Forget CDs: Your Retirement Savings Need to Go Here

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There's a reason so many people are interested in opening CDs right now. A lot of CDs are paying 5%, which is a pretty great deal for a risk-free return.

If you have money you're saving for a short-term goal, then it pays to take advantage of today's CD rates . But a CD is not the place to put your retirement savings if your golden years are still decades away. Here's why.

1. You might do way better with stocks

The idea of earning 5% on your money may sound nice, but what if you could score a 10% return on your retirement savings instead? If you load up on stocks instead of CDs, that may be more than possible, because the stock market has delivered an average annual 10% return over the past 50 years.

Let's say you decide to start saving $300 a month for retirement, and you continue to do so for the next 30 years. Even if CDs continue to pay 5% over that time (which they likely won't), that gives you a $239,000 nest egg. But if you invest your money at a 10% annual return, $300 monthly contributions over 30 years could leave you with $592,000 -- roughly 2.5 times the nest egg you'd have with CDs.

And remember, these numbers are assuming a 5% yearly return on CDs. In reality, the gap between a CD and a stock portfolio is likely to be much bigger.

2. You have time to ride out stock market volatility

It's pretty clear that stocks are the more lucrative bet for retirement savings. But what about the risk?

It's a valid concern. With CDs, your deposits are protected as long as they don't exceed $250,000 at a FDIC-insured bank. With a stock portfolio, you could lose money during a market downturn.

But you should remember that the stock market has a strong history of rewarding long-term investors. So if you're saving for retirement over a period of several decades, you have time to ride out periods of turbulence.

The 10% average stock market annual return talked about above includes years when the market did well and years when it absolutely tanked. But that should help you get more comfortable with the idea of putting long-term savings into a stock portfolio, because even when accounting for those down years, you're still looking at an impressive return overall.

3. You won't be doing yourself any favors from a tax perspective

Retirement savings plans like IRAs and 401(k)s allow you to enjoy tax breaks on your contributions. And while you might be able to open a CD inside of your IRA, there are no tax breaks for opening a CD outside of an IRA or 401(k).

In fact, the interest you earn on a CD is taxed at your highest marginal rate. When your investments gain value in an IRA or 401(k), you don't pay taxes on them year after year like you do with a CD.

Putting your retirement savings into CDs is a move you might regret. Use CDs for their best purpose -- short-term savings goals you want to meet.

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