When you think of the nest egg you’re building for retirement, what comes to mind first? Probably your funds in the stock market, or an IRA or 401(k) account. What about CDs and savings bonds? These often-forgotten savings mechanisms may not come with the growth potential other investment opportunities offer, but we believe there is a place for them in your retirement portfolio.
Let’s first get into the details of bonds and CDs, since they’re not all the same, before looking at what role they can play in your retirement plan.
Types of Savings Bonds
U.S. Savings Bonds: U.S. Savings Bonds are purchased directly from the U.S. Department of Treasury or a bank for as little as $25. The interest earned is subject to federal income tax. Most savings bonds accrue interest monthly, but you’ll receive all the interest at once when you cash in the bond upon its maturity date.
EE Bonds — You purchase an EE Bond for face value (a $100 EE bond will cost you $100) and comes with a fixed interest rate. Upon maturity, you’ll receive your initial $100 investment plus the interest earned. Electronic EE bonds issued on or after June 2003 have a redemption value of at least twice the purchase price at the 20 year mark. EE bonds continue to earn interest for 30 years.
I Bonds — I Bonds operate like an EE Bond in that you purchase them for face value but differ when it comes to interest. I Bonds have an adjustable interest rate based on inflation. The higher inflation, the higher the interest rate. While high interest rates associated with inflation often have a negative connotation for consumers, in this case, you benefit from rising interest rates. The interest rate can also decrease but will never go below 0%.
CDs
CD is short for Certificate of Deposit which is available for purchase at banks and credit unions with similar concepts available through brokerage firms. Like bonds, CDs are amongst the safest of investments when it comes to a guaranteed return. When purchasing a CD, you pay the principal while locking in an interest rate and the maturity date, which denotes the length of time you agree to leave the funds untouched.
When you reach the maturity date, you can cash in your CD to receive the principal back plus the earned interest. But if you try to cash in before the maturity date, you’ll be hit with a penalty fee.
Interest rates, terms, and penalties all vary between banking institutions. For this reason, it’s in your best interest to shop around instead of simply heading to your hometown bank, assuming you’ll receive the best rates.
Fixed Income Investments
So why would a person consider adding Savings Bonds and CDs to their portfolio? When it comes to retirement planning, we categorize Savings Bonds and CDs as fixed-income investments. With maturity dates in mind, you can rely on these funds to help cover short-term expenses. Much like having funds in a money market savings account that is FDIC insured, fixed-income investments provide a very safe money source.
We call funds in fixed-income investments the ‘War Chest’ part of your portfolio — and it’s something we build into every retirement plan to ensure you can cover short-term expenses. Having a War Chest outside of the equity market allows an investor to offset a certain amount of risk associated with the ups and downs of the equity market swings.
Retiring In or Near Delaware? Let Us Help You Be a Prepared Retiree
Being prepared is the name of the game when it comes to successful retirement plans whether you’re in Delaware, New York, or across the country in California. We must plan for rises and falls in the economy, unexpected changes to your health status, and many other ebbs and flows of life.
Have you considered adding CDs or Bonds to your portfolio? Or maybe you thought Wealth Management firms only focused on the stock market? Our retirement plans are a detailed road map covering every dollar to your name with the goal of allowing you to retire with confidence. From retirement dream vacations to long-term care and leaving a legacy — our plans cover every step of the retirement journey.
Let us help you orchestrate a retirement plan tailored towards your retirement dreams. Schedule a no-obligation meeting with a financial advisor today.
About Integrated Wealth Management
Integrated Wealth Management is owned by Burt Hutchinson, CPA, CFP®. We’re a CPA-led organization, meaning we’re here to handle your complex tax scenarios and provide cost-saving insight related to your financial plan.
We’re here to guide you through the 3 stages of retirement:
Uncertainty Stage: When you are within 10 years of retirement and have questions about how to make it work
Stability Stage: When you have reached the financial milestone to retire comfortably and confidently
Reflection Stage: When you are looking to leave a legacy
We are also here to provide experienced, empathetic support during times of loss, such as the death of a life partner. You need confidence and a sense of security to enjoy retirement. As fiduciaries with a fee-only structure, we never receive commissions. Free of ulterior motives, you can be sure we’re focused on your goals.
Continued Readings:
Sources:
https://www.treasurydirect.gov/