When my grandparents took early retirement at age sixty-two, they did pretty much what everyone of their era did: My grandfather had worked for the same company for more than thirty years while my grandmother stayed at home and raised the family. When my grandfather retired, they sold their home up north and moved to Florida.
They put all of their savings into bank Certificate of Deposits (CDs). Initially, this strategy worked out quite nicely for them.
Their pension and Social Security provided more than enough income to meet their everyday expenses. They didn’t need the interest from the CDs so they reinvested their returns.
Then something funny gradually began happening…the pension and Social Security that had appeared so generous was no longer enough to support their lifestyle. Consequently, they began to spend the interest they earned on the bank CDs.
This tactic covered their expenses—for a time—but eventually they found that they needed a new source of income to simply maintain their lifestyle. Like many of their peers, they had to decide whether to alter their lifestyle and activities or start spending some of their principal.
Their choice—spending some of their savings—was not surprising. After all, who wants to feel as if they’re stepping back? Why would you want to do less, having spent so many years looking forward to your retirement years?
In an effort to keep their money as safe as possible, my grandparents watched themselves go broke, slowly but safely. They suffered because of their reliance on CDs.
The downside to investments like CDs with a guaranteed return is that these returns won’t keep up with inflation. If you don’t plan for it, inflation will overcome and slowly eat away at what you worked so hard to build.
For more advice on retirement planning, check out Brian Fricke’s book, Worry Free Retirement.