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CD Laddering

I'm pretty risk averse.
I'm learning this more and more as I go through this journey.
As of right now, my retirement savings is in a 401k through my employer. I choose target date funds, and the funds I chose initially were much more conservative than what they should have been. As of today, they're even more conservative than they should be. When I say "should be", that's based off conventional advice and my age/projected time in the market. The market is volatile at times, but experts suggest I have time to take the short term losses and still make gains in the long term with stock investments (if past trends continue in the future).
In researching other retirement/savings vehicles, I stumbled upon a concept called CD laddering. CD's (certificate deposits) are a savings product that can be purchased through most financial institutions. CD's have a range of maturity dates (ranging from 6 months to 10 years at Discover Bank) which determines how long the institution will hold on to your money. As the length of the CD increases, the interest rate associated with the CD increases.

 Benefits of CDs

  • They are as risk free as it comes. 
  • They pay better interest rates than traditional savings accounts. 
  • Having the ability to choose the length of each CD allows you to only tie your money up for a certain amount of time, as opposed to your 401k which you can't access without penalty until you're 59.5 years old.
Downsides of CDs
  • Compared to the traditional rate of return from stock investments, your money isn't "growing" at the same rate with CDs. For example, depending on what statistic you see, stock investments have grown from 6-10% per year on average since it's inception. CDs, especially when interest rates are low, grow at 2-2.85% yearly (currently).
So, what is a CD ladder? CD ladders allow you to invest money in a handful of CDs with varying maturity rates. The benefit of this is you consistently have CDs reaching maturity, which means you can access that money if you need to. When a CD matures, you can move that money, with the gained interest, into your regular savings or checking or roll it into another CD. When beginning a CD ladder, it's best to buy some short term and long term CDs. The short term ones will gain less interest, but will become available sooner if needed. The longer term CDs gain more interest. For a visual, here is a chart I created using Discover's current CD options.

At year one, you take $10k and buy 4 CD's at $2,500 each. The colors are used to track each of the 4 original CD's, and for the purpose of this exercise, each CD is rolled over into another CD the year it matures. I designed this chart to have a CD maturing each year, with all 4 CD's maturing at year 10. At year 10, your original $10k will have earned $2,580 in interest, or 2.58% of growth each year (if my math is right). I used Discovers webpage to get this information. 

Due to inflation, experts say a dollar saved today isn't a dollar in 10 years. This is true. The stock market gets praise because of it's aggressive compounded growth, which supercedes inflation. However, the cost of living has only increased, on average, 1.6% over the last 10 years. Using the CD ladder and gaining 2.58% is still gaining ahead of the cost of living. For me, it's a safe and intriguing method. What says you?

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