If I were closer to retirement, it would be a different story.
In September, the Federal Reserve lowered its benchmark interest rate for the first time this year. And there’s a good chance we’ll see at least one more rate cut before 2025 comes to a close.
In light of this, you may be inclined to put some of your money into a CD before rates fall further. And if you’re near or in retirement, I’d say that’s probably a good idea.
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But I’m not planning to open any CDs this year despite rates still being around 4%. Although that’s a good return given the risk profile, it’s not right for me because of where I am in my retirement savings journey.
The problem with CDs
At first, putting money into a CD might seem like a no-brainer. You can lock in a virtually risk-free return on your money in the ballpark of 4%, which might seem like a great deal if you’re someone who dreads stock market volatility.
The problem with CDs, though, is that they probably won’t pay you enough in the long run to outpace inflation. And you need your retirement savings to beat inflation so that by the time your career wraps up, you’ll have a large enough nest egg to live comfortably.
Imagine you’re able to get a 4% return on a $10,000 CD over the next 30 years (it’s unlikely since rates are still near a high, but this is just to illustrate a point). At the end of that savings window, you’d potentially be sitting on a little more than $32,400.
Meanwhile, let’s say you were to invest $10,000 in a portfolio of stocks or an S&P 500 index fund. There’s a good chance you’d score an 8% yearly return, since that’s a bit below the stock market’s average. In that case, after 30 years, you’d be looking at a little more than $100,600. That’s more than three times the total CDs would give you in this example.
And yes, this is just one example. The point, however, is that if you’re in the process of building wealth for retirement, CDs are generally not a good bet.
It makes sense to put money into CDs when you’re saving for a near-term goal and can’t risk losing money in the stock market. For example, if you’re aiming to buy a home in early 2027, go ahead and put your current down payment savings into a 12-month CD. It wouldn’t be safe to put that money into the stock market since you’ll be needing it pretty soon.
However, if you’re retiring in 20 or 30 years, then it doesn’t make sense to put your money into CDs. And it’s for this reason that I’m not opening CDs right now, either.
I’m not close to retirement age, so I still need my money to grow at a decent pace. To put it another way, a 4% return is not one I’d be happy about in my investment portfolio, which is why I’m sticking to my strategy of loading up on stocks and various ETFs.
CDs are great for near and current retirees
While it doesn’t make sense for me to put money into CDs right now, I have different advice if you’re someone who’s on the cusp of retirement or already retired. In that case, I’d say it could make sense to lock in a CD before rates fall.
It’s a smart idea for people who are close to or in retirement to have one to two years’ worth of living expenses in cash. That way, if the stock market slumps and the value of your investments drops, you won’t have to sell assets at a loss to get access to the money you need to pay your bills.
I would never recommend having all of your cash in CDs, but it’s not a bad idea to start a CD ladder. This means opening a series of CDs that come due at regular intervals — for example, every three to four months, or whatever cadence works best for you. That way, you can earn a guaranteed return on some of your money while also ensuring that it’s available to you at regular intervals.
All told, CDs have their purpose. But they’re not a good choice for me right now. And if you’re years away from retirement, they may not be right for you, either.
