Q: Is it reasonable for me to invest in a five-year CD at 2.20 percent? I am 80 years old. I am concerned about safety but I also want a fair interest rate.
A: At the heart of this question is the issue of how much someone should shorten their investment time horizon as they get older. People often go overboard in doing this, but depending on the details, a five-year CD is probably perfectly fine in your situation.
These are some key issues to consider when making this decision:
- Cash flow needs. Naturally, if you have a need for cash within the next five years that would require you to break into the principal of this CD, it might not be the most appropriate investment for you. However, if you can get by comfortably on the interest from this CD and your various other resources, then it may make sense to get a higher interest rate by choosing a five-year CD.
- Reliability of income. In assessing your cash flow needs as described above, you have to factor in whether your primary source of income is reliable. If you are comfortable it will continue to meet your needs, that is another argument for considering long-term investments.
- Competitiveness of the interest rate. Once you have decided that a five-year CD is appropriate, the next issue is whether the rate you are looking at is competitive. At the time your query was being reviewed, the average rate for a five-year CD was just 0.77 percent, and the 2.20 percent you mention would be among the best CD rates available.
- Safety. This entire discussion is based on the assumption that you are looking at an instrument from an FDIC-insured institution, and that the amount of your deposit falls within the $250,000 deposit insurance limit. Otherwise, you would not be getting the total safety you want.
- Sustainability. The best approach to your finances at any age is to set them up to be as sustainable as possible. Assuming you have no short-term cash flow needs that have not been accounted for, long-term investments can make your financial situation more sustainable.
- Other investments. Consider this decision in the context of your other investments. Would this CD be redundant, or would it complement what you already have?
The irony is that by gravitating toward short-term deposits like savings accounts, people are generally trying to avoid risk, but risk is exactly what bit depositors when short-term rates plummeted to nearly zero. Risk comes in a variety of forms, so assuming you have more money than is necessary for your immediate needs, it is never too late to seek a balance between short-term and long-term investments.
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