This Might Be the Absolute Worst Reason to Open a CD Today

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There are plenty of good reasons to put money into a CD given today’s rates. But read on to make sure you’re opening one for the right reason. [[{“value”:”

Are you thinking about opening a CD today? You’re probably not alone.

CD rates have been strong since the start of the year on the heels of the Federal Reserve’s string of interest rate hikes. But with talks of rate cuts coming (and possibly really soon), you may not want to wait too long to open a CD. If you don’t act quickly, you might miss out on the 5.00% APYs many savers are getting to lock in today.

But while a CD could be a great place to park some cash for the near term, you don’t want to use one as a means of building retirement savings. Doing so could leave you seriously short on funds for your senior years.

Don’t choose a CD simply to avoid risk

Given today’s CD rates, you may be inclined to open one and use it to build a retirement nest egg. That way, you can avoid the risk that comes with investing in stocks and other assets that have the potential to lose value over time.

But if you’re looking at CDs for the express purpose of avoiding risk, you’re opening one for the wrong reason. In fact, in the context of retirement savings, opening a CD means taking on another big risk — not having enough money to pay your living expenses down the line.

See, right now, CD rates are strong. But today’s 5.00% APYs aren’t the norm by any means. And even if they were, they’d pale in comparison to the stock market’s impressive average annual 10% return over the past 50 years.

To illustrate what a mistake it might be to save for retirement in a CD, let’s say you have $10,000 at your disposal and you’re planning to work for another 25 years. Now without a crystal ball, it’s impossible to predict what CD rates will look like over the next two and a half decades. But let’s be optimistic and say that they’ll somehow stay at 5.00% — even though we all know they won’t. In that case, in 25 years, your $10,000 should be worth close to $34,000.

On the other hand, if you were to invest your $10,000 in stocks instead of CDs, at a 10% return, you’re looking at a balance of about $108,000. That’s more than three times what you might end up with by sticking to CDs.

Of course, ideally, you should be aiming for a retirement nest egg that’s larger than $108,000, since that money may need to last for 20 years or longer. The point, however, is that while saving for retirement with CDs helps you avoid the risks of stock investing, you risk falling short on your financial goals and struggling as a senior because of that.

The right reason to open a CD today

Taking advantage of today’s CD rates to save for a short-term goal makes a lot of sense. Maybe you want to buy a house in the next few years, and you need somewhere to keep your down payment funds in the interim. If you were to open a 12-month CD (knowing full well that you won’t be ready to buy in the next year), you can earn some nice interest without taking on the risk of putting your down payment into stocks (something you really shouldn’t do).

But for the most part, CDs aren’t great for saving for far-off goals. When you’re saving for something that’s a decade away or longer, investing in stocks is generally your best bet, despite the risks involved. So don’t let your fear of risk lead you to open a CD today instead, because you might sorely regret that decision down the road.

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