For any long-term CD investment strategy, saving up for retirement can be viewed as a long-distance strategy, much as it would be if one were contemplating a run in a marathon. It takes diligent and focused levels of training and dedicated persistence to wind up in the winner’s circle with any type of consistency. Just crossing the finish line in a decent time-frame would be the best most of us could hope for, and in this case, having enough savings accrued at the all-too-soon age of retirement is critical. However, retirement planning, much like a training regimen, must begin with practical and short-term objectives before the race can rack up any real mileage.
Judging the Distance
In this kind of competition, CDs can be an great financial tool to assist in this savings exercise, by slowly making good headway from short term length CDs to long term length CDs. An investor can begin by a process of incremental acclimation, from short periods of savings to much longer ones over a specific ‘training’ period, meanwhile building the interest rate steam up over the course of the race at a calculated clip. Just as a shorter run regimen initiates an effective running program, so too does a short term CD become effective in gaining the required discipline to stay away from accessing the savings on impulse. It will also avoid a sense of estrangement from those funds by using CD rates with short spans of maturity, such as 1 month, 3 months, or 6 months at the start.
Don’t Be Afraid to Go Further
If it feels like the CD interest rates are no better than a money market or savings account return, then move the maturity finish line further out to nine months or a year, where the rates are a bit more rewarding. In this fashion, by stretching the maturity date out further and further over time, the process of building endurance begins to take hold, along with an increased sense of commitment to the savings regimen, while the interest rates climb to higher and higher thresholds. Then come the ‘middle-distance’ CDs, with two or three year maturities, which can be utilized for savings objectives like a new automobile, a down payment on a new home, starting a new business, a college tuition, and so on.
Knowing that the finish line represents the long-term objective of the retirement plan, and will more than likely include financial products like stocks and bonds in the overall portfolio, there is definitely a place in the line-up for CDs. The middle range to longer term length CDs can be used to position emergency savings in times of need. Even though early withdrawal penalties must be accounted for, the higher interest rates in the long-term five year CDs may actually compensate for this contingency. Acquiring CDs with lower penalties at the start of the race is a wise strategy as well. In addition, numerous maturity roll-overs are likely to occur before the withdrawal even becomes necessary.
The Finish Line
No investment strategy, nor an effective training regimen, begins with the advance knowledge of what ‘going the distance’ is eventually going to require in terms of dedication, diligence and determination. With the end-game called ‘retirement’ so far off in the unforeseeable future, it is very difficult to maintain a good focus on the vague reality of the finish line. That is why the shorter objectives are so important, by providing the investor a measure of attaining a series of tangible and beneficial results within a framework of manageable and achievable goals, each and every step of the way.