If I Could Tell Seniors One Thing About CDs, This Would Be It

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When you're a senior, you need to be careful about what you do with your money. You'll probably be relying on your nest egg in your brokerage account to help you cover your costs beyond what Social Security pays for. But while you need to keep some money invested, you may also want to have some money in CDs.

In fact, if I could tell seniors one single thing about certificates of deposit , my advice would be to build a CD ladder. Here's why I think this is the most important piece of advice I could give to older Americans.

CD ladders are the ideal option for retirees

The big reason why I think CD ladders are so important for seniors is because they are the perfect solution for the situation retirees find themselves in.

Seniors should definitely have some of their money in the stock market. But they can't have all of it invested. It's too risky. Since they need to make regular withdrawals to cover expenses, they must have money accessible to them that they can access without selling stocks.

In fact, it's a pretty good idea for seniors to have enough money outside the market to cover a couple of years' worth of living expenses. That way, if there is a prolonged downturn, they can use this money instead of having to sell investments at a bad time, locking in losses and risking their future security by causing their account balance to fall too quickly.

Having a couple years of money sitting around means accepting lower returns on it, though. And that's where a CD ladder comes in. A CD ladder can give seniors the security that comes with having living expenses in a safe investment, while also helping them to maximize returns.

Here's how a CD ladder works

CD ladders are pretty simple. Basically, you take the money that you have set aside to live on during a market downturn and you invest it in CDs that mature at different times.

You do this so you always have a CD maturing soon that's available for you to use, so you can lock in your interest rate on the money that you have waiting to use, and so you can maximize the return on investment (ROI) you get on this money without putting it at risk.

Let's say for simplicity that you had around $120,000 you wanted to keep out to cover five years of expenses. Here's what you could do with it:

• Keep $10,000 in a high-yield savings account so it's accessible immediately if you need it.
• Put $10,000 into a 6-month CD
• Put $20,000 into a 1-year CD
• Put $20,000 into a 2-year CD
• Put $20,000 into a 3-year CD
• Put $20,000 into a 4-year CD
• Put $20,000 into a 5-year CD

If you took this approach, you'd have your $10,000 to cover immediate expenses, and you'd have CDs maturing regularly to make more money accessible if you needed to continue living off savings.

You'd also be able to take advantage of the rates that CDs offer. These rates are often better than what savings accounts offer. Although that's not the case now and savings account rates and CD rates are pretty comparable, CDs also give you the chance to lock in and guarantee you'll continue to earn today's high rates -- unlike savings accounts, which have variable rates. That makes right now an especially great time to build a CD ladder.

Locking in your competitive rate isn't the only benefit, either. The fact you do lock up your money for a set term also discourages you from spending your rainy day fund on non-necessities.

Seniors should think seriously about giving this approach a try, so they can get the benefits CDs offer and ensure they have money at the ready to cover living expenses during a market downturn if they need it.

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