401K Fund vs CDs - Post Retirement?

Question

A am recently retired and have a sizeable 401K account in a balanced fund (equities, bonds, short-term funds). Now that I have received benefit of tax savings in my working years am I better off to leave my money in the fund or move it to several FDIC insured IRA CD accounts to benefit from compounding interest?

Answer 1

Better off, compared to what?

Assuming you are 60ish and you will live to be 90ish, your biggest fear should be outliving your money...and your biggest enemy is inflation.   Don't let the screaming harpies of doom and gloom (the news media) scare you into being too timid.

Look at your 401(k) as three "buckets" of money:  (1) money I might need in the next 5 years, (2) money I might need in 5-10 years, and (3) money I don't expect to need for at least 10 years.  The amounts are subjective, although they should be based on your recent past and near term plans.

(1) Bucket one should be in money market funds, savings accounts, and CD's of less than 18 months.  The goal with this money is to ensure that you have cash when you need it.

(2) Bucket two should be accessible but moderate risk is okay.  Treasury notes and bonds.  Longer term CD's.   Some balanced funds are okay.  And, depending on how "sizable" is (if over $1MM), some direct ownership of corporate & muni bonds as well as long term stock holdings that pay dividends.

(3) Bucket three should remain a diversified stock portfolio/fund set up.

Answer 2

Any account that accrues interest will give you the benefit of "compound" interest, so I don't get your point there.

The answer to your question largely depends upon your tax rate, your need for income, your life expectancy, and the size of your 401k account.

CDs are obviously very safe in that they will keep the principal and give you a little income.  However as you have seen this year and in your lifetime, inflation can and will eventually eat into the purchasing power of that money.

If you recently retired and are  65 years old, you can expect to live another 20 years easily.  You will therefore need to take a little more risk with your portfolio than CDs.  Most experts agree an annual 4% withdrawal rate with increases for inflation is safe for a smartly invested portfolio.  Most experts also suggest your age as a percentage of bonds and cash (CDs) in your portfolio.  The rest should be well diversified in stocks.

You need to consult with a tax advisor to make sure you don't create a huge tax burden if you move money out of the 401k.  You should probably roll it over to an IRA where you have unlimited investment options.

Answer 3

Convert it to an IRA at a brokerage house.  A broker can put some in CDs (at better rates than banks pay in-person customers) and they can do a whole lot more for you.  

Bank interest usually loses money after inflation and taxes.  You may live another 20 - 30 years.  I would hate to see you outlive your savings trying to be "safe".

Answer 4

There really isn't any safe place for your money. CD's seem safe but don't pay much after taxes. Here is a trap my mother in law fell into with CDs. When she renewed them the interest rate kept going down. So at 6% she had some comfort with the income it generated but when she had to renew a few years ago it was hard to find 3% so she took a 50% cut in income. Also, with retirement lasting up to 30 to 35years you won't believe the way inflation will eat into your nest egg. You will think you are fine and then your nest egg will start dropping quickly after 85.

Now that inflation is creeping up the return on CDs may be close to negative.

I am recently retired. The best advice I have seen is to withdraw no more than 4% of your nest egg the first year and increase that amount by the rate of inflation each year. If you nest egg loses value maybe don't increase for a year or two.

Keep 2 to 3 years worth of withdrawals in CDs or money market funds. Invest the rest to suit your risk tolerance.

Most 401k plans do not offer great investment choices - they usually have high costs. You can rollover your 401k to a mutual fund company that has lower costs and more choices. I am a Vanguard fan. If you are not an expericenced ivestor you can choose from a number of balanced funds (Star, Wellesley? and Wellington to name a few.) (see link below)- They also have target date funds the gradually reduce the amount of equities as the target date approaches.You can also open a Vanguard brokerage account and invest in their mutual funds and buy CDs etc so all your nest egg will be in one place. Fidelity and T Rowe Price also are good fund families.

I strongly suggest you educate yourself. Retirement money management is important. I suggest the Boglehead's Guide to Investing. It is written in layman's terms and stresses the basics. I would also suggest you periodically check the boglehead web site (see link below) - You can join and ask a question or just read the questions and answers that are there. They cover the topics well.

Best of luck

Answer 5

CDs are currently a loosing proposition.  A one year cd pays about 3.5%,  a five year CD about 5%.  Inflation is currently about 6% to 8% depending on who you believe or do not believe.  

Of course it is no secret that balanced funds have returned even worse than that at about - 6% ytd, but inflation is just beginning and the government is bound and determined to keep interest rates in the free zone to bail out all of their Wall Street buddies and real estate speculators.  Stick with your 401k.  It is your only hope to cope.