Banks and the $1,000,000 problem

Having $1,000,000 always sounded like a life changing amount of money. Our retirement account brochures almost promised this much money when we reached retirement age. When our bank account suddenly grew to this size I thought we were winning at life. I also thought that happy feeling would have lasted much longer.

I’d heard there were two problems with money, not having enough, and having too much. We were suddenly faced with the “too much” problem. I was just a regular person with a job and some investment experience. I didn’t really know how to invest this much money. The thought of losing it on bad investments was even scarier. We decided to take the safe option and bank everything, at least until I learnt more about investing.

After the 2008 financial crisis the Government would guarantee $250,000 in bank deposits. If our bank was unable to repay our money, the government would eventually pay up to $250,000. The guarantee was per person per “financial group”, which was very important fineprint. This rule meant we risked losing money if we had more than $250,000 in accounts with a single bank, other banks they owned, or banks owned by their parent company. Confusing, but worth understanding for free insurance from the Government. My job became figuring out which banks belonged to the same financial group, and making sure the Government insurance protected our money.

As a married couple, my wife and I could hold $500,000 with each financial group in our own names. Joint accounts wouldn’t work here, because that would limit our protected deposit to $250,000. We had two accounts each at unrelated banks.

At this time the bank’s weren’t lending much money, so they weren’t offering very good long term deposit rates. Some bank savings accounts gave a bonus interest rate for 3 – 4 months for new customers, so we focussed on these. We shuffled our money from bank to bank every 3 – 4 months. Not a big deal, but sometimes we had to travel to community banks two hours away just to open an account.

Some of our banks accounts had special rules each month to qualify for a bonus interest rate. These included things like minimum monthly deposits and minimum number of bankcard transactions per week or month. Generally the higher the bonus rate, the more hoops and pitfalls. Failure to qualify for the bonus rate meant receiving a really low base interest rate. With a little effort we managed our weekly spending habits to meet the special rules.

Overseas holidays gave us a new challenge. We could use some of our bankcards overseas, but we faced paying high transaction fees. It became so hard that we just gave up on the first few trips, and took the low interest rate. We eventually learnt to move money to other accounts before our holidays. This paid us something higher than the base rate while away from home. It was clunky, but earned us a few extra hundred dollars per month.

Our bank money machine worked for about 18 months, then the interest rates started falling and we began running out of banks. We had accounts with most of the banks offering high bonus interest rates. The remaining banks were either occupation specific, only for police/teachers/nurses, or had very low interest rates.

The passive income from bank interest was dropping below our living costs. Dipping into savings was becoming a depressing reality. A million dollars would last for a while, but retiring early meant we faced outliving our savings. We were already running a tight budget, so generating more income was the solution. We now had to consider returning to work and pushing back retirement, starting a business, or figuring out how to generate more passive income.

I had always expected that $1,000,000 in the bank would generate enough interest to cover living costs. The reality was incredibly sad. We never imagined retiring with a healthy bank balance would come with these types of problems.

Banks and the $1,000,000 problem

Joe retired in his mid-thirties to spend more time with his young family. He started this blog to share his story, help others plan their path to retirement, and enjoy retired life.

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