Should You Keep Your Retirement Savings in a CD?

Certificate of deposit, or CD, interest rates are the highest they've been since before the 2008 financial crisis. A few years ago, it was difficult to find APYs of more than 2.00%, even on a long-term CD, but as of mid-2024, there are CD yields of 4.00%-5.00%, or even higher.

With CDs covered by FDIC insurance, this might seem like an extremely safe place to put some of your retirement savings. But just like any major financial decision, there are pros and cons to using CDs as a retirement investment. Here are just a few of the major factors you should keep in mind before using this route for your retirement savings.

Asset allocation

Under virtually no circumstances is it a good idea to put all of your retirement savings into CDs, or even most of it. And this is especially true when you're relatively young -- meaning, you're still a decade or more from retirement.

While CDs offer a safe and attractive yield, the reality is that over virtually any long period of time, CDs and other fixed-income investments have underperformed the stock market. By putting too much into CDs while you're young, you may be sacrificing the most important years of long-term compounding potential you have.

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One rule of thumb that is often used by financial planners is to take your age and subtract it from 110. This is the approximate percentage of your retirement savings that should be in stocks (or stock-based ETFs and mutual funds), with the rest in fixed income. For example, I'm 42 years old, so this implies a 68% stock, 32% fixed-income mix to give me the best balance of safety and growth potential. But CDs could certainly have a place in that 32%.

Taxes

Did you know that you might be able to invest in CDs through an individual retirement account, or IRA? While not all brokers offer CDs, several of our top-rated brokers do.

Not only do brokered CDs (offered by third-party banks through brokerage platforms) tend to have highly competitive interest rates, but they also help you avoid taxes.

Here's why this can be a smart move. If you take $10,000 of your savings and open a CD with a 5.00% APY, you'll generate $500 of taxable income over the next year. Depending on your tax bracket, this could mean $100 or more of your interest will go to the IRS, rather than toward your retirement.

On the other hand, you can open a CD in an IRA instead, and all of the interest it generates will stay in your account to grow and compound.

Reassess your strategy regularly

If you choose to incorporate CDs into your retirement plan, it's important to reassess this portion of your retirement portfolio often. Generally, it's wise to check in on your income strategy when your CD is a month or two from maturity to ask yourself what you want to do when it does.

Here's why. If you put a significant amount of your retirement savings into a 5-year CD at a 4.50% APY, that's a solid yield from the fixed-income portion of your portfolio. For now.

But if the Federal Reserve lowers interest rates significantly over the next few years, it's entirely possible that 5-year CDs will pay 2.00% five years from now. Would that seem as appealing? Many CDs renew automatically unless you act, so be sure to do a checkup to see if you might need to reallocate your money.

The bottom line

CDs can be a smart choice for some of your retirement savings, but not all of it. But as an easy-to-understand, FDIC-insured way to get a safe 4.00% (or higher) yield on the fixed-income portion of your savings, CDs can certainly be a piece of the puzzle.