CDs or savings? A question of risk

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Dear Dr. Don,
I am a 30-year-old man with a wife and a kid. I gross $9,000 monthly. I have more than $10,000 in savings and the same in my Roth IRA. In the midst of this troubled economy, I am becoming more timid about where to put savings. I dream of opening a restaurant when I retire in about 14 years. Would it be smart to take the money out of the “market” and put it in a safe financial vehicle? Also, what can I do with my money in the savings account to make it more active?
— Jesse Gingerly

Dear Jesse,
Retiring at 44? I hope you have a pension lined up with that planned early retirement date because the $5,000 per year you can put in a Roth IRA isn’t going to get you where you need to be for an early retirement.

To me, there’s a distinction between savings and investments. With savings, your primary concern is safety of principal. With investments, you’re looking to build wealth to help you meet your future life goals such as owning a restaurant.

When you dial down the risk in your portfolio, you protect the principal against loss, but you take on another type of risk — purchasing power risk. To build wealth, your portfolio has to earn more than the inflation rate. If it doesn’t, what your money can buy 14 years from now is diminished by price inflation.

One way to increase the yield in your savings is to put those savings into certificates of deposit, or CDs, that mature on a longer time horizon. You’ll pay an early-withdrawal penalty if you have to take the money out of the CD, so you either accept that risk or keep some of your savings liquid and just put part of your savings in CDs.

Investors with 14-year investment horizons have some rebuilding years ahead of them if their investments take a hit. Don’t let stock market gyrations scare you away from having some money in the market. Find a financial planning professional you trust to help you with your asset allocations.

By the way, owning a restaurant is one of the riskier financial decisions you can make. A landmark academic research study, “Why restaurants fail,” found that about 1 in 4 restaurants close or change ownership within their first year of business. Over a three-year horizon, that number increases to 3 in 5. You have some time to figure out what is going to make your restaurant beat the odds.

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