You probably know that it’s important to actively save for retirement rather than rely on Social Security alone to fund your senior years. Those benefits only pay the average retired worker about $23,000 a year now.
And while that number should rise in the future due to inflation, at the end of the day, you’re going to be limited in what you can spend if 100% of your retirement income consists of a Social Security check.
But even people who are motivated to save for retirement risk making a big mistake. These days, a lot of people are putting money into CDs to benefit from today’s great rates. But if you open a CD to save for retirement, you might sorely regret that decision.
Why some people like CDs for retirement
It’s common to use an IRA or 401(k) to save for retirement. And while you could keep your IRA or 401(k) in cash, people with these accounts generally invest their money in stocks and other assets.
Our Picks for the Best High-Yield Savings Accounts of 2024
|
American Express® High Yield Savings 
APY 4.25%
|
APY 4.25%
|
Min. to earn $1 |
|
UFB Portfolio Savings Account 
APY 5.15%
|
APY 5.15%
|
Min. to earn $0 |
|
Western Alliance Bank High-Yield Savings Premier 
APY 5.31%
Min. to earn $500 to open, $0.01 for max APY
|
APY 5.31%
|
Min. to earn $500 to open, $0.01 for max APY |
But when you invest money, you risk losing some — or, technically, all. With CDs, that risk doesn’t exist provided you keep your account balance to $250,000 in an institution that’s FDIC insured. And with today’s CD rates being so high, it’s easy to see why you may be tempted to stick to CDs for retirement savings.
Why CDs are a bad choice for building retirement savings
While you might get to enjoy a risk-free return in a CD, you take on another risk — ending up with a retirement savings shortfall. And the reason is that historically, stocks have outperformed CDs.
Over the past 50 years, the stock market’s long-term average annual return has been 10%. We all know that today’s 5% rates, meanwhile, aren’t what CDs usually pay.
But let’s say we’re optimistic and believe CDs will continue to pay 5% for the next few decades, and let’s say you’re saving $200 a month for retirement in CDs. At that return, in 30 years, you’ll have almost $160,000.
With a stock portfolio paying 10% annually, in 30 years, you’ll have $395,000. Which would you rather retire on?
Also, we need to be realistic about what CDs will pay. If we use a more down-to-earth number — say, 2.5% — then a $200 monthly CD deposit over 30 years will give you just $105,000.
How to cope with the risk of investing in stocks
If you’re someone who’s been choosing CDs over stocks because you find investing too risky, that’s understandable. But one thing you need to know is that the 10% average market return referenced above accounts for many years of downturns.
The stock market isn’t going to do well every year, and you should expect it to sometimes lose money. But history has shown that sticking with it for decades typically yields good results.
So yes, there may be a year when your stock portfolio drops 8%. But the following year, it might rise 15%. And then 18% the year after that.
That’s why you have to be willing to invest for the long haul. But if you’re saving for retirement, you ideally have many years to build your nest egg. So while it’s OK to turn to a CD to meet short-term savings goals, think twice before relying on one to fund your retirement.
These savings accounts are FDIC insured and could earn you 14x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 14x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.