Should Retirees Worry About Their Bank Failing?

A line of people at an atm. Should retirees worry about their bank failing?

The collapse of Silicon Valley Bank in March 2023 shocked the financial system and nearly everyone else. A few days after the second largest bank failure in the U.S., regulators shut down Signature Bank, also among the 30 largest in the country. The next to fall was First Republic, after losing 97% of its stock value. At publication, more small banks are in trouble, and more fallout seems imminent. Though this latest banking crisis has jittered plenty of retirees, financial experts say it shouldn’t overwhelm their concerns. 

“Retirees should stay informed but not panic,” said Jenna Lofton, a certified financial planner and stock trader in Staten Island, N.Y.  

These recent bank failures were largely caused by internal oversight, poor management decisions, not heeding regulatory concerns quickly or ignoring them altogether, and over-relying on cryptocurrency deposits without assessing the associated risk, Lofton explains.

Cash Deposits Are Safe for Most Retirees

Most retirees bank at well-capitalized financial giants or community banks that are far less exposed to the startup community, emerging markets, and the wild swings of cryptocurrency. The vast majority of retirees also have their deposits insured, Lofton assures. “While banking troubles can impact the broader economy, FDIC-insured deposits are protected up to $250,000 per depositor, per institution,” she said. 

And for those with more than that deposit threshold? 

“It’s a worthwhile reminder that retirees with over $250,000 cash holdings should review their account titling and financial plan to ensure they’re maximizing their cash positions and FDIC insurance,” said Jordan Taylor, an independent financial advisor and analyst at Core Planning in Birmingham, Ala. 

Bank Stock Blues 

Retirees with significant investments in banks, stocks, and bonds will feel the impact of this crisis, explains Jon Morgan, CEO of Washington, D.C.-based consultancy firm Venture Smarter

The nation’s leading bank index and exchange-traded fund (ETF) have toppled at nearly the same rate this year. The Dow Jones U.S. Select Regional Banks Index, which measures the performance of the regional bank sub-sector of the U.S. equity market, is down 26.4%. 

Meanwhile, iShares U.S. Regional Banks ETF, which is designed to provide broader exposure to regional banks, is down 27.3% year-to-date. 
Core Planning’s Taylor expects bank stocks and bonds to bounce back sooner than later. 

“The banking crisis could cause some temporary losses in bank-related stock holdings,” he said. “Keyword: temporary.” The industry will likely face more regulations and stress tests in the wake of the bank failures. These changes should ease some market uncertainty and investment concerns over time. 

Investment Strategies in Turbulent Times 

A push toward safer investments and away from riskier plays is generally the playbook in uncertain times. That includes avoiding speculative investments, considering high-quality bonds, and perhaps above all else, maintaining a diversified portfolio, Lofton contends. 

“Diversification helps spread risk across different asset classes, reducing the impact of a potential downturn in any one investment,” said Dave Anderson, a financial planner and founder of BMOGAM Viewpoints in Jacksonville, Fla. “This can be achieved through a mix of stocks, bonds, and other investment vehicles, depending on one’s risk tolerance and financial goals.” 

Anderson, who’s studied the market for over 40 years, recommends prioritizing liquidity and emergency funds. “Having readily available cash or cash equivalents can provide a safety net during unexpected events, such as bank failures or economic downturns,” he adds.  

Ideally, retirement reserves will comprise three to five years of spending across more liquid investments, according to Taylor. 

That includes money market funds, CD ladders, and bond ladders, which “provide a retiree cash holdings with amplified interest, additional FDIC insurance, easy liquidity, and some appreciation,” he said. 

A CD or bond ladder is a savings strategy of investing in certificates of deposit or bonds with staggered maturities. This strategy takes advantage of higher rates on longer-term CDs or bonds. It also keeps some investor funds accessible in the near term. 

Another potential option is sweep accounts. These are essentially bank or brokerage accounts that move excess money between a client’s cash account and an investment account. When the monetary level in the cash account meets the requirement, the excess cash automatically transfers into the higher interest-bearing investment account. 

Early Withdrawal Warning 

Having a cushion or nest egg to cover living expenses and emergencies provides peace of mind. It also prevents solely relying on retirement savings, which could be subject to early withdrawal penalties. 

Anderson warns that retirees, those nearing retirement, and anyone on a fixed income or social security with limited savings should carefully consider the implications of withdrawing funds early from their 401(k) or other retirement accounts. 

“Early withdrawals can result in substantial penalties, including taxes and fees, which can significantly erode your hard-earned retirement savings,” he said. “It’s crucial to explore other options, such as reducing expenses or tapping into alternative sources of income before considering dipping into your retirement nest egg.” 

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