CDs offer safety and predictability, but that comes at the cost of high growth potential.
The stock market recovered from its terrifying plummet last month, but if the majority of your retirement fund is in stocks, you may still be reeling. Seeing a nest egg decimated overnight can make anyone rethink where they’re keeping their money — especially since the economy as a whole is still precarious.
Certificates of deposit are known for being low-risk, with fixed interest rates that offer guaranteed returns. Does that make them a smarter place for your retirement savings than the stock market? As with many financial questions, the answer is: It depends.
“CDs can feel like a safe haven in this kind of environment because they offer predictability, which is appealing when everything else feels shaky,” says Taylor Kovar, certified financial planner and CEO of 11 Financial. But, he warns, “there are some trade-offs.”
Here’s what you need to know before you make any big decisions.
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Is retirement a long way off? Stick with your current strategy
Stock market swings are scary, but a smart investing strategy factors in the dips. The S&P 500 has historically delivered around a 10% annual return for investors who keep their money there for decades. If you have many years before retirement, you can afford to ride out the waves and grow your money over the long term.
“One of the biggest retirement risks is getting too conservative too soon,” said Noah Damsky, CFA, principal of Marina Wealth Advisors. “Retirement can last for over 20 years, so get too conservative too soon, and you risk prematurely depleting your portfolio.”
Keeping some of your retirement savings in low-risk assets is wise, but the amount depends on a number of factors, including your age and risk tolerance. A financial adviser or robo-advisor can help you create the best strategy for you.
Nearing retirement? Moving more money into a CD could make sense
If you’re close to retirement — or are already retired — you have less time to recover from stock market dips. So, your priority should be less on growing your nest egg and more on preserving it. In this case, allocating more of your savings to low-risk, fixed-income assets like CDs and bonds can be a smart move. Again, a financial adviser can help you determine your best route.
Don’t give in to panic
Whatever your age and investment goals, don’t let the economic headlines spook you into making any drastic changes to your retirement plan.
“For investors rattled by the recent dip, I’d say this: Don’t make emotional decisions in response to short-term volatility. Step back, review your timeline, and make sure your investments match your goals and risk tolerance today, not what they were five years ago,” said Kovar. “A well-balanced plan usually includes both stocks and CDs, one for growth, the other for peace of mind.”
