CD rates Blog

Finance Blogs » CD rates » CDs iffy for Gen-Y retirement

CDs iffy for Gen-Y retirement

By Claes Bell, CFA · Bankrate.com
Tuesday, November 27, 2012
Posted: 5 pm ET

Using certificates of deposit to save for retirement when you're in your 20s is a little bit like taking a cross-country road trip on a Segway two-wheeler. Sure, you may get where you're going eventually, but it's going to take a heck of a lot longer, and it won't be the least bit comfortable.

But despite CD rates being at historic lows, lots of 20-somethings think CDs are a great way to save for retirement, according to a recent survey on behalf of Wells Fargo Bank of 1,800 people conducted from July 9 to Sept. 7.

In the survey, respondents were asked how they would invest $5,000 for their retirement. Overall, 40 percent said they'd put the money into a savings account or a CD, and 24 percent said they'd invest it in stocks or mutual funds. But, when it came to those ages 25 to 29, nearly half said they'd put the money in a savings account or CD, while just 18 percent said they'd put the money into stocks or mutual funds.

Here's the thing: Using CDs to save for retirement is a terrible idea if you're that young. Over the long term, returns on CDs barely keep up with inflation. Even in the best-case scenario, at the end of the 30- or 40-year period when today's young people will be saving for retirement, the money they sock away in CDs will buy just a little bit more stuff than it would when they deposited it. Most people simply won't be able to save enough that way to finance a retirement that may last 20 years or more.

I don't really blame the under-30 crowd for being attracted to the idea of risk-free investments. If you came of age in the mid-2000s, your view of the market so far is of a once-in-a-generation financial crisis and an uneven recovery when stocks have essentially moved sideways.

But the stock market's' recent dismal performance hasn't been the case over the long term. To illustrate, I ran some calculations using Bankrate's CD data and historical stock data provided by CentralTendencies.com.

If you had deposited $5,000 in a one-year CD back in 1984 when Bankrate first started collecting data on CD yields and kept rolling the principal and dividends over until now, you'd have $12,272.29 sitting in your account today. Meanwhile, if you'd put the same amount in the Standard & Poor's 500 index, which includes the top 500 biggest U.S. stocks, and reinvested the dividends, you'd have $71,381.47.

While past performance is no guarantee of future results, there's a good chance that if you invest $5,000 in an S&P 500 index fund, you'll end up with a lot more money to blow on RVs and early bird specials than you would if you put the same amount in CDs.

What do you think? Are CDs a good way for young workers to save for retirement? What do you use CDs for?

Follow me on Twitter: @ClaesBell

«
»
Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
1 Comment
Jim
December 04, 2012 at 9:47 am

The S&P 500 and the other indexes are a joke because they drop the losers and add winners. That isn't accurate because the investor owned the loser. Also, they do not consider investment and management expenses.