The Benefits of Staggering Investment Maturities

As retirement looms closer, one's reduced time for market recovery diminishes a tolerance for risk. As a result, many workers nearing retirement should consider converting some of their long-term investments to more liquid, less volatile, instruments in order to reduce exposure to market fluctuations.

Still, despite this reduced tolerance for risk, many retirees continue to depend on earning a return on funds until withdrawn for use.

Certificates of deposit are favored investment instruments for retirement years. They provide immediate access to funds while still earning a rate of return that is generally more attractive than passbook savings accounts.

Short-term certificates of deposit are available with as little as 30-day maturity dates. These instruments provide easy access to funds, without penalty, but usually carry far less attractive interest rates than longer-term certificates.

Longer term (3 years or more) certificates of deposit will most likely earn higher interest rates, but the funds are not nearly as easily withdrawn. While most all certificates allow withdrawal with very little notice, early withdrawal penalties can be extremely high, often wiping out any benefit earned through interest.

On February 27, 2011, Bank Rate reports a national high of 1.15% for a six-month certificate of deposit (with a $1,000 minimum deposit) and a five-year high rate of 2.75% (with a minimum $500 deposit). Early penalties for withdrawing a five-year certificate early can be as high as 50% of the interest that would have been earned had the instrument been held until maturity.

For retirees who are reducing their market risk but want to continue to earn the best return possible, I recommend purchasing certificates of deposit with staggered maturity dates. This strategy allows retirees to earn the highest possible rates of interest and still provide penalty-free annual access to funds.

The process is simple. Once you have chosen to liquidate all or part of your stock and bond portfolio, divide the released cash into five equal parts.

Invest part one in a one-year certificate of deposit, part two in a two-year certificate. Parts three, four, and five should also be placed in certificates of deposit with corresponding maturity dates.

By staggering your maturities, you have now tiered your investments. Each year, a portion of your retirement savings, along with interest, will mature. At that time, consider your annual retirement needs and withdraw the necessary funds from the maturing certificate of deposit. Reinvest all remaining funds in a five-year certificate deposit.

By following this pattern, you will earn the higher rates usually offered with five-year certificates of deposit and yet you will still have funds maturing and available, penalty free, each year.

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