Planning for retirement is often a matter of balancing risk and reward. Households need the investment income to support their lifestyle goals, but must also avoid the kind of losses that would deplete their funds and limit their income. This is one area where CDs can be a viable investment option.
The great advantage of a CD is that their income is guaranteed at the time of signing. As people plan for retirement, they generally focus on identifying what percentage they need to earn on their savings in order to generate adequate income to maintain their lifestyles. If you have enough saved that you only need a small percentage of return on investment, then a CD could be perfect for you when you retire.
However, that option probably will not be the case for most people, as they will need larger returns than are typical for bank CD rates. On top of that, income from CDs is taxed, so you will often get more value from dedicated retirement accounts. CDs fit in as a low-risk way to generate returns that either guarantee a certain amount of income or to increase the value of excess funding.
For example, imagine you are preparing to retire and decide to take a lump sum of $150,000 to help you settle into retired life. You only end up spending $125,000. Instead of simply putting that leftover $25,000 into a low-yield savings accounts, you can reinvest it in a CD for a guaranteed return.
Many retirees cannot afford to lose the funds they have available to invest. This makes moderate- and high-risk investments difficult to deal with. CDs let you avoid this risk while still giving you returns on investment that exceed what is typical with savings accounts and similar options. We discuss some more specific ways to use a CD to support your retirement goals in our infographic below.
