Recently, the Social Security Administration announced that 58 million retirees and people with disabilities won’t get a cost of living (COLA) increase in 2011. This is the second year in a row that there will be no rise in benefits.
If you retired with lots of money, this won’t affect your standard of living but Social Security accounts for about 40% of the average income for retirees 65 and older. The pay freeze coincides with another hit to senior’s incomes: low-interest rates. The national interest rate average for one year certificate of deposit was 0.56%. Investments that offer a higher rate of return are often too risky for seniors.
Seniors can get the most out of their savings from laddering (Ladder = buying CDs of different maturities). Laddering a CD portfolio is a lot like dollar cost averaging when you buy stock. You don’t invest all your CD money at one low rate of return. You are also never more than one year away from at least some of your money. Here’s how it works: if you had $10,000 to invest, you would buy five CDs and put $2,000 in a one-year CD, $2,000 in a two-year CD and so on. Each year is a new rung on a ladder. Every time a CD matured, you would invest it in a five-year CD. The advantage of this strategy is that you benefit from higher rates from longer term CDs, while at the same time having more liquidity to reinvest when interest rates rise.
One problem with this strategy is that long-term CDs aren’t paying much now. The national average interest rate for a five-year CD is 1.61%, according to Bankrate.com. For this reason, you may want to consider going out no further than two or three years. Interest rates will probably go up quite a bit at some point in the future.
Another strategy is to shop around for CD rates. I recommend www.bankrate.com. Bankrate.com provides consumers with comparisons of different products such as CDs, mortgages, credit cards, bank interest rates, etc.