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Diversification in Retirement Savings

In about every article you read on investing money for retirement, the term “diversification” is used.   But, what does that really mean?    Traditionally, if this term is used in the investment arena, it is used to describe the spreading of your investment funds among various stock, mutual funds, bonds and cash.    However, your local Community Bank can play a key role in helping you “diversify” your retirement savings.   As interest rates are projected to continue rising, many investors will be concerned about loss of principal risk with international stocks and bonds so they will utilize their local Bank to diversify their investments.   The strategy of “Cash Reserves” and “CD Ladders” are productive ways to diversify your retirement savings.   

Cash Reserves:

If you are a stock market investor and find time periods where the market appears to be inflated you likely become nervous about potential declines in the market.  Consider increasing your cash holdings and utilize your local Bank to gain interest income.    You could convert a selected percentage of your investment portfolio to cash and place the funds in a money market or CD account with your local Community Bank.    These cash funds can then be used to support your living expenses or provide you with financial security during the timeframe where you are concerned about market volatility.    This technique can lengthen your time horizon on the remainder of your investment portfolio and eliminate a tendency to make short-term or rash investment decisions.  This may reduce your exposure to market volatility.    

Pro tip: If you are nervous about loss of principal in your retirement investment portfolio, consider moving more of it into cash and utilizing Bank CDs and Money Market accounts to gain interest income.   Remember, in addition to interest income, deposits in your local community Bank also help your communities grow.

CD Ladders:

Many investors like the security of Bank CDs for retirement savings because you do not have to worry about loss of principal and can select the CD terms to meet your cash flow needs.    Many investors prefer to use Bank CD’s instead of Bonds because they are not subject to the volatility in principal value.     A CD Ladder strategy is an excellent technique to grow the interest yield in your CD portfolio, but maintain good liquidity and access to funds.   Also, CD’s can typically be easy to borrow against if an emergency or unexpected opportunity would occur.   A simple example of a CD ladder would be to take 1/3 of your funds and invest them in a 12-month CD.   Then, invest an additional 1/3 in a 24-month CD and invest the final 1/3 in a 36-month CD.    Then, each year when a CD matures, you reinvest it into a 36-month CD.    After two years, the result is that all of your funds are invested in longer maturity CDs, which would typically have a higher rate.   But, you still have access to CD funds on an annual basis.     You can also use CD specials in CD laddering to gain higher interest rates when your Bank offers a special CD rate.   CD’s can also be used to generate regular income through having interest payments allocated to your checking account.    Remember, IRA funds can be held in Bank CD’s and your personal banker will work closely with you to ensure that option or mandatory withdrawals are customized for your personal needs.  

Pro tip: Use the CD laddering strategy to earn a higher rate on your investments while still maintaining access to funds on an annual basis. This strategy eliminates the risk of loss of principal and offers the ability to generate regular income through having interest payments allocated to your checking account.

Here at NebraskaLand National Bank, we offer bonus rates to customers who choose a CD Ladder. Contact a Personal Banker today to learn more!

Article written by Ty Lucas, EVP, Chief Lending Officer

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