Dear Rick:

            I hope you can give me your opinion on my situation.  I’m a small business owner in my early 60s.  However, because of COVID I had to permanently close my business.  As a result, my wife and I decided that it makes sense for her to continue to work. We should be able to live just on my wife’s salary, so I’m going to retire and delay Social Security at least until my full retirement age.  My wife and I have no debt and the monies in 401(k)s and IRAs, along with both our Social Securities will cover all our living expenses in retirement and even more.  My question deals with about $150,000 I received from selling what I could of my business.  We are lucky that we don’t need the money, but at the same time I don’t want to throw it away.  My feeling is that my wife and I will eventually use this money when she retires in a couple of years to take a number of vacations.  That being said, my banker has recommended three CDs – one, three and five year.  The rate on these CD’s is less than ½%.  The other option is a fixed annuity.  The fixed annuity is paying a little more than the CD; however, I only have very limited options to withdraw the money for the first seven years.  What would you do?

                                                            J.J.

Dear JJ.:

First, congratulations for putting yourself in such a good financial position.  Although I’m sure closing your business earlier than you expected has changed your plans, the smart decisions you made in the past with your money allow you to be in the excellent position that you’re in today.

In reviewing your situation, I believe that using this money to take dream vacations is a great idea.  Therefore, the key with this money is to keep it liquid and available for whenever you and your wife decide to travel.  Because availability is so important, I would not recommend a fixed annuity.  Fixed annuities by their nature are not very liquid.  In many annuities, you could be subject to severe penalties if you needed to withdraw large amounts of money before the annuity matures.  Since you want flexibility, annuities are not the way to go.

I like what the bank recommended in laddering CDs.  By laddering CDs, money will mature at different points in time thus, allowing you the flexibility of reinvesting that money in a similar CD or not.  In addition, with CDs, if you cancel them early the penalty is minor at best.  Unlike an annuity where the penalties can be severe, that is not the case with CDs.  I believe this route allows you to accomplish your goal; however, I do have a caveat.

When it comes to CDs, it pays to shop CD rates around the country.  There is a tremendous difference across financial institutions.  I venture to say, by shopping around and looking at internet banks you can at least double the return you’re getting on the CDs your bank quoted you.  Yes, CD rates are going to be low throughout the country; however, there is a big difference between getting less than a half percent and one percent.

With regards to the time period you ladder CDs, considering how low interest rates are, I probably would not buy a CD for longer than three years.  My reasoning is you really are not getting a premium by locking your money up for longer periods of time.  Therefore, why do it?  I would consider six months, one year and two year CD’s.  In that way, you have money maturing at regular intervals and as interest rates begin to rise, you’ll be in a good position to take advantage of them.

When you shop CD rates around, remember, you don’t necessarily have to use the same institution.  Sometimes you will find that the bank that has the highest rate for one-year CDs is not competitive at six-month CDs.  It may be a little extra work, but it may be worth it to use multiple institutions.  After all, if you can make more money on your money, why not?

I’ve always been a believer that when it comes to investing, the key is to invest based upon what your goals and objectives are for that money.  In the situation at hand, this money is to take some of those dream vacations and thus, considering those vacations are going to take place over the next few years, you don’t want to invest it in anything that’s going to have principal fluctuation, and you want accessibility without having to pay outrageous penalties.

Good luck!

Rick is a fee-only financial advisor.  His website is www.bloomassetmanagement.com.  If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com