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Watch Those CDs - Let's Talk About Reinvestment Risk

Watch Those CDs - Let's Talk About Reinvestment Risk

May 11, 2023

One positive outcome in this time of inflation and rising rates is that people have been getting paid a decent return for their cash on hand through high-yield savings, CDs and US treasuries.

But before you get too cozy, ask yourself: What is the purpose of this money? Is it money for your long-term, a home expenditure in the near future, or an emergency fund? If it’s money you don’t intend to use for a while, even into your retirement, look past the allure of the higher short-term rate.

The higher rates you are seeing now will drop, and the drop will come faster than you may expect. Often people assume that the rate continues at the rate they entered into, then are surprised to learn later on the higher rate long passed.

Reinvestment risk is the chance that an investor will have to reinvest money from an investment at a rate lower than its current rate. It may sound benign, however here is one example utilizing 1980s bond rates (instead of 2023 CD rates), of being lured into a higher rate with a shorter term, and what that means to your financial outcomes over a longer period.

If you would like to discuss how much you should have in what type of accounts—and for what purpose—please don’t hesitate to reach out. We are here to help you make informed decisions, organize your investments, and bring clarity and understanding to your financial planning.