It might be because I work in the personal finance space, but I have read (and written) a lot about certificates of deposit (CDs) over the last year or so. That’s not surprising — the Federal Reserve’s benchmark interest rate hikes in 2022 and 2023 led to CD rates over 5%, which certainly isn’t the norm. That benchmark rate is now coming down thanks to a Fed cut in September and another just this month, though.
Despite all the press, and the general sense of urgency in the air to open CDs with high rates while I still can, I’m not taking the bait. Instead, I’m focusing on contributions to my new, first-ever retirement account. Here’s why.
Sometimes life gets in the way of retirement investing
How did I end up opening my first retirement account at the ripe old age of 40? I spent my years in my first career earning enough money to meet my bills and debts, and that was it — there wasn’t money left over to invest and I certainly didn’t get any kind of employer match (and rarely even had access to an employer-sponsored retirement plan).
After I changed careers in 2021, I started building up my income in my new field, but my initial goals with additional earning power weren’t investing. Instead, I was focused on paying off debt and saving to buy a home. I achieved the first goal in 2022 and the second earlier this year, which means I finally found myself in the position of being able to invest for retirement starting just this past summer.
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I opened a traditional IRA with an online brokerage, and opted for its robo-advisor service. I’m new to the world of investing, and wanted the most painless option possible. Every week I have money transferred from my checking account to my IRA, where it’s automatically used to buy ETFs and bonds — no fuss, no muss.
Intimidated by investing, or just want to keep things simple? Click here for our best robo-advisors for beginners.
Why not invest in CDs instead?
Simply put, CD returns aren’t high enough for my needs, and CDs themselves don’t have the long timeline I need for retirement investing. While I don’t necessarily intend to retire in the traditional sense — I get bored easily! — it would be nice to spend the next 25 to 30 years padding my IRA so I can eventually work less than full-time hours as a 60- or 70-something. And CDs just won’t generate the kind of returns I’d need to make that a possibility.
Let me show you what I mean. Right now, I could probably lock in a CD rate of around 4% — but the S&P 500 has averaged annual returns of around 10% for the last several decades. Just for the sake of argument, let’s look at the difference between investing $7,000 (my annual contribution limit for my IRA) and earning 4% on it vs. 10% over a 25-year period:
|
Rate of Return |
Total After 25 Years |
|---|---|
|
4% per year |
$291,354.77 |
|
10% per year |
$688,036.03 |
Data source: Author’s calculations using Investor.gov calculator.
That’s quite a difference, right?
Are CDs right for you?
I hate to say it, but — it depends. CDs can be a great move in a few scenarios. If you’re a retiree and will be holding large amounts of cash to cover your expenses, a CD will let you lock in your interest rate and not expose your money to the risks of the stock market. And if you have a set amount of money for a set short-term goal (like buying a home or a new car in a year or two), a CD can keep that cash safe and growing until you’re ready to use it.
Interested in CDs? Click here for a list of some of the best rates on offer right now.
Otherwise, a different type of account likely makes more sense for you, like a high-yield savings account or an investment account. Don’t assume you must jump on the CD bandwagon, just because they’ve been in the news. Make the right choice for your money based on your goals, not the hype.
