Are CDs a Good Investment for Seniors?

By the time you've become a senior, you've (hopefully) amassed a significant amount of money to cover your future expenses. At that point, instead of aggressively trying to grow your wealth, you want to protect what you have. But you also don't want to leave all your cash languishing in a savings account where it could lose value over time.

There are a few ways to address this problem. One option is to move more of your savings into conservative investments, like bonds. You could also benefit by opening a certificate of deposit (CD), and now could be a great time to do it.

Why invest in CDs?

Investing in CDs is a way to grow your wealth without risking it in the stock market. When you open a CD, you're locking in a guaranteed interest rate for the full CD term. This could be anywhere from a few months to five years or more, depending on the CD you choose.

The catch is, you're not allowed to touch your money during that time. If you do, you'll have to take it all out at once and pay an early withdrawal penalty. This varies by CD but is usually equal to several months of interest payments. It probably won't cost you any of your principal, though, unless you withdraw your money shortly after opening the CD.

Because of the restrictions CDs place on your cash, they usually have competitive interest rates. They're even more appealing than usual right now because interest rates on all savings products are high. But rates aren't expected to stay that way.

Many speculate that interest rates will begin to fall later this year as the Federal Reserve is expected to cut its federal funds rate. By opening a CD now, you could lock in a rate as high as 5% on a 1-year CD. If you put $5,000 in a CD like that, you could earn $250 in one year.

You can have your monthly interest payments transferred to a savings or checking account, or you could leave them in the CD. The latter could increase your profits even more because you'll earn interest on your interest after the first month.

How to get started investing with CDs

Opening a CD is similar to opening any other bank account. You find an account you like, contact the bank, provide your ID and other identifying information, and then make your deposit. This might be fine if you don't plan to spend your funds for many years, but if you want more access to your cash, a CD ladder could be a better fit.

This is where you open several CDs of different lengths. A classic example is a 1-year, a 2-year, a 3-year, a 4-year, and a 5-year CD. You place equal amounts of money in each. When the 1-year CD term ends, you can either spend that money or move it to a new 5-year CD. You do the same thing the next year with the 2-year CD, and so on. This gives you access to some of your cash penalty-free every year.

If you choose this route, watch out for automatic renewal. Many banks roll your cash into a new CD term of the same length at the end of the initial term unless you say otherwise. It's usually best for you to investigate which bank offers the best CD rates at that time rather than staying where you're at.

When not to put your money in a CD

CDs can be a good home for a portion of your retirement savings that you plan to spend in a few years. It keeps the funds shielded from the stock market while still allowing them to grow a little. But it's probably not the right choice for all your money.

You don't want your emergency savings in a CD, for example. You never know when you'll need to tap these funds. If it's before your CD term ends, you could face penalties.

It's also fine if you just don't like the idea of locking your money away where you can't easily access it. In that case, a high-yield savings account might be a better fit. These also offer interest rates around 5% right now and they let you withdraw cash as needed. But savings account interest rates aren't locked in, so it's tougher to gauge how quickly your money will grow.

You can always spread your money between a few accounts, too. Keep some in a high-yield savings account for emergencies and near-term expenses. Then put money for a few years down the road in CDs and leave the rest invested for a while to maximize your gains.