The Complete Guide to CDs for Retirement

Triston Martin

Oct 11, 2022

Ideally, when you're ready to retire, the savings you've made in anticipation of that day will have grown into a substantial nest egg. If you want to guarantee that you'll have a set sum of money accessible at a future date without taking any chances with your investment, a certificate of deposit (or "CD") may be the way to go. That moment shouldn't be years away, but rather quite soon. When saving for old age that is still several years away, CDs may not be the greatest option because of the possibility of long-term loss owing to rising prices and taxes. Find out more about the situations in which Certificates of Deposit make sense as an investment, as well as those in which they do not.

CDs Pose a Risk of Loss

Even CDs, which are FDIC-insured, may lose money (FDIC). In many cases, the real interest rate on CDs will be lower than the pace of rising prices. Even seemingly safe assets, such as CDs, might result in a loss over time when interest is taxed by the federal government and individual states. Take, as an example, the case of a $10,000 CD with a term of five years. Since interest accrues at a rate of 3% per year, the investment would provide $300 in extra income annually. In the first year alone, you would have to pay $90 in tax rates on the CD income if you settle taxes at both the federal (27% rate) and state (5%) levels. Assuming annual inflation of 3%, at the year's completion, it will cost $309 to purchase the same amount of goods & services that cost $300 at the beginning of the year. The $210 you would have received from the CD would have been reduced by taxes.

How Certificates of Deposit Can Help You Plan for Retirement

If you put in the effort to create a retirement savings plan, you should be aware of the bare minimum return rate that your investments will need to generate throughout the course of your retirement if you want to realize your ambitions. A certificate of deposit (CD) might be an excellent option if you're looking to save for retirement and require just a 4 percent return rate to reach your objectives. A CD ladder, in which certificates of deposit (CDs) mature at intervals building up to your desired retirement age, may be an option in this situation. By doing this, you may protect yourself against a potential decline in interest rates. Several options remain open in case the CDs don't provide a sufficient rate of return to meet your objectives. As each CD matures, the proceeds may be reinvested in other retirement vehicles, perhaps those that provide a better rate of return. Alternatively, you may work more hours or find ways to cut costs to make up the difference between the yields on your CDs and your desired level of savings.

Who Should Make the Best CDs?

If you enjoy a low tax rate, want zero risk in your investments, care more about protecting your money than increasing it, and need the money around the time your CD matures, then you might consider purchasing a certificate of deposit (CD). You should also consider whether or not you can get a rate of return that is greater than the pace of inflation for the time frame you need. Consider a 10-year CD paying 5% if you're in a low tax band, don't require the money for ten years, and think inflation will be 3% or less.

Which People Should Never Be Considered for CDs?

CDs are probably not the best option for you if you feel that you will end up losing funds after accounting for taxes & inflation, if your major investment objective is to either increase or maintain a consistent income, or if you need the ability to access your funds at any time. Bank certificates of deposit (CDs) are not considered liquid investments. You will be charged a fee if you try to withdraw your money before its time. Long-term certificates of deposit (CDs) aren't a good choice for those who require frequent access to their money.

Retirement Planning Using CDs

If your retirement is still a few decades away, certificates of deposit (CDs) may not be the best option to save money. If you don't need the money right away, you may keep it collecting interest in a CD and have more of a nest egg when you retire. Due to the shorter time frame of the investment, there is a greater possibility that the income you earn on your CD will be able to beat the inflation rate. Other types of investments, such as high-yield savings, checking accounts that pay interest, and mutual funds, are also options for you to consider if you want your money to continue growing throughout your retirement. Hiring a financial adviser who is familiar with your individual situation is always a good idea, whether you are preparing for retirement or maintaining your funds in retirement.

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