How Much Income Can Retirees Make From CDs?

In the decades leading up to retirement, it's a good idea to invest your money in assets like stocks that have the potential to generate strong returns. But once you're actually retired, it's wise to shift money away from riskier assets like stocks to some degree and maintain a fair amount of cash -- perhaps enough to cover a couple of years of living costs, if not more.

The reason? The value of stocks can vary based on market conditions. And stock values can also rise and fall very quickly, often without warning. The value of cash, on the other hand, is more stable.

Granted, over time, inflation can erode the buying power of your cash. But ultimately, if you have a $10,000 stock portfolio one day, it could end up only being worth $9,000 a month later. If you deposit $10,000 in the bank and don't take a withdrawal, your balance is guaranteed to be $10,000 plus whatever interest you've earned in the interim. (This assumes, of course, that your bank is FDIC-insured.)

It's for this reason that CDs can be a great option for retirees. And right now, the amount of income you can earn from a CD has the potential to be huge.

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Take advantage of higher CD rates while you can

The amount of money you can make from CDs will depend on two factors:

• The sum you put into a CD or series of CDs
• The interest rate you're able to lock in

Right now, CD rates are up on the heels of a string of interest rate hikes by the Federal Reserve. You have a prime opportunity to earn a nice sum of money. 

How much can you earn with CDs exactly? As one example, right now, Capital One is offering a rate of 5.00% for a 12-month CD. If you open a 12-month CD with $10,000 there, you'll earn $480 in interest after a year. 

On the other hand, if you put $10,000 into a 60-month CD, your interest rate will be 3.90%, which means you'll earn a little less on your money in the next year than with a 12-month CD. But after five years, you'll be up $2,108 in interest earnings. 

If you're wondering why a longer-term CD may be paying less than a shorter-term CD right now, it's because the Federal Reserve is expected to start cutting interest rates as early as this year. Once that happens, CD rates are likely to fall across the board, so banks aren't paying as much for longer-term CD products. 

Keep money in a savings account, too

The nice thing about CDs is that they offer you a chance to enjoy some steady, predictable income as a retiree. But remember, once you're retired and therefore not working, you're living off of your savings. So you can't afford to tie up all of your cash in a CD because there can be steep penalties for tapping one ahead of its maturity date.

A smart move is to keep enough money in a high-yield savings account to cover a full year of bills at a minimum. You want to do this in case market conditions are unfavorable for cashing out investments. 

Even if the values of your holdings are all down, you'll still need to pay bills. And it's not like your bills will magically shrink because the stock market is doing poorly. But the money in your savings account won't lose value, so it's a safe income source in a situation like that.

Of course, in time, the amount of money you might be able to make from CDs is likely to decline from where it is today. That's due to today's impressive rates and expected interest rate cuts. But even during periods when CDs are paying a lot less, it could still make sense to incorporate them into your retirement income strategy.