Is a CD a Good Place for Retirement Savings?

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Many people are rushing to open CDs while rates are high. And you may be inclined to open a CD for a term of 12 months or less so you can snag some quick interest income and then take the money and run.

But for some people, CDs aren't a short-term trend. And you may be considering using CDs to house your retirement savings. Whether that's a good idea or not, though, depends on the stage of life you're in.

When CDs make sense as a retirement savings tool

If you're close to retirement age, then opening a CD could make sense. This especially applies today, given that CD rates are sitting at 5%.

When you're within a few years of retirement, it's a good idea to keep a portion of your savings in safer assets -- meaning those that are less likely to lose money. Bonds fall into this category, and they're a popular choice for near-retirees. But CDs fit the bill as well.

CDs can be a virtually risk-free option for near-retirees (and savers in general) because you're guaranteed not to lose out on any principal if you open one at an FDIC-insured bank and you limit your deposit to $250,000 or less ($500,000 if you have a joint account). Bonds can lose money, even though their values don't tend to fluctuate as often as stock values do. So if you're looking to safeguard a portion of your nest egg when you're near retirement, CDs could be a great bet.

When it pays to steer clear of CDs for retirement savings purposes

While CDs may be suitable for near-retirees, they're not an optimal savings tool for people who are in the process of building up their nest eggs. And the reason boils down to the fact that your money may not grow as much as you want it to if you stick to CDs.

Right now, it's easy to find a 5% CD. But today's CD rates aren't the norm. And even though CDs might be paying generously today, the stock market has generated an average annual 10% return over the past 50 years.

So let's say you're 30 years old and are about to start saving for retirement regularly. If you put $300 a month into CDs paying 5%, in 35 years, you're looking at about $325,000. And yes, that's a nice amount of money.

But if you were to put that same $300 a month into a brokerage account or IRA with a portfolio of stocks that gives you a 10% return, in 35 years, you could be sitting on about $976,000 -- more than three times what CDs would give you. And remember, that $325,000 assumes you'll get a 5% return on CDs for 35 years. That's unlikely, since today's rates are exceptionally high.

It's not always a bad idea to turn to CDs in the course of saving for retirement. But it's important to know when doing so makes sense and when it might leave you seriously short on long-term savings.

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