CD Laddering

During the course of previous discussions, we have identified three general stages in an individual’s investment lifecycle: building a fiscal foundation (conducted during your 20s and 30s), accumulating wealth (occurring between the early 40s and mid-50s), and pre-retirement, the five-year period prior to your desired retirement age.

During the pre-retirement stage, debt is eliminated and a plan – considering the withdrawal rate (e.g. the 4% rule) and the order of withdrawal from the various retirement accounts – to draw down the retirement nest-egg is developed.


With a sufficient nest-egg in place, debt eliminated, and an understanding that the nest-egg has to be drawn down in a manner to ensure that it will last 30+ years if necessary, the question then becomes, “how can I turn my retirement savings into a reliable retirement income and what type of investments should be held during the retirement period?”

Two weeks ago we talked about one potential option. Income funds. These types of funds are geared toward individuals already in or entering retirement. As the name suggests, an income fund is a type of mutual fund that emphasizes current income, either on a monthly or quarterly basis.

These funds attempt to meet the objective of providing steady income throughout retirement by holding some combination of government, municipal, and corporate debt obligations, preferred stock, money market instruments, and dividend-paying stocks.

Develop Your Withdrawal Plan [RetirementSavvy]

Last week we looked at annuities as an option for turning your retirement savings, your nest-egg, into a reliable retirement income stream. There are basically three types of annuities: variable, fixed, and equity-index. These can either be immediate (you make a single lump-sum payment and set the starting date for the payout to begin sometime in the very near future) or deferred (you build your retirement savings over a period of years, deferring when you begin to receive the income).

This week we take a look at an option – CD laddering – which on its own should not necessarily be the sole option for generating an income stream, but can nicely augment income funds and annuities.

With a Certificate of Deposit (CD) ladder, an investor divides a desired amount of money into equal amounts. That money is then invested in CDs, each with different maturity dates. The benefit of a CD ladder is that an investor can combine the high rates of long-term certificates with the liquidity of shorter term certificates.

An important idea behind CD laddering is that the investor must ensure that the cash requirements – when it will be most needed – align with the CD maturity dates. An emergency fund must be maintained so that in the event of unforeseen occurrences or emergencies, money is available and will not require a CD to be redeemed early. Early withdrawals will result in penalties, negating the benefits of the laddering scheme.

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