by Richard E. Reyes, CFP
These days’ retirees are finding it difficult to obtain the necessary income they require in order to maintain their standard of living. They continue to search for safe places to invest their savings for income and keep putting their money into certificates of deposits. Of course there is relative safety with CD’s since they are federally insured making them virtually a risk free option up to a certain dollar level. But in reality CD’s might not be your answer.
Even considering the volatility that we have experienced in the market in the last decade, CD’s in the past have been extremely volatile as well. Now you probably have never realized this but let me give you this example.
Assume you invested $10,000 in a 1 year CD’s in the good ole days of 1981, the rate back then would have been about 15%. That would have been $1500 on your $10000 investment.
If you would have invested the same $10000 in 1986, only 5 years later, the rate for the same CD was 7% which would have decreased your income to $700 meaning your income would have been cut in half.
Now its 2011 and CD’s and the same CD is paying 1% which is an income of $100 on the same $10000 investment.
If you were a retiree relying on income by using this strategy you would have seen your income plummet by over 90% during this time , while the cost of just about everything went up.
Now are CD’s bad? No not at all. CDs are useful as a way to protect capital for the short term, but they are not competitive income generators and they shouldn’t be used for that. In fact, as inflation rises, CD holders will experience negative returns if their money is locked into rates that don’t out pace the rate of inflation. Just in the previous example alone you would need $3500 in todays dollars to buy the same that $1500 bought in 1981.
When it comes time to retire and generate income from your investments finding a safe place to put retirement savings is important. But, finding a safe place and having a plan that also maximizes annual income is just plain smart.
So if you are close to retirement or in retirement, don’t put all your money in CD’s. It can be a very bad thing.
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Wealth and Business Planning Group, LLC (The Financial Quarterback™) is a Registered Investment Advisor in the State of Florida that provides Fee Planning and Asset Management. Depending on your state of residence, Wealth and Business Planning Group, LLC (The Financial Quarterback™) may not be able to immediately provide services. For more information go to www.thefinancialqb.com. Richard E. Reyes, CFP is an Investment Advisor and President of Wealth & Business Planning Group, LLC (The Financial Quarterback™).