Using Certificates of Deposit as a Retirement Strategy

Chances are, you’ve already started planning for retirement. You probably have a 401(k), an IRA and possibly some other types of investments. All of which are designed to help your money grow, meaning they also come with their own measure of volatility. One way to add some potential stability to your portfolio is to consider creating a Certificates of Deposit (CD) strategy.

While there’s not a lot of growth generated with a CD, there is a bit more certainty if you need a specific amount of money on a particular date. Which make CDs an interesting option for retirement planning and income.

Here's how they work:

When you open a CD, you can select the type of CD you want as well as the term. That’s the length of time your money is held in the account until it matures. At the end of its term, you can reclaim the money you originally invested in the CD, along with any interest it’s earned over time. You can also choose to receive interest payments over the course of the term.

The great thing about CDs is that they’re insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), if you haven’t already exceeded that limit with coverage in other products. Plus, you’ll have a guaranteed, locked-in rate that should deliver a predictable return.

Intrigued? Good. Here are a couple of ways you can use CDs to your advantage when it comes to retirement:

IRA CD

An IRA CD is a CD account focused specifically on retirement investing. The money stays in a tax-advantaged account, growing at a fixed interest rate for set amount of time. You can contribute more to it as you see fit. When your IRA CD matures, you can roll over the principal plus interest earned into a new IRA CD without paying taxes on those earnings.

IRA CDs are considered safer investments because the interest is not subject to market fluctuations. However, they do carry the same contribution and withdrawal limitations as a traditional IRA.

CD Laddering

The idea here is to open multiple CD accounts at once, staggering their maturity dates. Once one CD matures, you roll the principal and yield into the next one, allowing you to continue to earn interest. This allows you to extend the life of your CD investment strategy as long as you want while still having the freedom to use the money for something else once a maturity date is reached.

Like we mentioned, creating a CD strategy for retirement savings and income might be a good strategy if you are somewhat risk averse and want to build in a more known outcome in your portfolio. Take some time to research the different types of CDs and rates available. You might just find an option that fits your needs.

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