We have $1 million in high-yield savings and CDs set aside to buy a house. Should we move our money if the Fed cuts rates?

By Beth Pinsker

We have a lot of cash on hand for a specific purpose, but we won't be able to live off the income if interest rates drop

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Dear Fix My Portfolio,

We sold our home in 2022 and are still looking for another that works for us. We are renting and have our things in storage, both of which are heavy monthly expenses. Our savings and proceeds from the sale, which come to more than $1 million, are in high-yield money-market accounts with gains of 5.3%, along with a CD at 5.4%.

I am mainly concerned that when the Federal Reserve cuts rates, it will reduce the monthly gains from the high-interest money-market accounts. That could throw our budget into crisis, with more money going out than coming in.

What should we do? We need to keep some money liquid so that if and when we find a property, the money is available. I've been looking at CDs that offer more than 5%, but they are for short terms, like three months. What will rates be then? And will my money be safe? I always check the stability of any financial institution before investing, but I'm not sure about some of the deals that are out there.

Home Dreaming

Dear Dreaming,

There are big moves happening in the U.S. economy, and that can make things confusing for regular people trying to plan out their lives. Everything the Federal Reserve does has an impact on banks and other financial institutions, and then that gets passed along to the rest of us.

The good news for you is that as the interest rate on savings comes down, so should the interest rate on mortgages. Assuming you plan to take out a mortgage for your home purchase, whatever you're losing out on in the near term with your money-market account, you'd more than make up for over 30 years with a lower mortgage rate.

Think about the math involved here. Say you have your $1 million in a money-market account (or a combination of money-markets and CDs or any other interest-bearing investment) and your rate goes down 1% over the course of the year, from 5% to 4%. If you leave the money there, you're going to have roughly $10,000 less than you might have had, depending on when rates change and by how much.

However, if you take out a mortgage for $750,000, the difference of 1% - from a 6.5% loan to a 5.5% loan - is about $500 less per monthly payment. That adds up to roughly $180,000 over the course of a 30-year mortgage. Those numbers will vary depending on how much you borrow and what rate you get, but the ratio will stay constant, and you can run your own numbers using an online calculator.

"The upside is that the money is staying protected in the money-market while you're looking. You're not losing principal, even a dollar," said Raman Singh, a certified financial planner in Phoenix. "You're better off losing the battle on interest rates, knowing your money will stay liquid, so you can turn around and execute the decision to buy a new house with a lower rate when you're ready."

Think about long-term goals

There are caveats, though, because the right move for you depends on when you expect to purchase a new house, and how much cash you really need for it.

"The moment you pass the one-year mark, the money should not just be in high-yield savings. At that point, you would want to blend it into a fixed-income portfolio along with high-yield savings," said Singh.

How much you plant to spend matters, because whatever you don't need for the house could be put toward longer-term savings. You might want to invest that differently, perhaps taking on a bit more risk in an attempt to get a higher return over time.

"You have to identify your risk tolerance so you can have your money invested in a portfolio designed for longer-term goals, which requires some fluctuation in value," said Ryan Zabrowski, a certified financial planner at Krilogy, which is based in St. Louis.

You also want to make sure that all of your holdings are protected under the Federal Deposit Insurance Corp. If you have all $1 million of your savings at one bank, under your name only, then you are way past the $250,000 limit by account type and institution that is protected.

"When you see cash management done for large nest eggs, advisers choose them from different banks," said Zabrowski.

As long as you make sure that any bank you do business with has that key FDIC insurance, and you keep below the limits and read the fine print on any CD conditions (avoid the callable ones, which I fell prey to recently), then you should be able to wait things out until you buy your dream home.

You can also join the Retirement conversation in our Facebook community: Retire Better with MarketWatch.

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-Beth Pinsker

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09-18-24 1059ET

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