Here's the Single Best CD Investing Strategy for Seniors

When you're in the process of saving for retirement, certificates of deposit (CDs) can be a poor choice. The reason? Even if CDs were to keep paying the way they're paying today, those CD rates would still pale in comparison to the stock market's typical return.

The stock market's performance can vary tremendously from one year to the next. But overall, over the past 50 years, the market's average annual return has been 10%. Even if CD rates were to hold steady at 5% over time, that's nowhere close to 10%. And if you were to put $20,000 into CDs earning 5%, in 20 years, you'd have $53,000 -- as opposed to $134,000 in a stock portfolio generating a return of 10% per year.

As such, you may want to limit the extent to which you invest your long-term savings in CDs. But once you're within a year or so of retirement, it absolutely makes sense to move some of your money out of stocks and into CDs -- especially when rates are high. Furthermore, it makes sense to keep money in CDs during retirement as a means of limiting your risk.

But if you're going to hang onto CDs as a senior, it's important to take the right approach. And here's the one rule of thumb it pays to consider.

Why CDs are a great bet for seniors

During retirement, it's a good idea to set yourself up with income that's as risk-free as possible. And CDs fit that bill to a large degree.

If you open a CD at an FDIC-insured bank, your deposit is guaranteed, provided it doesn't exceed $250,000 -- meaning, if your bank fails, you won't lose a dime. And that limit doubles to $500,000 if you have a joint account.

So, let's say you put $20,000 into a 12-month CD paying 5%. Right there, you're earning a risk-free $1,000 in a year. That's $1,000 you can count on and use to pay near-term bills.

Furthermore, while you should leave some money in a regular savings account as a senior, the reason you may want to keep most of your cash in CDs is that your interest income will be far more predictable. With a savings account, you could start out with a given interest rate on your money, only to see it change with market conditions. With CDs, you're locking in a guaranteed rate. When you're on a tight budget, which is the case for many retirees, that's helpful.

The one strategy you need to employ with CDs

When you're in the process of building a retirement nest egg, you should plan to not touch that money. But once you're in retirement, you'll probably be tapping your savings regularly to cover your ongoing expenses -- because that's what that money is there for. And that's why it's so important to set up a CD ladder, rather than put a huge sum of money into a single CD.

When you ladder your CDs, portions of your cash come due at different times. This gives you regular access to your money, which you need in retirement. Remember, it's very common for banks to impose penalties for cashing out a CD before it matures. You don't want those penalties eating away at your retirement income. But with a CD ladder, that's a situation you can avoid.

So, let's say you want to keep $30,000 in CDs as a retiree. What you may decide to do is open a 12-month CD every month in the amount of $2,500. This way, you have 1/12 of your money becoming available to you roughly every 30 days. If you were to put $30,000 into a single 12-month CD, you could end up facing a penalty should you need to use some of that money before the one-year mark.

And to be clear, you can make your CD ladder continuous from year to year. You can also play around with different intervals -- CD terms usually range from three months to five years, so there is a lot of flexibility. The point, however, is to make sure you have access to your money consistently.

All told, CDs can be a great income-generating tool for seniors. But definitely take the laddering approach so you get the benefit of predictable income, risk-free income, and the flexibility to withdraw your money when you need to.