Why Your Retirement Plan Needs More Than Just CDs
After years of near-zero interest rates, many retirees are once again finding attractive yields in certificates of deposit (CDs) and U.S. Treasury securities.
Earning 4% to 5% on money that’s backed by a bank or the federal government can feel like a welcome change after years of watching savers earn next to nothing.
For investors who have experienced bear markets, inflation shocks and economic uncertainty, the appeal is understandable. Safety matters, particularly when you’re retired and no longer collecting a paycheck.
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But while CDs and Treasuries can play an important role in a retirement portfolio, relying on them too heavily may create risks that are less obvious than stock market volatility.
In some cases, the greatest threat to a retirement plan isn’t losing money in the market. It’s failing to generate enough growth to maintain purchasing power through a retirement that could last 20, 30 or even 40 years.
The challenge of inflation
One of the biggest dangers retirees face is inflation.
Even modest inflation can significantly reduce purchasing power over time. Per the Rule of 72, at an inflation rate of 3%, the cost of living roughly doubles every 24 years. A retiree spending $80,000 annually today could need about $160,000 per year later in retirement just to maintain the same lifestyle.
Many retirees focus on the yield they’re earning today. What often gets overlooked is their real return after inflation and taxes.
For example, if a CD pays 4.5%, federal taxes reduce that return, and inflation consumes another portion. The resulting increase in purchasing power may be far smaller than expected.
While preserving principal is important, preserving purchasing power is often the larger challenge.
Retirement has changed
Previous generations frequently spent 10 to 15 years in retirement. Today, many retirees can expect retirement to last 25 to 35 years.
A healthy 65-year-old couple has a meaningful probability that at least one spouse will live into their 90s. That longer time horizon changes the planning equation.
Investments designed primarily for capital preservation can be useful for short-term income needs, emergency reserves and near-term spending goals.
However, a portfolio that lacks sufficient growth assets may struggle to support decades of increasing expenses.
The irony is that investors often become more concerned about market losses as they approach retirement, even though inflation and longevity could become equally important risks.
The opportunity cost of safety
Consider two hypothetical retirees who each begin retirement with $1 million.
The first retiree places nearly all their assets in CDs and Treasury securities, earning about 4%.
The second retiree maintains a diversified strategy that includes investments designed to provide long-term growth alongside assets intended to reduce volatility and generate income.
The first retiree may experience fewer market fluctuation, but in a 25- or 30-year retirement, the difference in portfolio growth can become significant.
While no investment strategy guarantees results, history demonstrates that portfolios containing growth-oriented assets have generally provided better long-term protection against inflation than portfolios invested exclusively in fixed-income instruments.
The question isn’t whether safety is important; it’s whether safety alone is sufficient.
Taxes can create additional headwinds
Many retirees are surprised to discover how much taxes can affect their retirement income.
Interest from CDs is generally taxed as ordinary income each year. Treasury securities receive favorable state tax treatment in many states, but federal income taxes still apply.
For retirees who already have substantial balances in traditional IRAs, 401(k)s, 403(b)s or other tax-deferred accounts, additional taxable interest income can contribute to a larger tax burden.
It may also affect other areas of a retirement plan. Higher taxable income can increase the portion of Social Security benefits subject to taxation and may contribute to higher Medicare premiums through income-related monthly adjustment amount (IRMAA) surcharges.
This is one reason comprehensive retirement planning often focuses not only on investment returns but also on tax efficiency.
Building a retirement income strategy
None of this suggests that retirees should avoid CDs or Treasury securities.
They can serve valuable purposes.
Many retirees benefit from maintaining a portion of their assets in highly conservative investments to fund near-term spending needs, provide liquidity during market downturns and reduce overall portfolio volatility.
The challenge arises when investors view these tools as a complete retirement solution rather than one component of a broader strategy.
An effective retirement plan often considers multiple risks simultaneously, including:
- Inflation risk
- Longevity risk
- Market risk
- Tax risk
- Health care expenses
- Sequence of returns risk
No single investment addresses all of these concerns.
Finding the right balance
Retirement planning is ultimately a balancing act.
Investors need enough safety to weather unexpected events and market downturns. They also need enough growth potential to preserve purchasing power and support a retirement that could last decades.
For some retirees, that balance may include a meaningful allocation to CDs and Treasuries. For others, those investments may represent only a portion of a broader strategy designed to address income, taxes, inflation and long-term growth.
The goal isn’t simply to avoid losses.
The goal is to create a retirement plan capable of supporting the lifestyle you’ve worked so hard to build.
CDs and Treasuries can help provide stability and confidence. But for many retirees, they may be only one piece of the puzzle.
A successful retirement often requires looking beyond today’s yield and focusing on the bigger picture: Maintaining purchasing power, managing taxes and generating sustainable income for the years ahead.
