One of the things you can do to improve your retirement portfolio is to include CDs. However, as you plan for retirement, it is important to remember that CDs should probably not be the main focus of your efforts. That said, they really can be a helpful way for you to add a little safety and stability to your retirement portfolio.
Balancing Your Retirement Portfolio
If you rely only on low-yielding investments for your retirement planning, you will never be able to build up enough of a nest egg to retire. However, your retirement portfolio usually needs some stability and safety to help offset some of the losses that can come when you have higher yielding investments. This is where CDs can help.
Certificates of deposit are cash products designed to give you a competitive interest rate, considering what it is. CDs are usually FDIC insured, so your money is safe from loss due to bank failure. While you won’t see huge returns, you can see decent enough returns that have the potential to keep pace with inflation. You know a portion of your capital is preserved when you use CDs in your retirement portfolio, and that can provide you with a little peace of mind.
Planning to Use CDs in Your Retirement Portfolio
It is actually possible to hold CDs in a retirement account. Some banks offer IRA CDs, meant to be held in an IRA to give you more competitive returns. These CDs generally have maturities of seven to 10 years. However, you don’t need an IRA CD to keep CDs in your retirement account; any CD, for any maturity, can be held in your retirement account.
Many people like to employ the CD ladder when they use CDs as part of their retirement plan. Rather than lock up the money for 10 years, which can be a disadvantage if interest rates start to rise, a system can be set up so that CDs mature at smaller intervals. The key to CD laddering is to set up a system so that you know when CDs will mature, and you can roll them over for a period of time that is fairly long — five to seven years — but you still get regular access to some of your money. This also allows you the chance to take advantage of interest rates as they rise, getting you a better yield.
Using CDs to Complement Your Retirement Portfolio
A little cash in your retirement portfolio isn’t a bad thing. You can use it in addition to stocks and bonds, and other investments that you might hold in an IRA or a 401k. However, it is important that CDs (and other cash products) are used merely as complements to your portfolio. Especially when you are younger, a large portion of your retirement portfolio should probably be in higher yielding investments, with bonds to add some stability, and cash for true safety.
As you approach retirement, you can shift some of your assets out of higher yield investments and into bonds and cash. However, it is rare that cash should make up the largest portion of your retirement portfolio.
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