Given a few high profile bank failures, mostly due to cryptocurrency and bad management, FDIC insurance has been in the news a lot lately. The FDIC was created 90 years ago and the $250,000 limit has been in place since then. It was a good number back then. Congress dropped the ball. It needed to have a CoLA (Cost of Living Adjustment) annually.
2.50 * 2000 = 5000 250000 / 5000 = 50 years
When I was a wee lad minimum wage was between $2.25 and $2.75 depending on where you lived. I used $2.50 so the math would be easy. If you worked a standard 2000 hour year and didn’t spend even one red cent you could make $5,000. The basic working man would have to save 50 years of income without ever spending a cent to hit the $250,000 limit.
Today
While there are many MBAs desperately seeking $2.50/hr and under labor, the reality is Americans cannot hope to survive on that. Many states have official minimum wages either at or heading to $15/hr. Even Target has found out that doesn’t work. They’ve decided some starting positions should pay up to $24/hr. This is a reality. Box stacking doesn’t require a high school diploma or the ability to read above a fourth grade level. Handling cash at the checkout counter is a different story. If you want more than box stacking skills there you have to pay more.
Cashier Cindy
Let us use $18/hr as our new baseline calculation.
18 * 2000 = 36,000 250000 / 36,000 = 6.9444 years 36,000 * 50 = 1,800,000
We can all agree that working stiff Joe couldn’t hit the $250,000 cap earning $2.50/hr but $18/hr cashier Cindy could. If she opted to live with roommates (or at home) she could possibly hit it in ten years. Granted she would have to live like a hermit, but she could get there.
I won’t delve into how soon Stylist Sally could hit it. If she’s working at one of those $6 haircut places, she can’t. If she is working at an Ulta or other high end salon where customers tip $20-$60+ for great hair and service she most definitely can. I used to go to those $6 places, then for years I went to Ulta salons during my travels. Now I go to a better salon that has a stylist I used to use at Ulta. Yes, I tip $20 on my $20 guy cut. I’ve seen women tip $60 on a cut & color. You have to work for a while before you get to that level though.
College Kids Joe, Rita, and Fred
Yes, there are a lot of Joe’s that party too hard and flunk out. Even more Joe’s who get a degree in something like 17th Century Russian Literature or other “equally employable subject.” These three kids, however, were intelligent.
Joe
Joe found the last college in America with an IBM mainframe. He learned COBOL, JCL, CICS, IDMS, and DB2. Boring skills. He learned Waterfall SDLC and step-wise refinement. Joe came from a working family so he had $50K in student loan debt. Upon graduation Indian firms tried to hire him for $60K and meager benefits. A bank offered him $80K plus 3 weeks vacation, matching 401K up to $5K/yr and they offered to make his monthly student loan payments as long as he was an employee in good standing. A major insurance company offered him a starting salary of $120K, no loan payments, and a tinier bit of matching on the 401K. Joe went with the bank offer because he saw a smoking hot girl during his interview. Yes, at that age the little brain does most of our thinking but it didn’t steer him too far wrong. COBOL will live forever but those of us who wrote it 30 years ago won’t.
Rita
Rita went to a technical college for embedded software engineering and robotics. It was a pricey school and she also came from a “working family.” Income too high for grants and scholarships, too low to afford college. She and her family have $80K in student loan debt. She learned Yocto, embedded Linux, Bare metal C, some C++ and some board/hardware level skills. Indian firms tried to hire her for $60K. Multiple defense contractors clamored to interview her, several wanted her to submit to a hair follicle drug screening. Medical device companies also interviewed her. One, whose name is know both for all of the lawsuits and its products offered her $80K and some benefits. Another medical device company offered her $120K but she would have to move way far away. Out of the blue a defense contract she though had taken a pass made her an offer of $85K, 3 weeks vacation, some matching 401K contributions and assumed her student loans if she signed a document agreeing not to leave for ten years. They wanted her to work on highly classified projects and her debt was too high for the clearance. Solution, assume the debt. Yeah, this is the one she took.
Fred
Fred went to the same college as Rita. Learned mostly the same skills. His parents were broke so he got some grant and scholarship money. Graduated with only $35K in student loan debt. Took a job with a starting salary of $120K plus some bennies. He is paying for his own student loan.
The Point?
Each of these people will be able to hit the $250,000 insurance limit. That limit has some fuzzy definitions too.
Most people believe the limit is $250,000 per person per bank. It’s not exactly true but we believe it. This causes us to move accounts between banks. Local banks can’t make really big loans because they just don’t have the deposits. Big banks and brokerage firms pay for that Berkshire Hathaway (or other) insurance. My E-trade money market account is insured to something like $22 Million. Little local banks can’t pay those premiums and stay in business. They are the ones that have to take a gamble on a new restaurant because the only place left to get hot food is the Casey’s gas station.
You Can’t Retire on $250,000
Remember when in 1974 IRAs first came out? They had a pathetic $1500/yr contribution limit. Even with the meager passbook savings interest rate, you would have to contribute for 100 years to hit the insurance limit but at 70 years of age you had to start taking mandatory distributions. All of this “parked money” gave rise to a boom in the Savings and Loan industry. Owners used them as personal piggy banks leading to the Savings and Loan Crisis. Out of that crisis came the Keating Five.
Back then brokerage firms didn’t want Bob the builder or factory worker Sam as customers. Our retirement accounts were supposed to be held in local banks, boosting their asset base. (Everybody seemed to overlook the $250,000 FDIC insurance limit.) This was also when the myth of “You can retire on one million dollars” came about.
You Need at Least $8 Million to Retire
The one million dollar myth ASS-U-MEs you will live in perfect health until one day you just die.
It doesn’t take into account the cost of long term care in a nursing home, or out of pocket expenses to treat cancer, diabetes, etc. This myth also ignores the current state of Medicare supplemental insurance. Even a shit-hole of a nursing home costs you $8K/month right now today. No, Medicare doesn’t cover it. Your supplemental policy doesn’t cover it either. If you are north of 50 good luck finding anything remotely close to affordable in long-term care insurance.
People also tend to blow through a lot of money when they first retire. Those cruises and other vacations really dig into the nest egg.
Your local bank doesn’t get to hang onto any of this money because they are hamstring by the FDIC insurance limit. A $2 million FDIC insurance limit would let local banks hold more cash. We definitely wouldn’t be moving our IRAs out so soon. If the FDIC also allowed banks to create a Long Term Care account that was its own insurance limit category then lots of us could park money in such accounts, a little at a time like a savings account, in case we end up in a nursing home like so many do.
