Using CDs to grow retirement savings

Whether saving for retirement or saving in retirement, keeping those funds safe and growing remain key goals. Certificates of deposit offer the ability to meet both of the goals with a single financial instrument.

With locked-in interest rates, CDs can make for a great option to compliment a retirement saving strategy.

A retirement CD, or IRA CD, is a certificate of deposit (CD) held within an individual retirement account (IRA), which can allow retirees to grow their savings in a secure and predictable manner with potential tax benefits.

Some institutions may also promote CDs as “retirement CDs,” which can be more of a marketing distinction rather than a separate financial product. Those saving either for retirement or during retirement may look to CDs to grow their funds with limited risk and predictable returns.

Using CDs for retirement savings can be a prudent strategy for several reasons:

• Predictable returns: CDs offer fixed interest rates, which provide a predictable return on investment. This can be beneficial for retirees who need to plan their income and expenses carefully.
• Flexibility: By using a CD ladder, retirees can access funds periodically while still earning interest. This approach can help balance liquidity needs with the desire for higher returns from longer-term CDs.

Using CD ladders can help savers balance guaranteed returns with liquidity at regular intervals, making them a potential solution to keep cash safe and growing during retirement. Read on to learn more about how to use CD ladders for retirement income.

A CD ladder is a strategy that involves dividing an investment into multiple CDs with different tenures. This approach can allow savers to lock in a range of interest rates while still getting access to a portion of funds on a regular basis.

1. Divide your investment: Start by dividing your total investment amount into equal parts. For example, if you have $100,000 to invest, you might divide it into five $20,000 increments.

2. Choose maturity dates: Invest each increment into CDs with staggered maturity dates. For instance, you could buy CDs that mature in one, two, three, four, and five years.

3. Reinvest upon maturity: When the one-year CD matures, you can choose to either reinvest that balance into a new five-year CD or use some those funds for your financial needs and reinvest the rest. Continue this process each year, reinvesting maturing CDs into the longest-term CD in your ladder. This way, you will always have one CD maturing each year, providing regular access to your funds.

• Regular income: A CD ladder ensures that you have a CD maturing each year, providing a steady stream of income and predictable access to liquidity.
• Higher returns: Depending on the interest rate environment, you’ll be able to spread the risk of locking in a lower rate across a wider range of terms.
• Reduced interest rate risk: Staggering maturity dates helps mitigate the risk of interest rate fluctuations. If rates rise, you can reinvest at higher rates when each CD matures.

• Capital preservation: CDs are generally a lower risk investment, potentially making them ideal for retirees who want to protect their principal.
• Predictable income: Fixed interest rates provide a reliable income stream.
• Simplicity: CDs are straightforward an easy to understand, which can appeal to any retirees who prefer simpler investment options.

• Lower returns: CDs typically offer lower returns than stocks and other higher-risk investments. This could be a drawback for any retirees who need higher income from their investments.
• Inflation Risk: The fixed interest rate on CDs may not keep pace with inflation, potentially reducing purchasing power over time.
• Early withdrawal penalties: Withdrawing funds from a CD before it matures can result in penalties, reducing the overall return.

• Marketing focus: Retirement CDs are often marketed towards retirees.
• IRA CDs: Some banks offer IRA CDs, which are CDs held within an individual retirement account (IRA). These CDs may offer tax advantages but also come with specific rules and regulations.

• An IRA CD can be a good option for retirees looking to benefit from the tax advantages of an IRA while enjoying the relative safety of CDs. Here are some considerations:

• Tax advantages: Contributions to a traditional IRA CD may be tax-deductible, and the earnings grow tax-deferred until withdrawal. Roth IRA CDs typically offer tax-free growth and withdrawals.
• Predictable returns: IRA CDs offer fixed interest rates like regular CDs, providing a stable income stream.

• Contribution limits: IRAs have annual contribution limits, which may restrict the amount you can invest in IRA CDs.
• Early withdrawal penalties: Withdrawing funds from an IRA CD before age 59½ may result in penalties and taxes.
• Required minimum distributions (RMDs): Traditional IRAs require you to start taking RMDs at age 73, which could complicate your investment strategy if you have longer-term CDs.