Are CDs a good way to save for retirement?

Saving for retirement is one of the most important objectives that many people have to tackle in their financial journeys. The United States does not have a public pension system, and most private sector workers do not have access to a private pension anymore. For this reason, it's key to make a plan early and stick with it. Most retirement savers use a tax-advantaged retirement investment account like a 401(k) or an individual retirement account (IRA).

One vehicle that can be used for retirement savings is a certificate of deposit (CD). CDs aren't tax-advantaged, so you don't get that benefit, but they do provide a safe, efficient way to store money for retirement, provided you use them the right way.

Start exploring the rates you could earn on CDs here.

Are CDs a good way to save for retirement?

CDs can be a smart way to put money aside for retirement. Here are some rules to follow to make sure you're using your money in the most effective way.

Use CDs when rates are high

Right now, CD rates are very high. The Federal Reserve has raised interest rates repeatedly over the past 18 months, and CD rates have gone up in kind. Right now, many CDs offer interest rates of more than 5%. This won't last forever, though. 

This means that right now, putting money into a CD is a good way to store money you're saving for retirement. When rates go back down, though, you may want to consider other options.

Explore the benefits of saving with CDs today.

Use CDs when closer to retirement

Early in your working life, you probably want to put most of your money into assets that have higher earning potential, such as stocks. Investing in the stock market brings risks, of course, but if your time horizon for retirement is sufficiently far out, you can take the risk. If there is a big dip in the market, you have plenty of time to wait for a rebound.

Those closer to retirement, though, need to think more about preserving their wealth than building it. CDs are perfect for this; they're safe and you earn interest. Even if rates are low, those near retirement may want to consider using CDs as a way to keep their funds safe.

One important thing to remember for those close to retirement is that when you put money into a CD, you can't take the money out until the CD reaches full maturity. This is generally between three months and five years. Taking money out before the maturity date will typically result in substantial early withdrawal fees, so plan carefully.

Consider a CD ladder

Building a CD ladder is a way to make saving money with CDs a more long-term plan. To start, you buy a number of CDs with increasing maturity lengths. For example, you could do this:

• Put $2,500 in a 1-year CD
• Put $2,500 in a 2-year CD
• Put $2,500 in a 3-year CD
• Put $2,500 in a 4-year CD

The rates will be different for each CD and will depend on the current interest rate environment. 

After the 1-year CD reaches maturity, you take all of the money in it, including interest, and reinvest it in another 4-year CD. And, when the next CD term ends, you do the same thing, building a ladder of CDs.

This can be a good choice for retirement savers because it allows you to harness the power of compound interest. In theory, you can keep a CD ladder going for years, but make sure to consider shifting out of the ladder if interest rates get too low.

The bottom line

There are many ways to save for retirement. Investing in the stock market via a tax-advantaged plan is popular and should be part of most people's retirement plans, but other products are worthwhile as well, including CDs. Just make sure to plan carefully and pay attention to interest rates.