3 Good Reasons for Seniors to Open CDs

Certificate of deposit, or CD, accounts are typically thought of as long-term deposit vehicles. While that's certainly true, there's a lot more to CDs, and many of their qualities can be especially appealing to senior citizens. As we'll discuss here, CDs can be a great way to create an income stream, maintain financial flexibility, and protect your hard-earned retirement savings.

1. Predictable income

Many people don't realize this, but many banks allow CD owners to withdraw the interest in their account as it is paid, with no penalty, as long as the original principal balance is left alone.

Let's say that you put $100,000 of retirement savings in CDs with an average APY of 5%. These CDs will generate $5,000 of income in the first year. You can withdraw those interest payments as they appear in your account, or you can choose to leave them to compound over time if you don't need the money.

The point is that while CDs are typically thought of as a long-term savings vehicle, they can also be a great fixed-income investment, especially when interest rates are relatively high.

2. Financial flexibility

CDs can be used to maximize both income and financial flexibility for retirees, who may need access to their money for unexpected expenses from time to time. And there are a few reasons for this:

• CDs can be found in terms ranging from just a few months to 10 years. If you don't want a certain part of your savings tied up for longer than a year, you can simply open a 1-year CD.
• By creating a CD ladder (a portfolio of CDs with staggered maturity dates), you can get a great combination of steady income and some of your money maturing (becoming available) quite often.
• Money from CDs can be withdrawn in an emergency at any time, but you'll have to pay a penalty. This might not be as bad as you think -- CD penalties typically involve forfeiting the last few months' worth of interest. Ideally, you'll avoid early withdrawals entirely, but it can be less costly than, say, taking the tax hit from a large and unexpected individual retirement account (IRA) withdrawal.

3. You won't lose principal

Most CDs (including all of those on our best CDs list) are FDIC-insured bank accounts, which means they're protected for up to $250,000 per account holder, per institution in the event of a bank failure.

In short, your principal is safe when you open an FDIC-insured CD. Even if you have to unexpectedly close the CD early, you'll typically only forfeit some of the interest you've been paid -- not your principal (unless the penalty amounts to more interest income than you've earned to that point).

On the other hand, other fixed-income investments like Treasury bonds and bond ETFs have market values that can fluctuate over time. With investments like these, price and yield have an inverse relationship, so if interest rates unexpectedly rise, the market value of your bonds can fall. If you put $10,000 into a 1-year CD and rates rise, it's still a $10,000 CD.

The bottom line on seniors and CDs

CDs can be an excellent way for seniors to simultaneously create a reliable income stream and protect their hard-earned retirement savings. There are certainly pros and cons to consider for opening CDs as opposed to other types of investments, but they can be a great choice for many income-seeking retirees.