The world of retirement investing is loaded with acronyms, abbreviations, and complicated finance terminology. It’s enough to push many would-be investors out of the space entire, and certainly just enough to confuse those that think they have it all worked out. From IRAs to CDs, there seems to be a complex acronym, or even several acronyms, for almost every financial product and service.
But despite the inherent complexity of the industry, beneath the complex terms and confusing short names is a relatively simple concept. From savings accounts to IRAs, there are several main options when it comes to retirement financial planning, each boasting its own set of positives and negatives, its own set of hurdles for would-be investors, and its own range of return on investment potential.
Finding the ideal option for your retirement certainly isn’t a simple task. Given the importance of having a healthy savings account at the time of your retirement, alongside plenty of assets too, it’s understandable that many people fret about how well prepared they are for their non-working years. Some switch between investments hurriedly, while others worry a lot about their financial state.
The reality is that any retirement preparation option is better than doing nothing, and any consistent investment is better than flitting from one investment to another in search of key opportunities. This doesn’t mean that you shouldn’t worry about retirement – only that it’s important for you to take key action, even if the action you’re taking may not be the most efficient or effective investment.
In this brief guide, we’re going to look at IRA Certificate of Deposit investments, and explain how they can help you prepare for your retirement while keeping your finances safe. Combining two of the most popular retirement investments out there – IRA accounts and CD accounts – this form of retirement financial planning remains a highly regarded, effective, and time-efficient investment.
Firstly, it’s important to clear up exactly what an IRA certificate of deposit is. Most investors are familiar with certificate of deposit accounts, known as CD accounts to most. Similarly, it’s tough finding an investor that isn’t familiar with IRA accounts, which are a common form of retirement investment account. Despite this, many are completely unfamiliar with the joined type of account.
In short, an IRA certificate of deposit is an IRA account that’s subsequently invested into a CD, allowing the account holder to pool their IRA holdings into a high-interest CD account that has backing from the FDIC. This results in extra security for the contents of their IRA, while giving account holders additional income from the CD’s earnings, alongside FDIC insurance backing.
The end result of this is a retirement-based investment account that’s backed by the FDIC’s deposit insurance program up to $150,000 in value, and is able to earn a relatively high rate of interest due to its IRA – individual retirement account – structure. It’s the best of both worlds, and it’s a reality that a surprisingly slim number of investors are familiar with, many not even knowing it at all.
It sounds like a dream come true, particularly for investors that want to maximize their returns for retirement while simultaneously keeping their money safe. But is it? Are there any downsides to a shared IRA and CD account that aren’t well known? Unfortunately, despite their value, there are a few key downsides to IRA certificate of deposit accounts that aren’t widely reported on.
The first is the fact that they’re generally not high-performing investments, bringing in little interest over time and frequently being outperformed by other investment options. This is a reality that’s far from uncommon to FDIC-backed investments. Due to their lower risk factor, these investments tend to have significantly lower returns than others. It’s not a surprise, but it can be a potential pitfall.
This becomes an issue when savings invested for retirement grow at such a slow rate that they’re being outperformed by inflation. The end result of this is an investment that despite growing, has become less valuable than it was when it was opened. As a result of consumer price index hikes, your $100,000 investment may only have a true value of $90,000 after it’s reached maturity.
To protect against this, many people who invest heavily in CD accounts and IRA CDs combine them with a balanced portfolio of higher-risk investments in order to increase their returns. The ‘risk’ factor of other investments, despite being higher than an FDIC-backed CD account, isn’t a major issue, as these investments tend to earn greater amounts of interest, producing big returns.
There are also age-related downsides to IRA investments, many of which are the product of key investment regulations. People aged over 70 are unable to continue contributing to an IRA, and must begin using their IRA certificate of deposit investment. This is unlikely to be a major issue, however, as most people aged above 70 are likely to be retirees with an existing investment.
Despite the sea of acronyms, it’s far from difficult to piece together your own portfolio of high-risk investments and secure retirement savings options such as IRA certificate of deposits. Balancing an adequate amount of risk, return potential, and overall interest, an IRA certificate of deposit is a key instrument in your financial future, and one that you can begin saving for right away.