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If you’re saving for retirement, you need to make smart choices about where your money goes.
It may be tempting to put your cash into certificates of deposit for a few different reasons. CDs are FDIC insured, so you can feel confident you’re most likely not going to lose money on them. They also provide a guaranteed rate of return, which is pretty good right now. Some CDs are offering yields above 4.50%.
Unfortunately, while CDs seem like they have a lot going for them, they are not the right place to put the money you’re saving for your senior years. Here’s where your money should go instead.
Rather than buying CDs with your retirement savings, you should put the funds into the stock market. For most people, the best option is an index fund that tracks a financial index, such as the S&P 500. This is made up of around 500 of the largest U.S. companies.
Investing in the stock market has a much higher upside. The S&P 500 in particular has produced average annual returns of 10% over the last five decades, which is far more than CDs offer, even in today’s environment when yields are pretty competitive.
Of course, it’s true that there are also more risks to putting your money in the market. However, if retirement is years in the future, those risks aren’t that high since you’re a long-term investor. You can leave your money alone for a while if there’s a market crash, which history shows us is inevitable. But historically, the market has always recovered, and if you stay invested, your portfolio should too.
Earning 10% on your money rather than 4.50% can make a huge difference in the amount you ultimately end up with. A $250 monthly investment made over 30 years and earning 4.50% returns would net you $183,021.21 in the end. But the same investment at 10% would leave you with $493,482.07 instead.
Which amount would you rather retire with?
The argument is pretty compelling that your retirement savings should be in the stock market rather than CDs. But you’ll also want to be smart about the account you use to get it into the market.
If you have access to a workplace 401(k) plan, that’s usually the first account you should invest in. You can have money withdrawn right from your paycheck and your employer may even match some of your contributions — which is free money (something you also won’t get by buying CDs).
Since 401(k) accounts do have limited investment options, once you’ve earned any employer match it’s a good idea to move on to making traditional or Roth IRA contributions. You can open one of these accounts with a brokerage firm of your choosing to gain access to a wider pool of potential investments.
A traditional IRA is likely best if you think your tax bracket is higher now than it will be as a retiree, since this account lets you claim a tax deduction upfront when you make your contribution. Roth IRA contributions are taxed, but in retirement, you get to withdraw your funds tax free.
If you’ve exhausted IRA contribution limits ($7,000 in 2024, or $8,000 for those 50 and over), you can go back to putting more money into your 401(k) until you’ve hit the max contribution for that account, at which point additional investments are best held in a taxable brokerage account.
Funneling your money into a tax-advantaged plan and buying index funds that track the S&P 500 is likely to set you on the path to much greater success than sticking your hard-earned funds in a CD. Forget about certificates of deposit for retirement savings and opt for investments in a retirement account instead. You likely won’t regret it.
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