Most of the coverage of the Federal Reserve’s September rate hike focused on what it means for borrowers. Less attention went to a simpler question that affects nearly every federal retiree: where is the cash sitting right now, and is it earning what it could be?
What the Federal Reserve decided on September 16
The Federal Reserve raised its benchmark rate by a quarter point, to a range of 3.75% to 4%. It was the first increase since 2023, the vote was unanimous, and the Federal Reserve’s statement said plainly that inflation remains elevated. Banks responded quickly on the lending side, raising the prime rate that variable credit cards and Home Equity Lines of Credit (HELOCs) often follow. Savings rates move on a much looser schedule, largely whenever a given bank decides to compete for deposits.
The gap between what’s earned and what’s available
The national average savings account still pays 0.38%, according to the Federal Deposit Insurance Corporation (FDIC). Some competitive high-yield savings accounts are paying around 4% or more, while top one-year Certificates of Deposit (CDs) are also available above 4%. High-yield savings accounts and CDs held at an FDIC-insured bank receive the same FDIC protection — generally up to $250,000 per depositor, per insured bank, per ownership category — although they differ in their rates, access to the money, and any early-withdrawal penalties.
| Balance | At 0.38% (national average) | At 4.2% (example competitive rate) | Annual Difference |
|---|---|---|---|
| $10,000 | $38 | $420 | $382 |
| $25,000 | $95 | $1,050 | $955 |
| $50,000 | $190 | $2,100 | $1,910 |
That gap applies to any cash sitting outside the Thrift Savings Plan (TSP) and outside investment accounts: an emergency fund, money set aside for a near-term expense, or proceeds from a home sale waiting to be redeployed.
Comparing where the cash could go
| Option | Typical Rate | Liquidity | Tax Treatment | Backing |
|---|---|---|---|---|
| High-yield savings | ~4.0-4.3% | Immediate | Federal + state taxable | FDIC insured |
| 6-month CD | ~4.0-4.4% | Locked, early withdrawal penalty | Federal + state taxable | FDIC insured |
| 1-year CD | ~4.0-4.2% | Locked, early withdrawal penalty | Federal + state taxable | FDIC insured |
| Treasury bills | ~4.0-4.3% | Sellable before maturity | Federal taxable, state/local exempt | Backed by the U.S. government |
| Money market funds | ~3.9-4.2% | Immediate | Federal + state taxable | Not FDIC insured |
Rates shift week to week, so it’s worth checking current numbers before moving money. The larger point holds regardless of the exact figures: each of these options can offer a meaningfully higher yield than a typical bank’s default savings rate, although their liquidity, guarantees, and risks are not identical.
Why Treasury bills deserve a second look
Treasury bills, purchased directly through TreasuryDirect or through a brokerage, carry one advantage that gets overlooked: their interest is exempt from state and local income tax. For a retiree in a state that taxes investment income, that exemption can make a Treasury bill’s after-tax return higher than a bank CD paying a similar headline rate. Retirees in states without an individual income tax generally won’t get an additional state-tax advantage from Treasury bills, but for everyone else it’s worth running the comparison before defaulting to a bank CD.
Why locking up cash for five years deserves more scrutiny right now
For the past two years, with rates falling, one argument for a longer-term CD was the opportunity to lock in a higher rate before rates dropped further. The Federal Reserve’s September increase changes that calculation. A five-year CD purchased now locks in today’s rate for five years, and getting out early typically carries an interest penalty. If market rates continue rising, that money could remain locked at a lower rate while newly issued CDs and other short-term options offer more. On the other hand, if rates eventually fall, locking in today’s rate could prove beneficial. For retirees who want flexibility while the direction of rates remains uncertain, shorter terms — such as a one-year CD, a six-month CD, or a Treasury bill — provide more frequent opportunities to reinvest at prevailing rates.
Building a cash reserve that can adjust as rates change
Rather than picking one account and leaving it there indefinitely, a tiered approach gives cash more frequent opportunities to re-price as interest rates change: a checking account for immediate needs, a high-yield savings account for near-term spending, and short Treasury bills or CDs for money that won’t be needed for three to twelve months. That structure is worth a closer look on its own; it comes up again in the context of building a full emergency fund for retirement.
Frequently Asked Questions
Is money above $250,000 at one bank still safe?
FDIC insurance generally covers up to $250,000 per depositor, per insured bank, per ownership category. A depositor can potentially receive more than $250,000 of coverage at one bank by holding deposits in different qualifying ownership categories; otherwise, spreading deposits among separately insured banks can increase coverage.
How often should this cash be moved?
Checking current rates every few months is reasonable. Moving money every time a headline changes is not necessary and can trigger unnecessary CD penalties if funds are already locked in.
Does this apply to money inside the TSP?
No. TSP balances follow the Thrift Savings Plan‘s own fund structure and are not affected by where outside cash savings are held.
Is a new bank required to get these rates?
Not necessarily. Some banks offer separate higher-yield savings products, so it’s worth checking what is available before opening an account elsewhere.
This article is for general informational purposes only and is not personalized financial, legal, or tax advice. Rates, terms, and tax treatment can change and may vary by institution; verify current details before making a decision. Consult a qualified financial professional regarding individual circumstances.