Savings Account Interest in 2013: Thanks For Nothing, Banks

Interest pennies
Interest pennies

We're only half a month into 2013, but already, you may have started giving up on some of the resolutions you made for the new year. If you're a retiree living on a fixed income, we suggested one important resolution would be to make sure you're getting a decent interest rate on your savings so you don't have to dip into your principal to get by in 2013.

Well, banks are not making it easy to follow through on that one.

In the face of pressure from the Federal Reserve, banks have been cutting their savings rates for years. Since early 2008, the average rate on an insured bank money market account has plunged from above 4 percent to just 0.5 percent.

The impact of falling rates has been devastating for many retirees, with monthly interest income plunging nearly 90 percent.

Moreover, even once you think you've found a relatively good deal, you can't count on it lasting for long. For instance, last year, TIAA Direct offered online savings accounts paying 1.25 percent. Earlier this month, though, TIAA cut that rate to 1 percent. It also imposed some tight new restrictions on managing your money, including imposing new $5,000 limits on ACH withdrawals.

TIAA Direct is hardly the only bank to make rate reductions lately. Capital One's (COF) ING Direct, HSBC Bank (HBC), and CIT Bank (CIT) were just a few of the many banks that cut their savings rates in 2012.

What Comes Down Must Go Up, Right?

For years, investors and savers have believed that falling interest rates would eventually have to hit bottom. But it's taken a lot longer than they expected, and the downward trend went far further than anyone had initially expected.

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Still, some signs are emerging that low rates might finally come to an end. Some dissenting members of the Fed have argued that rates will need to rise sooner than other members want in order to prevent bad economic results like higher inflation. If the economy recovers more strongly, then that will be the time to look for rates to rise.

Until then, though, the key is to make the best of a bad situation. For instance, Sallie Mae Bank (SLM) offers 1.05 percent currently, and although there's no guarantee it won't be the next bank to cut its attractive rate, you should be able to find other banks that will take its place if it sends its rates down hard.

Even if you find your rate dropping on your savings account, it's still worth the effort to find above-average interest rates. The extra money can mean the difference between living off your income and having to tap into principal to make ends meet.

Motley Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned.

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