If your focus has shifted from earning as much interest as possible to protecting your savings, investing in the stock market may seem too risky. On the other hand, low-yield savings accounts may not offer the interest rates you need to maintain the value of your wealth. In this situation, certificates of deposit could allow you to earn competitive interest rates without exposing yourself to financial risk.
A certificate of deposit (CD) allows you to earn a guaranteed interest rate on your savings for a predetermined period. Because you can't withdraw your funds during the CD's term without incurring a financial penalty, banks and building societies tend to offer higher interest rates compared to standard savings accounts. Therefore, a CD lets you earn a relatively high interest rate on your savings without risking it on the stock market.
You can open a CD with most banks and credit unions. Interest rates, early withdrawal fees and other product features can vary significantly between financial institutions, so it's worth shopping around to get the best deal.
Most products offer fixed interest rates, but variable-rate options also exist. The advantage of a fixed interest rate is that you'll know the value of your CD when it matures from the outset, provided you don't withdraw your savings early. Variable-rate CDs may offer better returns if the interest rate rises, but rates could also fall.
Most financial institutions offer CDs with varying terms. The term is how long you must leave your money untouched before the product matures. Banks and credit unions can set their own term lengths, and longer-term products typically offer higher interest rates. Common options include:
Long-term CDs can be an excellent, low-risk option for investing money if you haven't earmarked the funds for any particular purpose. However, withdrawing your money early will likely incur significant fees, and you'll have to withdraw the entire balance in a single lump sum. A shorter term may be a more sensible option if you're saving for a specific project or anticipate changes in your financial circumstances.
The principal amount is the money you deposit in your CD as a one-time payment. Unlike regular savings accounts, you can't usually add more money after opening a regular CD account. How much to invest as principal depends on your financial position — you should balance depositing enough to make decent returns on your investment against tying up more of your money than you can realistically afford.
After opening a CD, your financial institution will send you regular statements and deposit earnings into your account monthly or quarterly. CDs earn compound interest, which means the bank or credit union calculates interest on your initial deposit and any accumulated earnings.
Generally, CDs are worth considering if you prefer not to risk your savings by investing in the stock market but want a higher interest rate than a regular savings account. If you have retirement savings with no immediate plans to spend your money, opening a CD offers predictable earnings and could simplify long-term financial planning.
CDs are also a sensible way to save for future events. For instance, if you want to financially support a grandchild's college education in the future, a longer-term CD lets you earmark that money, earn some interest on the principal and protect it from stock market fluctuations.
However, tying up all your money in CDs could cause financial difficulties because it makes your savings inaccessible without paying fees. Generally, it's wise to keep emergency savings in an account you can access immediately.
Some seniors simply feel uncomfortable about locking money away for a fixed period. In this situation, an instant-access savings account could be a better option, but fluctuating interest rates could make forecasting your earnings more challenging.
Many older adults manage their savings by investing money across several accounts. For example, they may keep some of their savings in a variable-interest savings account to ensure it's easily accessible for day-to-day expenses and emergencies. They may also invest a portion of their money in CDs to cover future expenses and earn a higher interest rate.
CDs suit many older adults but aren't the right option for everyone. Whether you should invest in certificates of deposit as a senior depends on several factors, including your appetite for risk and financial situation. If you're unsure, a financial adviser can assess your finances and recommend the most suitable saving methods for your circumstances and goals.
