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Pros and cons of IRA CDs

By Claes Bell, CFA · Bankrate.com
Monday, October 3, 2011
Posted: 4 pm ET

The other day I saw a Web ad from a major bank urging me to get a great CD rate and protect my retirement by rolling over my IRA into an IRA CD. It got me wondering if a lot of folks are doing just that -- liquidating their stock portfolios and placing the proceeds into a slow-but-steady IRA CD that won't lose principal no matter how badly the market is doing.

With hundred-point swings in the Dow Jones Industrial Index become less and less rare, the idea of getting off the stock market roller coaster may be tempting, but before people take that kind of drastic step, they need to think carefully. Investing decisions based on frustration, fear or other feelings can often turn out badly.

Here are some of the pros and cons of investing large portions of your retirement savings in a CD.

Pros:

  • Security: Your principal, up to $250,000, is protected by the full faith and credit of the U.S. government, thanks to FDIC insurance.
  • Predictability: You know exactly how much you'll earn on your IRA CD over its term, allowing you to plan your retirement date without worrying it'll be disrupted by a massive downturn.
  • Ease: Setting up an IRA CD ladder is often less difficult than setting up a diversified stock portfolio and maintaining your asset allocations over time.
  • Low fees: Retirement investing as a whole is plagued by all kinds of fees, from asset management fees assessed by advisers to brokerage commissions to fund loads. An IRA populated solely by laddered CDs avoids these costs.

Cons:

  • Inadequate growth: Retirement lasts a long time, and enjoying yourself while covering increasing costs for things like medical care requires a lot of money. In order to save enough for retirement, most people need to earn a return on their retirement investments more in keeping with a diversified basket of stocks and bonds than with CDs.
  • Vulnerable to inflation: Even during the best of times, CDs struggle to outpace inflation. With CD rates on 5-year jumbo CDs hovering at 1.29 percent, if inflation were to pick up, the value of the money locked in those CDs would be substantially lower at maturity.

There may be only two cons here, but in my opinion, they're big enough to outweigh the benefits of rolling over a retirement portfolio solely into CDs, even if you're already retired. The markets may be panic-inducing and heartbreakingly unpredictable for those on the cusp of retiring, but they're still the best chance most people have of turning retirement savings into the kind of nest egg needed for today's long retirements.

That isn't to say, though, that CDs don't have a part to play in retirement portfolios, especially as people get closer to retiring and need to be sure they'll have a lump sum to kick off their retirement. They just need to be grouped with a more diverse range of retirement investments that help balance all types of risk.

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