During times of economic recession, investments typically lose money and interest rates on savings account products drop down to next-to-nothing percentages. Choosing where to put your savings for retirement becomes a challenge – and the closer you are to retiring the more the dropping interest rates should scare you (because you have less time for the market to recover and re-build your savings before you need the money). Many people decide to move their retirement savings to deposit accounts which are insured by the federal government in order to reduce their risks for financial loss. Are money market deposit accounts a good way to save for retirement?
Money market deposit accounts are offered by banks and are FDIC insured up to a certain amount of money, in the same way your traditional savings accounts are insured. They are different from Money Market Funds which are investments and therefore not insured against loss. The primary benefit of saving your money in money market deposit accounts (in addition to the money being insured against loss) is that they usually earn higher interest rates than a regular savings account will; while still giving you access to the money when you need it. Other FDIC insured accounts with higher interest rates tend to require that the money is saved for a committed period of time – and if you withdraw the money early you pay penalties.
Considerations for Using Money Market Deposit Accounts For Retirement Savings
When saving for retirement, the idea is to put your money into an account or an investment, let it earn as much interest as possible, and then withdraw it once you're ready to retire from the career-working world. The fact that money saved in a money market deposit account is readily accessible then, may not be an advantage for people looking to save money for their retirement years. The temptation to “borrow” from your retirement may be too great, and you may find yourself dipping into the funds you are setting aside for your golden years. Only people who have enough financial discipline to stay out of their money market deposit account retirement money should consider using an MMDA as their primary retirement savings.
Another consideration for using money market deposit accounts to hold your retirement savings is that right now, during the recession, money market deposit accounts are not earning as much interest as they usually do in better economic times. It's possible that you could make better use of your savings by opening high interest Certificate of Deposits, or even online savings accounts offering high interest promotions meant to attract new customers. Both of these savings options are also federally insured by the government, but should help your savings earn more interest than money market deposit accounts with interest rates that are negatively affected by the current economic conditions.
If you are someone who is approaching your retirement years, or perhaps have even entered retirement – keeping money in the money market deposit account may be beneficial. The money you hold in the account will continue to earn interest; and you will have access to the money when you need it (although federal regulations of MMDA do require that the number of withdrawals or checks written each month are limited to a certain number of transactions, unlike a traditional bank account where you can usually make as many individual transactions as you need without paying any extra fees).