top partner

for CFD

Image source: Getty Images

If you’re a retiree (or plan to be a retiree) who relies on their investments for income, there are a few things you need. For one, you need to protect your nest egg, which is why CDs can be particularly appealing compared with investments like dividend stocks.

However, it’s also important to have consistent income as well as financial flexibility. Short-term CDs pay the highest rates right now and maximize your access to your money, but there’s no way to know what rate you’ll get after the CD matures. And long-term CDs can give you consistent income for several years, but you’ll pay a hefty penalty if you have to withdraw your money early.

What is a CD ladder?

The short definition is that a CD ladder involves dividing your money into equal amounts and using it to open several CDs with various maturity terms. As each CD matures, you roll the money into a new, long-term CD.

We’ll look at an example in the next section, but using this strategy has three key benefits:

You’ll always have some money in a CD that matures within a year. This allows you the flexibility to use some of the money if you need it, and if interest rates rise, will give you the ability to take advantage.You’ll have income that is more predictable than simply buying a 1-year CD, which is where you’d find the highest CD rates as of this writing. Sure, you can find a 1-year CD with an APY of more than 5.00%, but there’s no guarantee that CD rates will be anything close to that when it matures in a year.In most cases (just not right now), 5-year CDs have significantly higher yields than 1-year CDs. A CD ladder will let you take advantage of long-term interest rates.

Example of a CD ladder

As a hypothetical example, let’s say that you have $100,000 to invest in CDs. You might choose to create a CD ladder as follows:

$20,000 in a 1-year CD$20,000 in a 2-year CD$20,000 in a 3-year CD$20,000 in a 4-year CD$20,000 in a 5-year CD

The basic idea is that when the 1-year CD matures, you’ll use the money to open a new 5-year CD. Each year, one-fifth of your money will mature, and you’ll open a new 5-year CD with it. Eventually, you’ll have a portfolio composed of 5-year CDs with various lengths of time remaining to maturity.

You don’t necessarily need to open these CDs at the same bank. Some of our favorite banks don’t offer every CD term, and the best rate on a certain CD maturity might be at a specific bank.

Two important caveats

First, CDs typically renew automatically unless you act. And they renew into the same term length at the bank’s current CD rate. So, when your 2-year CD matures, it will renew into a new 2-year CD, and that’s not what you want with a CD ladder. Upon maturity, you’ll need to manually let the bank know that you intend to not renew and then open a new 5-year CD with the money.

Second, not all banks allow CD owners to withdraw the interest as it is paid to the account. If you plan to rely on your CDs for income to cover living expenses, be sure you’ll be allowed to access your interest income during the term.

A CD ladder can be part of a smart retirement income strategy

To be perfectly clear, I’m not saying that retirees should use all of their nest egg to create a CD ladder. It’s important to have a balanced portfolio, even in retirement. One common rule of thumb is that by subtracting your age from 110, you can determine the percentage of your portfolio that should be in stocks (or stock-based mutual funds and ETFs in your IRA), with the rest in fixed income investments like bonds or CDs.

In other words, if you’re 70, this implies a portfolio of about 40% stocks and 60% fixed income. But the best move is to speak with a financial planner to determine the ideal mix for you.

Having said that, creating a CD ladder can be a great way to put some of your fixed income allocation to work in a way that combines financial flexibility and maximum long-term consistent income.

Alert: highest cash back card we’ve seen now has 0% intro APR until 2025

This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!

Click here to read our full review for free and apply in just 2 minutes.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

Read the full story: Read More“>

Blog powered by G6

Disclaimer! A guest author has made this post. G6 has not checked the post. its content and attachments and under no circumstances will G6 be held responsible or liable in any way for any claims, damages, losses, expenses, costs or liabilities whatsoever (including, without limitation, any direct or indirect damages for loss of profits, business interruption or loss of information) resulting or arising directly or indirectly from your use of or inability to use this website or any websites linked to it, or from your reliance on the information and material on this website, even if the G6 has been advised of the possibility of such damages in advance.

For any inquiries, please contact [email protected]