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When I sold my business and retired last year, I decided to keep two years of expenses in cash to avoid thinking about portfolio withdrawals immediately. I’ve worked through most of the first year’s buffer, and with recent strong equity returns, I’ve moved some gains into a money market fund to replenish my cash reserves.
Since this cash is earmarked for spending 24 months from now, I was initially planning to just leave it sitting in the money market fund—rates are still around 4% at the moment. But I’ve been reconsidering given that the Fed has been cutting rates and appears likely to continue. Money market funds adjust to rate changes very quickly.
With that in mind, I’m considering moving the funds into a 24-month fixed-rate CD at around 4.0%. Yes, I’d be giving up a slight amount of current yield, but I’d lock in protection against further rate cuts over the next year and a half.
My question for the community: Has anyone else been thinking about shifting cash from money market funds into fixed-term CDs in the current rate environment? Are you locking in rates now, or staying flexible? What factors are influencing your decision?
Yesterday’s post on Can I Retire Yet? titled What to do with a Windfall and a current baker’s dozen comments addresses many of the same concerns you ask about in this HD forum post. You may find David Champion’s post interesting.
The what for and when funds will be used seem to be key and would be particular to the specific decisions each of us each of us makes with a windfall of cash. I expect liability matching and liquidity will be key to my decisions along with having a sufficient cash cushion for when my planning turns out wrong.
The major factor I am concerned with is future unexpected inflation so my decision is to build out a rolling 10 years Treasury Inflation Protected Securities (TIPS) ladder for a large part of the fixed asset portion of my retirement portfolio while keeping a money market balance for our primary emergency / annual known lumpy expenditures fund and keeping a mostly unused large HELOC I could draw if needed.
I am 18 months out of having the TIPS ladder built and will roll the ladder rungs into our Roth accounts as circumstances make sense tax wise.
William, at retirement I purchased a collapsing UK equivalent of a TIPS ladder to fund my first ten years of expected discretionary expenses. I have to admit, I’m coming around to your way of thinking for my main fixed income exposure regarding a rolling TIPS equivalent, I can’t really see much downside compared to other options, particularly if it’s combined with a reasonable money market buffer. I also have the structural advantage that in the UK TIPs are entirely exempt from capital gains tax.
Ive been doing the same MM to CD shift this year, mostly because Ive grown quite tired of watching the money market rate drift down every time the Fed moves. For a 24 month bucket thats really just earmarked spending, locking in the low 4s makes sense to me. My advice to you though is dont just take whatever your current bank offers. The rates can vary a suprising amount between institutions and so shopping around has actually been worth real money for me over the years.
I use CD Valet for shopping around for better CDs now. Its basically a CD marketplace, tens of thousands of CDs listed, and all of them are federally insured. It makes it easy to compare CD terms and rates without having to open a dozen browser tabs. And I have often found rates above 4%, if youre willing to explore lesser known credit unions and banks. It’s also free to use btw.
In my experience the flexibility of a money market isnt worth much once you already know the date you need the cash.
Nicholas, In the end I decided to use laddered CDs for the proceeds of the business sale, overall I’m happy with that choice. That said, if I stepped back and stopped treating the business-sale cash as a separate pot from my main portfolio, I’d have to admit I have too much in cash-like assets overall. As the CDs mature, I should probably shift some of that money into index funds instead.
Nothing wrong with splitting the difference and doing both, keep half in money market and half in CD’s.
An Adam Grossman’s solution. If you can’t decide between two options split the money equally into both. That way you will always be at least half right.
Fair point. Splitting the difference has a great pedigree!
I have recently rolled over several CDs. I’m not contemplating additional CDs at this time. I monitor the total return of my money market/high yield savings and CD accounts. They are currently within my target.
I do own dividend paying stocks and the return is part of my consideration. I also own an “Income Fund” which has a yield of about 4.2%. One of my investments, a fund, yields 9.97%. My portfolio has 28% growth and is not dividend-centric.
My portfolio was providing up to 50% of my RMD this way, but I do expect falling interest rates will reduce that. Different portfolios get different results.
My spouse owns two dividend ETFs, including Vanguard High Dividend Yield Index Fund Admiral VHYAX which has a yield of 2.42%. Her portfolio shows a dividend yield of 2.41%.
Is there any reason you wouldn’t invest in a stable, old economy stock with a 4-7 percent yield. I’ve held MO for years and it just keeps increasing the dividend year after year. It’s also tax advantaged too because the dividends are taxed at 15% instead of your marginal rate, and if you’re married and retired, it will likely be close to zero if you’re under the threshold.
