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When Should Seniors Consider CDs?

Banking, CDs
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In the years since the financial crisis hit in 2007, seniors, especially retirees, have had to get used to some new investment strategies to produce returns. After a rough start, it seems like they’re beginning to get the hang of it. Retiree confidence in having a financially secure future increased to 28% this year from 18% in 2013, according to the 2014 Retirement Confidence Survey from the Employee Benefit Research Institute in Washington.

But some questions still remain, like when should a senior consider liquidating assets or putting money in certificates of deposit (CDs)? What proportion of assets should go into CDs? Here are some things to consider when pondering those questions:

Age

You may have heard that the stock market is a young person’s game. That’s because, as you get older, the time you have to recoup losses decreases. So if a 35-year-old takes a big hit in the stock market, she still has 25-plus working years to rebuild before reaching retirement, while someone already past 60 may not have that long.

Experts say that you should gradually reduce your stock holdings as you age ¾ from about 50% to 60% of assets in your 60s to about 20% to 30% in your 80s ¾ and replace them with safe investments like CDs or credit union share certificates. A good rule of thumb is to cut stock holdings by 1% a year, but you may increase your proceeds by selling up to 5% in years with good gains and none in a corresponding number of years with poor returns.

Inflation

When figuring out how to balance your investments, you’ll need to take inflation into consideration. If you’ve saved enough to carry you through retirement, the desire to preserve it is understandable. But if you put the full amount into risk-free savings or CDs, the interest you earn probably won’t keep up with inflation, reducing the value of those assets. The latest annual inflation rate was 2.1% in May, on a non-seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported on June 17. So if the interest rate you’re getting on a 1-year CD or savings account is anything less, you’re losing money.

Risk tolerance

When deciding whether to move your money to CDs and how much, it’s important to consider what level of risk you find acceptable and how much you can afford to expose to potential declines.

Your investments may generate enough income that you’ll never have to dip into your principal, or you might be worried that you may not have enough to last. Either way, you should keep some money in safe investments like CDs. Beyond that, you may consider taking on some riskier assets to grow your nest egg. Experts generally recommend that those already retired take fewer chances to prevent major losses, but in the end, the amount you put into riskier holdings ultimately depends on your comfort level.

Another thing to consider is how much of an emotional toll a loss would take on you at this stage in your life, regardless of whether you can afford it. To get an idea of where you stand, take this risk-tolerance quiz on the Rutgers University website.

How long can you go without drawing down your principal?

There are lots of options when it comes to term lengths of CDs. In general, though, the longer the term, the higher the interest rate you’ll earn, so it’s best to find the most financially productive structure for your circumstances.

Risk image via Shutterstock