Does it make sense to rely on CD’s for your retirement? Looking at inflation and monetary policy of the past, it’s not a good idea!
But yet I see this 1980’s era retirement plan all the time.
Back in 1981, a one-year Certificate of Deposit might have paid 15%. Not any longer, that’s for sure. According to BankRate.com, the current national average for one-year CDs is .29%, which is far lower than the average rate of inflation.
Last year, the inflation rate was 2.9%.
Unfortunately it is sad, but true, that far too many retired seniors travel from bank to bank trying to find an extra one-tenth of a percent interest, thinking that it will make a difference in their lives. It is easy to understand why they do this, considering the life time taken to accumulate this nest egg. It cannot be lost!
Last week, talking to a friend and fellow Investment Advisor Henry in New Jersey, he shared the story of a recent conversation with an older couple who clearly were having trouble making ends meet. Like far too many retirees, they supplemented their pensions and Social Security checks solely with CD’s. Just about their entire investment dollars – yes, they called it “their investment dollars” – (vs. savings dollars) were in ultra-low paying Certificates of Deposit.
They had to depend on their adult children for additional monetary support, and they were actually terrified to consider any other alternative to the CD strategy they were currently pursuing. And what was their reasoning? What was their logic for continuing with this doomed strategy?
This couple truly believed that any other avenue to increasing their retirement income was gambling and speculating. They were convinced that anything other than insured bank CD’s meant that they “were going to lose all of their money”! However, the real risk that was staring them in the face was their loss of purchasing power due to inflation. At just 2.9% annual inflation, something that cost $100 last year, costs $102.90 this year, $105.89 next year, and $133.09 in 10 years. Remember that current inflation calculations do not include energy and food, two HUGE budgetary items!
Today’s ultra low CD rates just won’t cut it. This gradual loss of purchasing power sneaks up on all of us, but it is especially harsh on seniors relying on CD income for their retirement. It’s no surprise why so many seniors are forced to rely on family and Reverse Mortgage strategies to make ends meet later in retirement.
Should you know of a family member or friend who is retired and trying to make it on CD income, ask them to give me a call, and we can talk about their options that make sense with some analysis and coaching?