My equity holdings are diversified across all sectors and business types. I don’t consider equities an ideal place to park cash. On a side note: while I’m sure I own Altria Group through my index funds, I admit it’s somewhat hypocritical of me, but I wouldn’t deliberately seek out and actively invest in a tobacco company.
My mother died of lung cancer from smoking and I immediately invested and have done incredibly well. Them and PM are awesome places to park cash. Cash, even at a 4% return, barely keeps up with inflation. I always laugh when people invest based on morality.
I guess that’s why we call it “personal investing”. As I say, I’m sure I’m invested in multiple businesses that make money by questionable means. As long as it’s legal and doesn’t compromise your personal moral compass, I’m sure it’s the correct and right choice for you.
Although I personally prefer to respect others’ moral positions rather than laughing at them, I’m sure from your frame of reference, your reaction is also the correct one for you.
The answer to the question of whether to stick with money market or lock in your interest rate with a CD is….
Yes.
(That was the answer our high school German teacher always gave to either-or questions.)
My prediction, which is likely meaningless, is that the next Fed Chair coming in later this year will be more accommodating than the current one, resulting in lower short-term rates likely in the back half of 2026 and through 27-28.
One factor depends in what stage of retirement you are in for the amount of reserve money in cash, money markets or CDs you need.
If you are in your eighties you may need 10 years of reserve since you may not have enought life left to see a recovery of a 50% dip in the market.
A couple years ago when we needed to hold some extra cash we used 1 year cd’s from our credit union. We added a new cd each month so a new one matured each month.
Laddering your CDs, that’s a good idea. I do something similar with bonds.
What is the penalty for early withdrawal?
When a CD matured 3 months ago we moved the proceeds to a local credit union and locked in a 19 month CD “special” at 4.30%. Current best rate at that CU is 13 months at 4.10%. Also holding money market fund in IRA at 3.52%. Will know in a few weeks what we earned on fixed income in 2025 when all the 1099’s roll in. Not sure how to estimate what our earnings will be in 2026 since who knows what the interest rates will do? Also not sure what we will do if interest rates drop to below inflation rate.
Synchrony had a 4.10 nine-month rate that I was mulling over for a while; I see the nine-month rate is currently 3.75. Now they’re highlighting a 4.0 rate on a fourteen-month CD. I’m mulling. He who hesitates . . .
We are considering CDs but haven’t pulled the trigger yet. Money market for now. Chris
The choice between fixed-rate CD and flexible-rate money market yield is for the ‘optimizer’ to figure out, while the ‘satisficer’ sleeps. The former wants safe and highest yield, while the latter settles for safe yield with simplicity and flexibility.
The middle could be CD for fixed spending in 24 months, and money market money for flexible spending / investing between now and the future.
The current CD and money market rate difference is far less than 1%. A 1 percent differential between CD and money market fund is 10K for a million-dollar principal over one year, i.e. the liquidity premium – a subjective value (before taxes).
Quan, optimizer vs Satisficer? I see you read Christine Benz articles at Morningstar.
You sound like my wife, Suzie. Although she put it differently: “Mark, you’re thinking of doing an awful lot of arsing around for not much difference.” 🙄
I wouldn’t dare. You are not arsing around, but you do the hard work of sitting on your rear, thinking hard to protect your bottom line.
I moved some cash from MM to CDs 3 months ago and purchased a 3,4,5 year ladder. The best I could do was 3.65% & 3.75% because I chose non-callable (I was burned the first time I bought a CD ladder by purchasing callable CDs because they had a higher return). Not sure if this is helpful to you – I’m trying to hold cash for a longer time frame than you.
Market odds from analysts are currently about 95% that the Fed won’t change rates at its meeting at the end of this month. Thus, I would take a wait and see approach for now.
I’ve been reading that most “pundits” don’t think there will be more than two 25 basis points decrease in rates this year unless the Fed goes totally off the rails, which the odds seem to be improving. If investors see the Fed is losing their independence bond investors will be asking for higher rates to compensate for the increased risk. This would increase the federal debt payments which would then increase the need to pay even higher rates to attract cash. This I fear could become a vicious cycle.
I never owned a CD, just have cash reserves in money market in brokerage and IRA account yielding 3.35%
I also have municipal bond funds in brokerage of three duration lengths that are yielding between 3.97% and 5.30% on a combined state and federal taxable basis.
Not sure if that’s good or bad.
I already have a five year CD ladder. When this year’s pays out in February I will replace it with one worth more – enough to cover five year’s worth of 4% inflation. I don’t plan to do anything with my other cash reserves.