Planning your income in retirement? Consider a CD ladder
Published May 23, 2022
As your retirement nears, your portfolio’s investments and purpose will begin to change. Your money no longer has to get you to retirement; it has to get you through retirement. And as your regular paychecks stop, you’ll need a strategy to help provide for your income needs.
This chart offers an example of how you can purchase CDs with different maturities to make up the short-term portion of your overall fixed-income allocation. By buying five CDs with different maturities – one year, two years, three years, four years and five years – you'll have income at the end of each one-year period as each CD reaches maturity that you can either spend or reinvest in another CD to keep your ladder growing.
With this shift toward retirement income, focus on the purpose of your investments. Different investments serve important roles. Some are designed to provide income now and others income later, but they’re all important.
To help ensure your income needs are covered, we usually recommend you have about one year’s worth of living expenses in cash, adjusted for outside sources of income like pensions or Social Security, within your portfolio at any given time. One way to accomplish this year after year is a CD ladder. Working with your Edward Jones financial advisor, you can purchase certificates of deposit (CDs) or other short-term investments that will mature annually over the next three to five years to cover your income needs.
This chart shows how it works. Let’s say you decide to invest some of your retirement portfolio in CDs. This ladder would likely make up the short-term portion of your overall fixed-income allocation. You’d purchase five CDs with different maturities: one year, two years, three years, four years and five years. One year later, your first CD (the one-year maturity) would pay you back. Depending on the market environment and your needs, you could then either spend that income or reinvest it in another CD. For example, if the markets are up, you may decide to pay for your expenses using the growth in your portfolio, and your financial advisor could purchase another five-year CD to keep your ladder growing.
Using a ladder can help provide the ongoing “paycheck” you need to help you live the retirement you deserve, as well as ensure your income needs are covered, regardless of the markets’ short-term movements. Your financial advisor can help you evaluate whether a CD ladder is consistent with your investment objectives, risk tolerance and financial circumstances.
Scott Thoma
Scott Thoma co-chairs Edward Jones’ Investment Policy Committee and is responsible for Client Needs Research, the team that develops and communicates advice and guidance for client needs, including retirement, education, preparing for the unexpected and leaving a legacy.
He is a CFA® charterholder and a member of the CFA Institute and the CFA Society of St. Louis. Scott also earned the CFP® professional designation. He graduated summa cum laude from Southern Illinois University-Edwardsville with a bachelor’s degree in business administration, with an emphasis in finance. Scott earned a master’s degree in economics and finance from the same university.