I inherited a CD a few years ago which is coming due soon. It is worth about $54,000 and has paid a good interest rate that I don’t imagine I could match today. I need to reinvest this money in something relatively safe (I am 60 and can’t afford to lose the money). But I also want some growth potential because I won’t be retiring for another five years or so. What would you suggest?
There is no “right” answer to your question. It’s entirely a tradeoff between the safety you want and the return you want. Any attempt to achieve growth carries with it the risk of losing some of your principal. At the same time, if you try to avoid losing any principal, you won’t get much of a return and you could run the risk of losing purchasing power to inflation.
So how does one deal with this dilemma? First, be thankful that you have this money and that you have received decent interest on it.
Beyond that, your best guidance will come from looking at the time frame of your intended investment.
One possible point of view is that you are 60 and have presumably five or six years before you retire. That time horizon is too short to count on the stock market for gains.
A second possible point of view is that you are 60 and presumably have 25 to 30 years left to live – a relatively long time for this money to keep working for you. Over that time horizon, you need the prospect of growth to stay ahead of inflation.
Here’s how to decode that into a decision:
If you expect to spend this money in five or six years when you retire, or if it would make a good permanent emergency fund after you retire, then keep it in short-term bond funds and money market funds. That way you can be pretty certain it will be there for you in 2015 or 2016.
If on the other hand you will add this money to other savings in a retirement portfolio that’s meant to provide income for 25 or more years, then you should invest the proceeds of this CD similarly to the rest of your retirement portfolio. (This, of course, assumes your portfolio is well diversified, with enough fixed-income funds to keep your risk in check.)
