What Are Certificates of Deposit?

CDs are savings products offered by traditional banks and credit unions. You open one with a fixed amount of money for a specific length of time, called a term. The CD earns interest throughout the term until it reaches maturity. Then, you can cash out the CD or roll it over into another CD.

Benefits of CDs for Seniors

For seniors, there are several advantages to using CDs as investments. Among them are the following.

Higher Interest Rate Than Deposit Products

Generally, CDs pay more interest than other traditional banking products, such as savings and checking accounts. However, rates do vary, making it important that you compare CDs at multiple banks before opening one.

Security

CDs offer a very low-risk investment opportunity for seniors. Typically, CDs pay a guaranteed rate throughout the term. Plus, they come with Federal Deposit Insurance Corporation protection. In the event of a bank failure, the FDIC covers $250,000 per bank per depositor, so you won’t lose your investment.

Convenience

CDs can be opened in person at local banks and credit unions. Some financial institutions also enable you to open them online. Many financial institutions offer automatic rollover, too. Unless you notify the bank to make changes, your CD then renews for the same term at the current interest rate upon maturity.

Wide Range of Options

Most banks and credit unions in the Fort Worth area offer CDs. As a result, you have a wide range of options to choose from, meaning you can find a CD with a term that suits your needs.

Potential for Flexibility

Laddering CDs is a strategy that increases flexibility while allowing you to earn the higher rate of interest that certificates of deposit provide. This investment strategy involves breaking a large deposit into several smaller CDs with different terms.

For example, say you have $10,000 to invest in CDs. You might ladder the investment as follows:

• $2,000 in a 1-year CD at 1.1% interest
• $2,000 in an 18-month CD at 1.5% interest
• $2,000 in a 2-year CD at 2.1% interest
• $2,000 in a 30-month CD at 2.6% interest
• $2,000 in a 3-year CD at 3.1% interest

With this approach, $2,000 would become available for you to spend or reinvest every 6 months after the first year.

Estate Planning Support

CDs can also simplify passing money onto your heirs. When opening a CD, the CD owner can title it Payable on Death, or POD, to a beneficiary of your choosing. If the owner passes away before the end of the term, the bank will typically cash out the CD early and give the funds to the named beneficiary.

Drawbacks of CDs for Seniors

Despite their many benefits, CDs do have some potential disadvantages, including the following concerns.

Opening Deposit Requirements

Usually, the amount needed to open a CD is higher than the opening deposit requirements for savings, and each financial institution establishes its own rules. These requirements may vary based on term. For example, you may need only $500 to open a 2-year CD but at least $2,500 to invest in a CD with a term under 1 year.

Low Interest Rate Compared to Other Investments

Although CDs generally pay a higher rate of interest, their returns may be lower than other investment products. Annuities, stocks and mutual funds may allow you to earn more. However, these alternatives often carry more risk.

Penalties for Early Withdrawal

If you need to withdraw a CD early to cover an unforeseen expense, you'll typically pay a penalty. How much an early withdrawal will cost you depends on the financial institution’s policies and how far the CD is from its maturity date.

Locked-In Rate

Once you purchase a CD, your money becomes locked into an interest rate. Should interest rates increase before the end of the term, you won’t be able to take advantage of them.

Tax Challenges

In some cases, interest earned on CDs may be taxable. Depending on your financial situation, other types of tax-free or tax-deferred investments may be a better choice.

Are CDs Right for You?

CDs may be right for you if you:

• Want to minimize risk as much as possible but want to earn more interest
• Have money in a savings or checking account you can access in an emergency
• Prefer to lock your money in so you won’t be tempted to spend it
• Are saving for a future goal, such as a vacation you plan to take in 2 years

Ultimately, the best way to determine if a CD is right for you is to meet with an expert in financial planning for seniors. Both the National Association of Personal Financial Advisors and the Financial Planning Association have search tools to help you find experts in the Fort Worth area.