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Are You Invested Too Heavily in CDs?

Risk aversion is a funny thing. It can help keep you safe, both in finances and in life. But the actions you take when you’re risk averse aren’t risk-free. In fact, they often open you up to entirely new perils, some you might not even expect.
This is especially the case when you’re financially risk averse. I mention this in my book, Retirement You Can’t Outlive . In the book, I talk about a client I had who was invested entirely in CDs. Sounds pretty safe, right? I mean, that’s a fixed investment—totally predictable and not exposed to the ups and downs of the market. But as I said above, this kind of action can introduce a person to a whole slew of new problems, including:
• Interest-rate risk: When interest rates rise and, subsequently, the return on new issue CDs and bonds rises, you’re locked into the old, lower rate unless you want to pay penalties to withdraw your principal early.
• Outliving your retirement: CDs offer a fixed, guaranteed rate, but that comes at a price—low returns. In fact, the interest earned on CDs is so low, it often won’t keep up with inflation and puts your overall retirement savings at risk.
None of this means that CDs can’t have an important role in your retirement portfolio, but it does mean that you want to be careful to avoid being overly invested in them. Just as you wouldn’t want all your money invested in one single stock, you also want to diversify your fixed holdings. Here are three situations that may indicate you’ve got too much invested in CDs and need to meet with an advisor to consider reallocation.
1. The overall growth of your portfolio isn’t keeping up with inflation.
2. Retirement calculators indicate that your savings won’t last.
3. You’re more than 50 percent invested in CDs, and many of them are maturing in the next two years.
Remember, reallocation doesn’t have to mean taking on more risk, just different risks. You can consider tools like guaranteed income annuities to help maintain a low-risk portfolio while creating an income that can sustain you.

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