With thirty years or so until retirement, I haven’t considered investing in certificates of deposit in my retirement accounts, money I would hopefully have no need to touch for decades. Despite recent problems, the stock market is expected to provide the best returns, even with risk, over a long period of time. But not everyone is in the same situation as I am or has the same beliefs or trust in the stock market as I do. Discover Bank is offering high interest rates for CDs designed for IRAs, and for some this can be a great investment.
As you draw closer to retirement, a certificate of deposit is a good way to earn a guaranteed rate to offset your risk. You don’t want to be invested fully in stocks and find you need your money when the stock market is in one of its inevitable downturns. Discover’s 10-year IRA CD is currently earning 2.5% APY, lower than expected stock market returns, but there is no risk of losing your money as there is in the stock market.
That is better than every savings account I know of, and if you’re not touching your retirement funds for at least ten years, or if you have other retirement funds you can tap while you continue letting the CD approach maturity, this could make sense. It is true that CD rates are historically low right now, but if rates change significantly, you can withdraw the CD early with a small penalty you could easily recover with a new CD.
Certificates of deposit offer FDIC protection of your principal up to certain limits, so when they offer rates comparable to bond indexes, you can gain an advantage with safety. Vanguard’s Total Bond Market Index Fund is currently yielding only 3.01% APY.
CDs can be an appropriate retirement investment for a saver with a high net worth, low income needs in retirement, or a combination. If that describes you, a 2.5% annual interest yield could be all you need to cover each year’s expenses. Don’t forget you can ladder the CDs so you will always be earning the highest interest rate on all your money invested in these investments.
Updated November 3, 2011 and originally published May 24, 2010. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.