CD question for retirement?

Question

Lets say I retire in the future with 2 million dollars(Roth IRA+401K). I am thinking of a way to maintain that money, but while trying to live on the interest I Could possibly get. Let me know if this makes sense. Lets say I have that 2 million and I use 1 million of it. I can do what I like with the 1 million and invest the other 1 million in a 1 year cd at say 5% APY. Is my math correct here? That means on the interest of that CD(which I believe is paid out monthly) I would get $4,167 montly just in interest. I am thinking it would be smart to try to maintain the money I have from my retirement. I could then live off that interest for as long as I feel necessary and then take out my 1 mill principal and throw it together with my other 1 million. I have been retired, but will show no loss financially. Now my point of doing this would be to leave my grandchildren some money for college and other things like that. Obviously I cant take the money with me, but I could pass it on. Thoughts

Answer 1

Never put all your eggs in one basket. I would look at muni bonds, money markets, mutual funds and cds.

Answer 2

If your goal is to have some liquidity now and leave something for the kids later, you don't necessarily need to just rely on CDs.

first, you need a place to park the whole $2 million until you can figure out what you are going to blow the $1 million on. Until then, you should consider putting some of that money in an online banking account where the savings accounts (without any withdrawal penalty) are almost as high as money markets and CDs.

Second, you should remember that you will have to pay income tax on dividends and interest payments so you should take that into account when you do your math.

Third, you should consider how you can structure your savings so that people can't go after it if something happens (say someone sues you or you have a catastrophic health issue - god forbid - and your gov insurance won't pay all of it because you have savings). This could include a trust or something where you get income and could even get at the principal but if not the trust is deeded over to your kids....

Fourth, of the money you want to invest, there are plenty of relatively safe higher yielding investments that may be better for you. One example would be tax free municipal bonds or muni bond funds that yield almost if not as much as the CD yet are state and fed tax free (so your net yield is better). Another is relatively safe stocks like utilities that can yield 7 - 9% annual dividends plus offer a little capital gains upside yet be safe.

check out morningstar.com and motleyfool.com for some ideas and stock screening.

good luck.

Answer 3

Extremely conservative but also a very reasonable plan.....It is always a good idea to alter the portion of your portfolio allocated for retirement more towards capital preservation and away from growth the closer you get to retirement. I would not argue with your plan and believe it to be very sound. And yes when you set up your CD you can have the interest paid out monthly to your checking/savings account....be aware that your actual return on the CD will be the stated rate and not the compounded APY as you stated (assuming the bank compunds interest monthly)..not a big difference in actual income but you should use the interest rate when calculating the interest income rather than the APY. Some people believe your strategy to be risk free but it isn't. You need to consider the role that inflation plays on your real return. You need to calculate what $4,167 a month will be in purchasing power discounted at 1-3% rate of annual inflation at the time of retirement as well as based on how long you expect to live in retirement...it's possible that you may live for 20-30 years in retirement so for that reason most advisors would suggest that you keep some exposure in stocks/bonds for growth to better ensure you don't run out of retirement funds late in your life.

Answer 4

Your plan doesn't account for inflation. Hopefully you will be retired for over 30 years. Your $4,167 won't go as far in 2020 as it did in 2010!

Give yourself a diversified portfolio of stock and bond funds. If your account is balanced, you will be able to allow you money to grow consistently and withdraw funds regularly each month. This will allow you to keep ahead of inflation and still earn a good income.

Look into ABALX, the fund has had no negative years in the last 10 years and has averaged a better return than the S&P 500 over the same period. That's an investment you will want in retirement!

If you really want security, there are insurance products that let you invest in mutual funds, but guarenteeif the investments don't perform at 5% per year, that they will give you at least 5% per year. So you are covered in bad years and you still have opportunity in the good years. Good Luck!

Answer 5

Your plan is very sound. However, there is a product designed specifically for retirees who want their money safe, and pay higher interest for you to live on. They are accounts with Insurance Companies vs. a Bank. They are guaranteed and if interest tanks like it did in the last 6 years, you are guaranteed a minimum base. If you are single and wish to leave the money to your grandchildren/beneficiaries, your money in the bank will be tied up in probate for around 18 months before anyone can lay a hand on it. Fixed Annuities and Life Insurance avoid all probate. This is what I would recommend to one of my clients.

1. Put 1 Million in a Fixed Annuity IRA Rollover (No fees to rollover or taxes) Live on that interest monthly when you are ready to retire. 1 Million at the Fixed Annuity Current Interest rate My company offers today would pay you $5416 a month just in interest.

2. If your health is good, put $250K in a Single Premium Whole Life Policy for the grandkids. This would turn that money into $500K upon approval and will pass tax free to the kids upon your death.

3. Put $100K in a CD IRA, because FDIC insures up to 100K

4. Put the remainder in another Fixed or Equity Indexed Annuity and let it sit and grow. If you need more of a monthly income later because of inflation, then you can use this interest.

If nothing catastrophic (Like a Long Term Care need) arises, you will have a comfortable retirement, and able to leave your heirs 2.5 Million dollars after living on the interest your entire life! Not only leave it to them, but leave it to them without a lawyer getting his cut when you die. All but the 100K in the CD will avoid probate!

Let me know if you need more specific information

Answer 6

I think you need a plan that will work long term. If you have one million in CD's you will have to have ten CD's in ten different banks in order to have your investment fully insured if we go through another round of bank failures like we did in the late 80's.
Your plan does not address the effects of inflation on your cash needs. CD's simply don't keep up with inflation, especially if you are spending the money.
If you can live on the $50,000 per year that the CD's give you great, but after ten years the effects of inflation will make this seem like $30,000.

Answer 7

Good plan, just be aware that your money would be untouchable for one year. I'm guessing you'd withdraw the interest after the first year then throw the $1mil back into another 1yr CD. Then live off the interest (minus taxes).

Answer 8

I am not in any way a financial expert, but I did not see taxes mentioned in there at all, you need to factor taxes in to whatever plans you have.