It’s said that a bird in the hand is worth two in the bush, and it appears that many Americans are heeding that age-old advice when it comes to their money. Credit Unions, in particular, are enjoying a 6% surge in deposits while traditional bank deposits grew 2.4% in 2019.1
Such a conservative approach may partially be fueled by lingering skepticism about the resilience of the U.S. economy and uncertainty over whether there may be a downturn in the economy looming on the horizon. That’s not to suggest that saving money using a bank or credit union is a bad practice. On the contrary, most financial advisors would likely agree that a savings habit is more favorable than spending.
However, savers who rely on traditional savings accounts simply aren’t asking their money to work for them and, more specifically, for their retirement.
The Truth About Return on Investment (ROI)
The rise in the number of traditional bank deposits may reflect a cautionary tale for your clients, but also an opportunity for you to educate them about what they may sacrifice by choosing to tuck money away rather than invest it.
Using a simple comparison of returns may best illustrate the point. The average yield on a traditional bank savings is about 0.09% APY.2 On the other hand, the 10-year average rate of return on the S&P 500 is 11.8% through 2019.3
Variables like investment type, size and time in the market keep this from being a true apples-to-apples comparison, but the wide swing between the percentages is probably enough to give clients pause about their strategy for funding their future.
Startling statistics alone presumably won’t convince your clients who are somewhat savings-account-dependent to ramp up their investing. After all, more than 60% of Americans feel anxiety when they think about investing in the market, because they’re afraid of losing money in a market downturn or a crash.4 Such hesitation may be a result of memories that still linger from the Great Recession that began more than a decade ago.
The emotions surrounding money are very real and can cloud an investor’s judgment. Clients you speak with about transitioning from cash hoarding to investments may feel that risking any part of a healthy bank balance in the market sounds uncomfortably similar to a gambling proposition — and that may cause them to shut down.
It’s okay to defer the conversation but, as an advisor, it may be in your client’s best interest to pursue having it at some point. Simply put, to do otherwise may be a disservice. When you speak with them, explain that entering or increasing their stake in the market doesn’t need to be an all-or-nothing proposition and that there are options beyond traditional portfolios.
It may be eye-opening for your clients who are highly risk-averse to know that there are options like risk control annuities that can address their apprehensions, allow them to gain market exposure at their comfort level, and ultimately serve their retirement needs in ways bank accounts simply can’t.
By taking advantage of teachable moments like those presented by the growing number of individuals relying on traditional bank accounts as savings vehicles, you can help clients grow their money and increase their retirement confidence.
The advice you’ll find in our case study, Downside Protection — A Winning Play, can also help you share insights with clients. Click the button below to access your copy now!
1ABA Bank Marketing Banking Journal, Branch Deposit Statistics: Initial Findings, December 17, 2019
2FDIC, Weekly National Rates and Rate Caps - Weekly Update, February 2020
3Macrotrends, S&P 500 Historical Annual Returns. February 12, 2020
4Markets Media, Americans Fear Stocks More Than Retirement, July 17, 2019