Older retired relative wants to just put her money in a 10 Year CD-- Good idea?

[Digital Nomad]

An older relative in her 70s is looking at CDs now moving up to the 5% interest level.

Up to recently most of her money was in the stock market and she was doing a 3% withdrawal annually adjusted each year for her personal level of inflation. The rest of her money would come from Social Security.

Now she is tired of the volatile stock market and is strongly considering putting most of her money in 10 Year Certificate of Deposits and living on the interest. She found a non-callable 10-year CD that pays close to 5%.

Assuming her personal level of inflation is about 5% a year for the next ten years she could spend money in such a way as to manage the ever-increasing loss of the value of her principal and still not spend more than 3% of the original value of her funds adjusted to inflation a year and reinvest the difference. She would not spend the entire interest payment but would reinvest it to make up for the money being worth less each year going forward.

Can you do a sanity check and see if the math works on her plan?

 

[Aerides]

where is this magical CD? The most I've seen are non-callable 4.5% 5 years. A 10year paying close to 5% is very interesting.

As far as the relative, not enough info really (what bank, how much, how big a chunk of her savings, etc.) other than if she'd have to sell equities now to fund it, that's probably a negative not factored in.

 

[VanWinkle]

per Aerides post, selling equities that are down 25% to make 5% on a cd may not be a great short term decision. If the money is already in cash, and she is highly risk adverse, the cd may be fine. An immediate annuity would also guarantee her lifetime income. Do not let someone put her in an indexed annuity due to high expenses and low returns.

VW

 

[Earl E Retyre]

where is this magical CD? The most I've seen are non-callable 4.5% 5 years. A 10year paying close to 5% is very interesting...

Today there are non-callable 4.75% CDs that are 5 years (see Capital One on most of the brokerages like Vanguard, Fidelity).

There is a 5.1% brokered CDs that is 10 years. The problem is that its is callable as early as 10/23. So, assuming interest rates comes back down next year, the CD will get called and one will only get that rate for 1 year. Not bad, but does not solve OP's relative's long term goal.

 

[Aerides]

Yes, that's why I'm very interested to find out more about this 5% non-callable 10 year CD that the OP has found. Seems like it would be big news around here!

 

[njhowie]

Key phrase in original post is "close to 5%":

She found a non-callable 10-year CD that pays close to 5%.

Maybe she found a CD at a local bank or credit union that is paying 4.5% to 4.75% for 10 years? I'd consider that close to 5% considering where rates have been for the past 10 years. It wouldn't be extremely surprising if some local community bank or credit union offered a special like that.

OP, putting aside that the non-callable CD exists, if her withdrawal rate is 3% and then adjusted upwards 5%/year for personal inflation, if she puts everything into the 10 year CDs we know she's fine for the next 10 years, as it will throw off 5%/year and she only needs 3%. The excess 2% will easily cover the assumed 5% personal inflation over that period.

So, let's go forward 10 years from now, and the CD is about to mature. What are interest rates? Obviously we do not know. However, she still has her original pot of money, untouched, coming out of the matured CDs. Assuming rates are back to 0%, and she continues withdrawing at the same rate (let's assume we're now at 4.9% withdrawal rate = 3.0 * 1.05^10), she's got at most about 20 years assuming no further increase for inflation going forward.

Now, how might her expenses escalate down the road? Healthcare and/or having to change living situation can lead to unexpected increases.

I think if she can lock in to the 10 year non-callable for about 5%, there's nothing particularly wrong with it. However, I believe she needs to be saving/reinvesting the extra amount between her expenses and the ~5% the CDs are throwing off.

There is a nice comfort to not having to be concerned with stock market gyrations and I can appreciate her thoughts on this.

 

[aja8888]

If that CD really exists, I think she has a good plan. Just remember folks, the lady is in her 70's!

I am waiting for 6 to 7% 10 year treasury bonds to appear and I will back up the truck with every cent I can get my hands on that we don't need to live on.

But I am now 79 (happy birthday earlier this month) and that kind of SAFE investment can double my stash and leave a really nice nest egg for my daughter, who will need it someday.

Different strokes for different folks.

 

[ShokWaveRider]

5% is my trigger point, but not for 10 years, I am past that duration. 5 years Max for me.

 

[carnivalday]

On the other hand, dividend stocks are on sale right now and it might be a good time to invest in them. My entire portfolio is dividend paying stocks, and even tho the value of my portfolio has gone down, my dividend income hasnt; in fact it increases every year. Stocks like CTBI, D, DUK, ORI, are paying nearly 4% right now, and all increase their dividends every year. They have very safe Safety score, and a long history of paying dividends. Just another idea.

 

[aja8888]

On the other hand, dividend stocks are on sale right now and it might be a good time to invest in them. My entire portfolio is dividend paying stocks, and even tho the value of my portfolio has gone down, my dividend income hasnt; in fact it increases every year. Stocks like CTBI, D, DUK, ORI, are paying nearly 4% right now, and all increase their dividends every year. They have very safe Safety score, and a long history of paying dividends. Just another idea.

Have a look at Verizon (VZ), it's yield just went up today! And add AT&T (T) as it's a bargain now and pays a great dividend (still, even after the recent cut).

 

[Spock]

Well... SOMEBODY got a 2.5year CD at 5.044% this morning.
I had to sell a CD on the secondary market to raise cash for an unplanned cross-country move.
Highest offer was 94.665.

 

[njhowie]

On the other hand, dividend stocks are on sale right now and it might be a good time to invest in them. My entire portfolio is dividend paying stocks, and even tho the value of my portfolio has gone down, my dividend income hasnt; in fact it increases every year. Stocks like CTBI, D, DUK, ORI, are paying nearly 4% right now, and all increase their dividends every year. They have very safe Safety score, and a long history of paying dividends. Just another idea.

Disagree with this entirely within the context of the original post.

Now she is tired of the volatile stock market...

 

[Sunset]

How much money are we talking ?

I'd suggest she consider easing into it as rate are still going up. Doing it now will mean not getting the optimal rates.

Also at her age a 10 year CD leaves a big question mark after 10 years. Maybe some should be 15 or 20 year CD.

Lastly, best to buy these at a brokerage, as I've noticed my brokerage offered CD's from Ally that paid 1% more than I could buy at Ally.

Finally - Wouldn't limit it to CD's , Treasuries might be better, even Bonds could be great. I bought a 5 yr 6% one (but it is callable). However what will be available in 1-3 months will pay more.

 

[Katsmeow]

I am not quite in my 70s but DH just turned 75. I think that something like that could be attractive for the bonds portion of our portfolio. However, the 55% of our portfolio that is in stock funds is down a lot this year. I can't really see selling it right now to buy something paying close to 5%. I could see, perhaps, over a period of time slowly reducing the percentage of equities but locking in losses by selling now wouldn't appeal to DH or me.

 

[razztazz]

It's a great idea. As someone else suggested easing into them as interest rates rise might be a good idea. And, bond if she's mostly just holding them and trying to play bond trader are also fine. Stocks at her age with sufficient funds are irrelevant.