A Primer on Certificates of Deposit (CDs) for Seniors


What do you do when it turns out that, "investing in your future," wasn't enough?

Paying for costly medical procedures and home care arrangements on a fixed or limited income means that money can be perpetually in short supply for the elderly and their caregivers.

This situation sometimes compels people to seek out "safe" investment options to help augment existing funds. And, while no investment is riskless, a certificate of deposit (CD) may offer a viable investment choice if age and financial situation induce you to minimize risk.

Kevin Erndl, a financial representative at LPL Financial, says that CDs can be a feasible investment choice for seniors in a variety of different financial positions—the key is that the senior, or their financial POA, is completely cognizant of that what that position is.

This is important because, as Mr. Erndl puts it, "there is a universe of investment options for the elderly."

CDs represent just one small galaxy in this universe.

The CD—in layman's terms

Essentially, a CD represents an amount of money that you have agreed to place in a bank for a certain time period. You cannot take your money out prior to the maturity date on the certificate; therefore, CDs are considered a brand of "time deposit."

In exchange for agreeing to keep your money in the bank for a set amount of time, the bank will offer you a certain interest rate. This rate varies from institution to institution and will fluctuate in response to a variety of factors, the most important of which is the national interest rate set by the government.

Despite a shaky stock market and an uncertain economy, certificates of deposit remain one of the lowest-risk choices of investment available today. The FDIC guarantees that you will not lose your money if you put it in a CD, and interest rates earned on CDs are generally slightly higher than those of traditional savings accounts.

This makes them a potentially useful tool for seniors seeking to earn a bit of extra money without endangering their valuable retirement nest eggs.

However, it's important to bear in mind that, while you can't lose any of your initial investment, the overall value of your money may go down if interest rates rise above the rate locked-in rate of your CD.

Types of CDs

There are a dizzying variety of CD types, each of which would warrant a separate discussion to fully describe. So, for now we'll stick to the basics.

Forbes magazine describes two common variations on the traditional CD:

  • No-penalty-Allows you to take your money out without incurring a financial penalty.
  • Rising-Rate
    • Bump-up: In the event that interest rates increase, you can ask the bank to increase the interest on your CD to match. Use this technique judiciously, as you are usually limited to one or two bump-ups over the term of the CD.
    • Step-up: In the event that interest rates increase, the bank will automatically boost your interest rate.

Laddering Strategies

In order to circumvent the negative aspects of a CD, like having your money tied up in an account for a certain period of time at a fixed or limited interest rate, some investors choose to spread their money out over several different CDs with varying dates of maturity. This strategy is called, "laddering."

A typical laddering strategy would see you investing a portion of your money in a three-month CD, another portion in a six-month CD, another portion in a nine-month CD, and so on. On a given CD's maturity date, you can decide whether to reinvest the money into one of your other CDs, or use it to pay for living expenses or health care.

A laddering approach to CD investment ensures that you do not become a victim of rising interest rates that would cause you to lose the purchasing power of your money. While not always appropriate, this tactic is particularly advantageous in an economy with rising interest rates.

Guidelines for Senior Investors

When it comes to senior CD investment strategies, Mr. Erndl emphasizes the fact that a person's age should not be the primary concern when it comes to financial decisions—touting knowledge and preparation as twin defenses against a poor investment. This includes being aware of your personal preferences as well as your financial situation.

Some of the questions you should ask yourself when deciding where you want to put your money: How much risk am I willing to take on? How long can I go without needing to withdraw my money to pay for things like medical bills and long-term care?

Mr. Erndl offers these general guidelines for elderly investors:

  • Be honest with yourself and know exactly where you stand financially.
  • Know where your money is going and who you are working with. Understand the transfer process or flow of money both in and out of the institution.
  • Understand the discretion the organization or advisor may or may not use on your account, and any associated terms of the account or investment. Familiarize yourself with how and when transactions are executed in your account.
  • Read all related material and do your homework. This will allow you to ask thoughtful questions. You know your situation better than anyone…or you should.
  • Don't limit yourself. Being elderly doesn't mean that you need to stick with certain investment types. CDs, US Treasuries and other government guaranteed investments are not your only options.

Being an elderly investor can be a daunting task during the best of times, and the current economic climate is certainly not making things any easier for those looking to supplement their fixed incomes. Understanding your personal situation and available options will help you make sense of the chaos.

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