Retired? Don't Make This Huge CD Mistake

Retirement can be a financially tricky period of life. You’re going from earning money at a job to having to live off of savings and Social Security. And it can be difficult to figure out exactly where to put the money you’re supposed to be living on.

As a general rule, you don’t want to go too heavy on stocks in retirement since the stock market can be volatile. If you have the bulk of your savings in stocks, you risk locking in serious losses if you have to cash out investments to pay your bills.

That’s why you probably don’t want much more than 50% of your assets in stocks as a retiree. The remainder should, ideally, go into safer assets like bonds and cash.

But for the cash portion, you don’t have to stick to a savings account. CDs can be a great choice for retirees because you’re getting guaranteed income on that portion of your savings. If you open a 12-month CD with a 5.00% APY, for example, and you’re putting in $20,000, you’re guaranteed to earn $1,000 in a year’s time.

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However, if you’re going to put money into CDs as a retiree, there’s one big mistake you need to avoid.

Don’t go overboard on CDs

While putting money into CDs could make a lot of sense in retirement, be careful not to put too much of your cash into CDs. If you do, you might run into a problem if the stock market happens to decline.

Remember, when you open a CD during your working years, you may not need to access that money because you’re earning a paycheck. In retirement, you’re living off of your savings.

If you put 50% of your nest egg into stocks and the remaining 50% into CDs, you may be in trouble if the stock market crashes. At that point, you have two choices. You could either sell off stocks at a lower price and get less money for them, or you could cash out a CD early and take a penalty for doing so. Neither is ideal.

That’s why if you’re going to open CDs in retirement, make sure to leave yourself enough cash in a regular savings account to cover 12 to 24 months of bills. This way, you have cash available in the event of an extended stock market downturn.

A CD ladder is ideal for retirement

Another thing you should do if you’re interested in putting money into CDs as a retiree? Set up a CD ladder instead of opening one large CD.

With a CD ladder, you have various CDs maturing at different times. This means that a portion of your money frees up regularly, which is important when you may need that money to cover expenses.

Now, you have different options for setting up a CD ladder. But if you’re going to keep a nice chunk of cash in a regular savings account, one approach you may want to take is opening a 6-month CD, 12-month CD, 18-month CD, and 24-month CD.

This way, a portion of your money matures every six months. And you can tap your savings in between as needed if the stock portion of your nest egg is unavailable due to a market downturn.

Of course, if you do end up in a situation where you’re forced to either cash out a CD early or take a loss in your stock portfolio, crunch the numbers carefully to see which constitutes less of a loss. If you have a 12-month, $10,000 CD with a 5.00% APY and an early withdrawal penalty of three months of interest, that’s a $125 hit. You might lose a lot more than $125 by selling a stock when its price has declined. So take the time to calculate the least financially painful option.

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