All You Need to Know About CDs for Retirement

Who Should Invest in CDs and Why

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When you invest money, it should generate more money for you later on down the line.

Buying a certificate of deposit, also known as a CD, might the perfect investment choice if you need a specific amount of money to becomes available at a certain future time at no investment risk. That time should ideally be not too far off, rather than years down the road.

If you're investing for something like retirement that's many years away, CDs might not be the best choice because you run the risk of losing money in the long run.

Learn more about when and why CDs are a good investment choice.

Risk of Loss with CDs

How can you lose money in a safe investment like a CD? Through taxes and inflation.

The rate of interest on CDs is often less than the rate of inflation. When combined with taxes on the profits, you can lose money over time in investments like CDs that appear to be safe and secure.

For example, suppose you're considering a $10,000 CD that matures in five years. It pays 3% a year in interest, so it will produce an additional $300 a year.

If you pay taxes at a 25% federal rate and a 5% state rate, you'll owe $90 a year in taxes on the CD interest each year.

If inflation is 3% a year, at the end of the year, you would require $309 to buy $300 of goods and services. But after taxes, your CD delivered just $210.

Planning for Retirement with Certificates of Deposits

If you take the time to design a retirement plan, you should know what minimum rate of return you'll need over the years if you're going to achieve your retirement goals.

If you need only a 4% rate of return to meet your retirement goals, and you can find a CD that pays 4% or more, a CD might be a good investment for you.

In this case, you might be able to create a ladder of CDs that mature on different dates leading up to your target retirement date. This can hedge against a decrease in interest rates, and if the CDs don't achieve the rate of return you need to achieve your goals, you'll still have a few solutions.

You can reinvest in other retirement vehicles as each CD expires, options that might achieve a higher rate of return. Or you might decide to work longer or find a way to reduce living expenses so you can achieve your goals on the returns offered by your CDs.

CD rates are constantly changing. As interest rates change and as your goals change, reevaluate your investment choices to keep pace with the economy.

The Best Candidates for Certificates of Deposit 

In general, CDs are a good investment if you:

  • Are in a low tax bracket
  • Want no investment risk
  • Have a primary goal of preservation of capital
  • Plan to use the funds at a time that matches the CD maturity date
  • Can lock in a rate of return higher than inflation over the time period you need

For example, if you are in a low tax bracket and don’t need the funds for 10 years, a 10-year CD that pays 5% would be a good investment if you expect inflation to be 3% or less.

If you're in a higher tax bracket, consider a tax-deferred or tax-free alternative to CDs, such as:

  • iBonds
  • Fixed annuities
  • Ultra short-term bonds or bond funds
  • Short-term municipal bonds or bond funds

The Worst Candidates for Certificates of Deposit 

CDs are likely a poor investment if you:

  • Are losing money after you factor in taxes and inflation
  • Have a primary investment goal of growth or income
  • Need to be able to withdraw your money at any time

CDs are an illiquid investment. This means you can't withdraw your cash early without incurring penalties and fees.

Anyone with liquidity needs would be a poor candidate for long-term CDs.

Using CDs in Retirement

While CDs may not be a good investment for retirement that's still several decades away, they could be a useful tool once you are already retired or close to retirement age.

Storing money that you don't need immediately in a CD allows you to continue earning interest, which can increase the amount available to you during retirement. And the shorter investment timeline means the interest on your CD is likely to be higher than inflation.

Other investments that you can use to help your money grow in retirement include:

As always, when planning for retirement or managing your money while retired, talk to a financial advisor who can help you make the right choices for your particular situation.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.