“Are CDs a Good Fit for Your Retirement Strategy?”

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Pros and Cons of Using CDs for Retirement

Certificates of deposit (CDs) can be a valuable tool for growing your savings, particularly when interest rates are high. Funds are typically locked in for the CD term, and upon maturity, you receive your initial investment plus interest. While CDs can be a beneficial part of your retirement strategy, they shouldn’t be your primary saving tool. Here’s a look at when they might be useful and other retirement saving options to consider.

Pros of Using CDs for Retirement

CDs are low-risk investments, providing predictable returns as long as you don’t withdraw early, which usually incurs a penalty. They often offer higher yields than savings accounts, especially when interest rates are up. As of November 2023, some CD yields are as high as 6.5%. Additionally, CDs can be a good option if you’ve maxed out contributions to other retirement accounts, allowing you to continue saving with decent returns.

Cons of Using CDs for Retirement

CD returns are generally lower than higher-risk investments like stocks, which have historically averaged around 10% annually. CDs may not be ideal if you are far from retirement, as other accounts like 401(k)s and IRAs offer tax advantages and potentially higher long-term returns. Early withdrawal penalties can also significantly reduce your returns.

When CDs May Be a Good Addition to Your Retirement Portfolio

CDs can be a solid addition to your retirement strategy in certain scenarios:

You’re Getting Closer to Retirement

If retirement is just a few years away, CDs can provide a safe way to earn extra money on your savings. For example, if you plan to retire in three years and find a five-year CD with a competitive APY, you could invest a portion of your savings in it. Upon retirement, you can rely on other income sources until the CD matures.

You’ve Maxed Out Your Retirement Account Contributions

Once you’ve reached the annual contribution limits for tax-deferred accounts like 401(k)s, IRAs, and HSAs, CDs can be a good option to continue saving. This is especially beneficial since you’ve already maximized the tax benefits of those accounts.

Other Ways to Save for Retirement

401(k)

Employer-sponsored 401(k) accounts offer tax benefits, reducing your taxable income while you work. You may also receive an employer match. Taxes are due upon withdrawal in retirement.

IRA

Traditional IRAs offer similar tax benefits to 401(k)s, while Roth IRAs are funded with after-tax dollars, making withdrawals tax-free in retirement.

HSA

Health Savings Accounts (HSAs) offer tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. After age 65, you can use HSA funds for any purpose, though non-qualified distributions are taxable.

Brokerage Account

Brokerage accounts allow you to invest in stocks, bonds, mutual funds, and ETFs without the tax advantages of 401(k)s or IRAs. However, they offer flexibility as you can withdraw funds without penalty.

Annuity

Annuities, available from insurance companies and financial institutions, can provide guaranteed income in retirement. Be mindful of fees, which can impact the benefits.

The Bottom Line

CDs can be a useful part of your retirement plan, especially if you’ve maxed out other retirement accounts or are nearing retirement. They are safe investments, though their long-term returns are typically lower than higher-risk options. Early withdrawal penalties are also a consideration.

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