Key Takeaways
- CDs offer a fixed rate of return, creating a low-risk source of passive income for your retirement.
- CD yields are still excellent, despite recent rate cuts.
- Investing in a top-earning CD before the Fed lowers rates further can help you take advantage of the current high yields.
- Shop around to make sure you get the best rate possible.
- Know the risks that come with CDs, including liquidity risk, opportunity cost, and reinvestment risk.
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Being close to retirement often means changing your lifestyle, spending habits, and investments. Since your time horizon is shorter, you may need to shift from an aggressive to a conservative investment approach to reduce the risk of losses.
Certificates of deposit (CDs) can help provide a steady rate of return, especially since rates are still high, despite a September drop in the federal funds rate. Here’s what you need to know to lock in a high-rate CD before the Federal Reserve cuts rates even further.
Why CDs Make Sense for Retirees
Some retirees adjust their investment strategy as they approach retirement, making capital preservation and income stability a priority over growth. This strategy aims to limit the potential for investment losses if the stock market declines.
CDs can help you diversify your investment portfolio by offering a safe option for reducing your risk exposure. CDs are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Association (NCUA). In other words, if the bank or credit union fails, your investment is protected and you won’t lose your money.
CDs offer a predictable income with guaranteed returns provided you keep your money locked in until the maturity date. Cashing them in early means you may lose the interest earned up to that date, and forfeit any additional interest owed to you at maturity. Some issuers may even issue severe early withdrawal penalties that can eat away at your original investment.
What This Means for You
If you’re retiring or are already retired, you’ll probably want to have some cash that’s fairly accessible and less risky than the stock market. CDs can be a smart choice, especially now when rates are still very high but are expected to fall in coming days and months.
Why Now Is a Great Time to Invest in CDs
Locking your money into a CD in 2025 can make sense if you’re about to retire because the best CDs still offer excellent annual percentage yields (APYs). CD yields move in tandem with the federal funds rate, meaning they rise when the Federal Reserve hikes the fed funds rate and drop when the Fed cuts it.
The Fed raised rates in 2022 and 2023 to fight inflation.Its target range reached 5.25% to 5.50% in July 2023. Since then, it has been gradually lowering rates as inflation has cooled, with the latest cut, in September, bringing rates to a range of 4.00% to $4.25%.
However, these high rates probably won’t last. The Federal Reserve is increasingly concerned about the slowing job market. Investors are now overwhelmingly betting that the Fed will cut rates by another quarter of a percent at its late-October meeting. More rate cuts are expected later this year and in 2026. Locking your money into a CD now guarantees you the best yield and a higher return upon maturity if the Fed decides to lower the fed funds rate.
Investopedia conducts research every business day into the best CD rates, which range from 4.30% to 4.45%. Terms start at three months, and you can invest as little as $500 with some financial institutions.
How to Choose the Right CD
Shopping around and comparing rates can ensure you get the most bang for your buck. Here are a few tips to consider:
Term and Timeline
Align the CD term with your own timeline, so your needs dictate the length of time you lock in your money for with the CD issuer.
- Short-term CDs, which range from a few months to a year, can be a great option if you know you’ll need to access your money within a short timeframe. Right now, the best CD rates are for terms of 3 to 10 months.
- Long-term CDs require a longer commitment, typically ranging from two to 10 years. These make sense if you know you won’t need your money immediately and want to earn today’s high rates for as long as possible.
Shop Around for the Best Rate
You can get CDs from banks, credit unions, and online institutions, but the best rates today are far above the national averages of 0.23% to 1.34%, so you’ll have to shop around for the best one.
Compare the rates and terms, starting with your current bank or credit union, since an established relationship may help get you a better rate. If you aren’t able to get a satisfactory rate there, research other options. Smaller banks and credit unions often pay more because they have a greater need to attract customer deposits than large banks do.
Tip
Do you have a large amount to invest? Use CD laddering to spread your money across several CDs with different maturity dates, rather than investing a lump sum in just one. With a CD ladder, each CD should have a different maturity date, so when one matures, you can reinvest those funds into a new long-term CD.
Understand the Risks and Downsides of CDs
Although CDs are considered safe investments, they’re not entirely risk-free. Some of the drawbacks of investing in CDs include:
- Liquidity risk: Since you’re expected to keep your money in for the lifetime of the CD, you can’t access the funds in an emergency, as you can with a checking or savings account. If you break the CD before it matures, your institution will likely charge you an early withdrawal penalty.
- Opportunity cost: A CD offers a guaranteed rate at the time you make your deposit, but your CD rate won’t change if interest rates rise, so you could be losing out on earning more.
- Reinvestment risk: If you decide to reinvest your money after your original CD matures, you may not get the same rate, especially if market rates drop.
The Bottom Line
CDs are among the safest investments available, making them a good option for people close to retirement. They’re protected by deposit insurance and provide you with a guaranteed source of income. Locking your money in now ensures that you take advantage of the currently high rates before the Fed cuts interest rates in the future. Before investing in a CD, ensure you know your time horizon and shop around to compare rates.
