.
• The best choice depends on when you'll need the money: savings for emergencies, CDs for money you won't touch for months or years, and Treasuries for very large sums you want to keep extremely safe.
• Interest rates change constantly, so the rates available today will not be the same next month or next year.

Savings accounts and money market accounts: Access whenever you need it

A savings account is the simplest option. You deposit money, the bank pays you interest, and you can withdraw it whenever you want. There's no penalty for taking your money out early, no waiting period, and no minimum balance (though some banks do require one). The tradeoff is that the interest rate is lower than what you'd get from a CD or Treasury.

A money market account works the same way but usually pays slightly more interest. Some money market accounts come with a checkbook or debit card, which makes them feel more like a checking account. The catch is that banks can limit how many times per month you withdraw money — often six times — though this rule is rarely enforced now.

Right now, savings accounts and money market accounts at online banks typically pay between 4 and 5 percent annually. Banks that operate only online usually pay more than brick-and-mortar banks because they have lower overhead. The rate your specific bank offers depends on the bank, the account type, and the size of your deposit. Rates change frequently — sometimes weekly — so the rate you see today may not be the rate you get tomorrow.

Use a savings or money market account for money you might need within the next year or two, or for an emergency fund. If you know you won't touch the money for longer than that, a CD or Treasury will pay you more.

Certificates of deposit: Higher rates if you can lock up your money

A certificate of deposit (CD) is a contract between you and a bank. You give the bank a sum of money, and the bank promises to pay you a fixed interest rate for a fixed period of time — typically three months, six months, one year, two years, or five years. When the time is up, you get your money back plus the interest.

The interest rate on a CD is higher than a savings account because you're promising not to touch the money. Right now, CDs typically pay between 4.5 and 5.5 percent annually, depending on the length of the CD and the bank. A longer CD (five years) usually pays more than a shorter one (three months), but not always — sometimes the rates are nearly the same.

The catch is that if you withdraw your money before the CD matures, the bank charges a penalty. The penalty is usually a few months' worth of interest, but it varies by bank and by the length of the CD. Some banks charge more for longer CDs. Before you open a CD, read what the penalty is — it matters if your circumstances change.

CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per bank per account type. If the bank fails, the government covers your deposit. Use a CD for money you know you won't need for at least six months to a year, or for a portion of your savings that you want to earn a higher rate on without taking any risk.

Treasury securities: The safest option, but with limits

Treasury securities are loans you make to the U.S. government. You lend the government money, and the government promises to pay you back with interest. There are three types: T-bills (mature in less than a year), T-notes (mature in two to ten years), and T-bonds (mature in 20 or 30 years). For a retiree looking for a safe place to park cash, T-bills and short-term T-notes are the most relevant.

Treasuries are backed by the full faith and credit of the U.S. government, which means they are considered the safest investment in the world. You will not lose your principal. The interest rate is lower than what you'd get from a CD or savings account — right now, T-bills pay between 4 and 5 percent, depending on how long you lend the money for. The rates change constantly as the government auctions new securities.

You can buy Treasuries directly from the government through TreasuryDirect.gov with no fees and no minimum investment except $100. You can also buy them through a bank or brokerage, but you'll pay a fee. If you need to sell a Treasury before it matures, you can do so, but you have to sell it on the secondary market — which means you might get slightly more or slightly less than you paid, depending on interest rates. The sale takes a few days to settle.

Use Treasuries for very large sums of money that you want to keep extremely safe and that you won't need for at least a few months. Because you have to buy them in $100 increments and selling them takes time, they're less convenient than a savings account for emergency money.

How to compare these options for your situation

The best choice depends on three things: when you'll need the money, how much you have to invest, and what interest rate each option is currently paying.

If you need the money within the next three to six months, use a savings account or money market account. You'll earn some interest, and you can access your money without penalty. If you have an emergency fund, this is where it belongs.

If you won't need the money for at least six months to a year, a CD makes sense. You'll earn more interest than a savings account, and you're not giving up access for very long. If you think you might need the money sooner, check the early withdrawal penalty first — some banks charge less than others.

If you have a large sum (several thousand dollars or more) that you're certain you won't need for at least a year, compare the current CD rate at your bank to the current Treasury rate. If they're close, a CD is simpler because you don't have to manage a separate account. If Treasuries are paying significantly more, the extra interest might be worth the small amount of extra work.

Don't try to time the market or wait for rates to go higher. Interest rates move unpredictably, and the difference between waiting and acting is usually small. Open an account or buy a security when you have the money and when you know when you'll need it.

Understanding FDIC insurance and government backing

Money in a savings account or CD at a bank is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per bank per account type. This means if the bank fails, the government covers your deposit up to that limit. If you have more than $250,000 at one bank, the amount over $250,000 is not covered. If you want to insure more than $250,000, you can split it across multiple banks or use different account types (for example, a savings account and a CD at the same bank are insured separately).

Money market accounts are also FDIC-insured if they're held at a bank. Money market mutual funds, which are similar but held at a brokerage, are not FDIC-insured — they're a different product.

Treasuries are not FDIC-insured because they don't need to be. They're backed by the U.S. government itself, which is considered safer than a bank. You cannot lose your principal on a Treasury. If you buy a Treasury and hold it to maturity, you will get your money back.

What happens to your money when interest rates change

Interest rates are set by the Federal Reserve and change based on economic conditions. When the Fed raises rates, new CDs and Treasuries pay more interest, but the interest on your existing CD or Treasury stays the same. When the Fed lowers rates, new CDs and Treasuries pay less, but your existing CD or Treasury still pays what it promised.

If you own a Treasury and need to sell it before it matures, the price you get depends on current interest rates. If rates have gone up since you bought it, the Treasury is worth less (because new Treasuries pay more). If rates have gone down, the Treasury is worth more. This is why Treasuries are less convenient than savings accounts for money you might need suddenly — you could be forced to sell at a loss if rates have risen.

Savings accounts and money market accounts don't have this problem. The interest rate can change, but the value of your account doesn't fluctuate. If your bank lowers the rate on your savings account, you can move your money to a different bank.

Frequently Asked Questions

Can I lose money in a savings account, CD, or Treasury?

You cannot lose your principal in any of these three. Savings accounts and CDs are FDIC-insured up to $250,000. Treasuries are backed by the U.S. government. The only way you lose money is if you withdraw from a CD early and the penalty is larger than the interest you've earned, or if you sell a Treasury before it matures and interest rates have risen (making the Treasury worth less).

What's the difference between a money market account and a money market mutual fund?

A money market account is a bank account that's FDIC-insured. A money market mutual fund is an investment that's not insured. They sound similar but they're different products. For a retiree looking for safety, a money market account is the better choice.

Should I buy Treasuries through TreasuryDirect or through a bank?

TreasuryDirect is free and has no fees. A bank or brokerage charges a fee, usually $25 to $50 per transaction. If you're buying a small amount, the fee might be worth it for convenience. If you're buying a larger amount, TreasuryDirect saves you money.

What if I need my money before a CD matures?

You can withdraw it, but the bank will charge an early withdrawal penalty. The penalty is usually a few months of interest. Before you open a CD, ask the bank what the penalty is. Some banks have lower penalties than others. If you think you might need the money sooner, a savings account is safer.

How do I know which bank offers the best savings account rate?

Rates change constantly and vary by bank. Websites like Bankrate, DepositAccounts, and NerdWallet list current rates at different banks. Online banks usually pay more than brick-and-mortar banks. Compare a few banks, but don't spend weeks looking — the difference between the best and second-best rate is usually small.