While high inflation and corresponding interest rates have negatively affected many people’s finances, one benefit has been that savers can earn more interest without having to take much risk. For example, putting money into deposit accounts like certificates of deposit (CDs) or high-yield savings accounts has lately enabled savers to earn around 4% to 5% or more in annual interest.

For seniors, these high interest rates could be beneficial. As you age, you often want to take less risk with your money, due to not having as much time to ride out the ups and downs of markets. Plus, many seniors want to draw a stable income from their savings and investments to enjoy retirement. If you hold risky assets that experience significant volatility, you might not be able to withdraw as much income if those assets lose value.

So, assets like CDs — which typically pay fixed interest rates for a given amount of time if the money is not withdrawn early — could provide the stability many seniors look for. CDs come in a variety of terms, with short-term CDs often lasting for 12 months or less, while long-term CDs often last for up to 10 years.

“Long-term CDs can be a useful tool for seniors in retirement. CDs can offer principal protection and predictable interest that is often valued by senior investors,” says Tommy Thompson, Jr., a Certified Financial Planner (CFP) at Innovative Financial Group. However, just because long-term CDs can be good investments for seniors doesn’t mean that these should make up 100% of their portfolios.

“Long-term CDs are rarely a good fit for the majority of any investor’s portfolio. All investments can carry risk and a long-term CD typically carries a surrender charge and opportunity cost,” says Thompson.

Seniors might want to take on some level of risk to grow their wealth, such as investing in a small amount of equities and diversifying with different types of fixed income assets, including some CDs. Doing so could help them withdraw enough money to enjoy retirement while having a nest egg that outpaces inflation, which could enable them to leave an inheritance or reduce the risk of outliving their savings. 

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Should seniors add long-term CDs to their investments?

While seniors probably want to invest in more than just CDs, long-term CDs can be a useful component. In typical economic environments, long-term CDs provide higher yields than short-term CDs. However, short-term CD rates are currently higher, amidst expectations that the Federal Reserve will cut interest rates soon.

But if you know you don’t need the funds for a given amount of time, then long-term CDs could be useful, as you can lock in returns for longer. Short-term CDs might pay more now, but by the time they mature, CD interest rates might be lower across the board. So, seniors might prefer the certainty that long-term CDs provide.

“Seniors may consider long-term CDs when seeking low-risk, reliable income for known future expenses like healthcare or supplemental retirement income. However, if liquidity is a primary concern or if they anticipate needing access to funds for unexpected expenses, alternatives with more flexibility might be preferable,” says Tyler Meyer, CFP and founder of Retire to Abundance.

Thus, seniors need to assess how long-term CDs align with their situation, as different people may want different allocations.

“Seniors should evaluate their financial goals, time horizon, and risk tolerance. If stability and a guaranteed income stream align with their needs, long-term CDs can be suitable. Alternatively, if flexibility and potential for higher returns are prioritized, diversifying into a mix of fixed-income assets like bonds or bond funds may be a more appropriate strategy,” says Meyer.

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Finding balance

If a senior does want to add long-term CDs to their portfolio, consider how these assets fit in with other investments and savings vehicles. For one, you might want the certainty that long-term CDs provide, along with the liquidity that short-term CDs offer.

“There are some approaches to balance the risks and rewards of CDs for seniors. Start by using a ladder approach to money put into CDs by allocating some in short- and some in longer-term CDs. Spread the amount of money across a variety of timeframes so the entire amount isn’t locked up for too long a period of time,” says Chris Orestis, Certified Senior Advisor, president of Retirement Genius.

In addition to balancing CD durations by laddering, seniors can also balance factors such as liquidity, stability and returns by putting money into different buckets.

Orestis says that a smart move to balance risk and returns can be to put a portion of savings into a high-yield savings account or money market account for the most liquidity, as well as putting some money into CDs, along with investing a portion in securities that have more risk yet more reward. 

The exact investments, like the split between stocks and bonds, depend on factors like risk tolerance and the expected number of years in retirement. But using a diversified approach across investments and deposit accounts could help.

“Seniors in retirement need to protect their nest eggs with smart balancing of how they allocate their funds to provide the income they need and opportunities to still find rates of return over months and years,” adds Orestis.

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The bottom line

Overall, long-term CDs can be a good fit for many seniors, but these generally shouldn’t be the only assets seniors invest in. For many, investing in different types of assets, including long-term CDs, but also some that have more risk and reward and some that have more liquidity, could be the key to having enough money in retirement. Still, the exact proportions and specific investments will depend on your circumstances, such as how much risk you’re willing to take and your other sources of income, if applicable.