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Question for the Money Doctors

Question submitted on Jan 10, 2011.

Question

I have over $ 1.1 million in savings, most of which is two years into a six-year CD at an interest rate of 3.5%. I did this largely because of my distrust in the stock market, which certainly has not been gained with the economic downfall of the past few years. Am I being over-cautious in the way I invest or prudent ? My age is 51.

Answer

That depends on your objectives, time horizon and risk tolerance with regard to the funds, though your CD has a higher interest rate than what is available in the current environment.  One concern would be having that much cash at a single institution depending on the financial stability of that institution and limited FDIC coverage of $250,000.  Another concern would be will your return on the CD outperform inflation, net of taxes.  Assuming the CD is not within an IRA or other qualified account, your rate of return is reduced by your tax bracket on that income.  For example, if you are in a combined Federal and state tax bracket of ~28%, your true rate of return is ~2.5% as opposed to 3.5%.  I believe the February CPI number for inflation was about 2% so that would be a concern being in a CD.

I would meet with a professional advisor to discuss your overall situation, objectives, time horizon and risk tolerance.


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