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CDs vs. stocks for retirement

By Sheyna Steiner ·
Wednesday, November 16, 2011
Posted: 12 pm ET

A recent study by Wells Fargo peered into Americans' feelings about retirement and found that 68 percent of respondents are not confident that the stock market is the best place to invest their retirement savings. Nearly half say that they would prefer to invest in CDs instead of stocks and mutual funds for retirement.

From the press release for the survey, titled "80 Is The New 65 For Many Middle Class Americans When It Comes To Retirement, Wells Fargo Retirement Survey Finds":

When Americans were asked what they would do to invest $5,000 for retirement – invest in a CD or the stock market – 50% of respondents said “invest in mutual fund or stocks” and 45% said they would purchase a bank CD. The percentages flipped when people age 25-29 were asked the question.

With five-year CD rates hovering at just 1.19 percent according to Bankrate's most recent weekly rate survey, investing in CDs and excluding stocks from a retirement portfolio could add a few years to a saver's retirement plan as well as dramatically increase the amount they need to save.

Savers willing to be more aggressive with their investments run the risk of losing part of their savings but also may get better returns.

Over the past 20 years, between Nov. 15 1991 and Nov. 15 2011, the Standard & Poor's 500 index increased about 225 percent. But if you narrow the range to just the past decade the returns are decidedly lower -- the index is up 10.12 percent from the same date in 2001.

Of course, if you further narrow in on the past five years, the returns are incredibly varied. Focusing on a short period of time that also happens to be one of the most turbulent periods in recent history would be enough to send anyone running for the safety of CDs.

That may be the case with today's young investors who have experienced all of the downsides of the stock market in recent years: terrifying prolonged drops, giddy highs and abrupt reversals.

Recent studies have shown that younger workers are decidedly more risk-averse than older workers. For instance, the Merrill Lynch Affluent Insights Quarterly Survey released in July 2010 found that more investors between the ages of 18 and 34 said that their risk tolerance was low than did investors between the ages of 35 and 50 -- with 52 percent of the younger generation identifying as having low risk tolerance compared to 45 percent of the older generation.

While some caution may be warranted, investing too conservatively at a young age can have a negative impact on the overall amount saved by the time a person retires. Over a long period of time, stocks will earn more than conservative investments but in the short-term, are much more volatile.

In order to take advantage of the long-term potential of the stock market while diminishing the impact of short-term stock market swings, investors can spread their investing dollars among several different types of investments. Rather than being forced to choose between very safe investments and extremely risky ones, investors have a smorgasbord of options in between the two poles.

Choosing from a range of investments will likely help quell stock market uncertainty while helping workers hit their retirement goals.

If you had to pick between putting $5,000 in a CD or the stock market for retirement five years, which would you choose?

It's kind of an unfair question because "for retirement" could mean two years or 20, so let's narrow it down to a five-year window. In the Wells Fargo survey I didn't see a mention of a specific time frame besides for retirement, which makes it even more notable that such a large percentage of the under-30 set gravitated to CDs.

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Ken Orenstein
November 30, 2011 at 10:58 am

A "best of both worlds" approach might include, for at least a portion of an individual's investment assets, a deposit into an index or variable annuity WITH a guaranteed income rider; preferably one issued by a well rated, very financially strong company that also includes a long term care benefit with the plan.

Tom Picciani
November 30, 2011 at 10:02 am

Anyone putting money in a CD is a fool! There are plenty of well paying dividend stocks that are lower risk. There are bond funds paying 3-5% dividend. The Telco's, Verizon and ATT are both paying 5% divided. Many electric utilities, Dominion, Chesapeake Energy, Con Ed. are paying 4-5% dividends.
Why settle for 1/10 of a percent? One MAC fee on your account and you've lost money for the year! Come on!
Get in a ROTH and max out your contributions yearly. If you're not investing in a Roth you're not getting your money's worth. It's your money. Do the research. Do the math!

November 30, 2011 at 6:37 am

I'd put mymoney in an annuity and get between 2% and 12%

November 21, 2011 at 4:40 pm

Well BR at least you have a large field to pick from!

November 21, 2011 at 4:28 pm

Joseph, that's terrible, what an awful story! I hope you filed a complaint with FINRA after finding that you had been defrauded.

For anyone else considering buying a CD through a deposit broker, the SEC has some tips on staying safe.

Joseph L. Vella
November 21, 2011 at 12:18 pm

Recently I received a phone call from a polite refined type speaking person from Chicago. He quoted me an enticing rate on a CD $10,000 for one year. The CD would be placed with Wells Fargo. The "firm" rate was only for a limited time as his board of directors have indicated that the rates would be dropped next week. All the paraphernalia would be delivered personally by United Post. Their folders, brochures and etc. were first rate and they had a web cite. My primary contact was Dave Smith, reportedly a Harvard graduate, and my secondary contact was Kendrick Bass, the company name is/was Heritage Corp. I was issued an impressive CD purportedly from Well Fargo. I went to Wells Fargo and they could NOT verify the CD. Dave Smith said they would return my money.........THEY NEVER DID !!! So beware of the Heritage Corp and similar scams,,,that's what it was.

November 21, 2011 at 11:37 am

Great article - it is important people become their own advocate when it comes to their money. Just like when we were younger and were supposed to practice something for a little bit each day, one day mastering it. Everyone should be educated on money and investing and not conditioned be by television and media.

I am 26, CD or stock? Stock. Something like a cigarette company, or an indirect supplier or supporter of war 😉

NO stocks 4 me
November 20, 2011 at 11:50 am

I for one won't put a penny of my "principle" it took me 65 years to save in they're gambling game marrkeeet. I'll just wait it out as I have before.

I can't wait for the 80's interest rates again, least this time I have some money to put in those "high" rate CD's.

No cell phone, LCD, or high speed ISP for me buddy. just what you don't wana hear is it Ben? maybe when the rates go up I will actually "spend" on those things.

t money
November 18, 2011 at 1:30 am

Being 23 and given the choice of putting 5k in a 5 year CD or five years in the stock market? I'd put it in a CD. On the flipside, 5k for retirement (which is 40 or so years away for me), stocks please!