Suze Orman Thinks Retirees Should Invest in CDs. Should You Listen to Her?

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Retirees must be a lot more careful with their money than people who are still working and who have the time to recover from financial problems. That's why it's especially important for seniors to be smart about what they invest in.

Financial guru Suze Orman has a suggestion for retirees for a safe investment: CDs. In fact, she said seniors should put a good amount of money into certificates of deposit. But, is that really a good idea?

Here's why Suze Orman believes retirees should put some money into CDs

Orman has long urged retirees to have "safe" money that they keep outside of their brokerage accounts. She suggests having about three to five years of living expenses (beyond an emergency fund) in savings, so it's accessible

This is good advice. Market downturns can happen any time. Retirees won't want to pull money out of the stock market when a crash has recently happened. That could mean locking in their losses. They'll need some money they can live off as they wait for the market to recover.

Now, though, Orman suggests putting some of this "safe" money into CDs.

"Because you won't need to use all that money right now (that's what your emergency savings is for) you could put this retirement savings account in CDs that will pay you even more than a regular savings account," Orman advised.

Is Orman right about this?

So, should you listen to Orman? Maybe.

The reality is, there are lots of CDs paying rates above 5.00% right now (just check out The Ascent's list of the highest CD rates today). While there are also savings accounts paying upward of 5.00%, the CD rate is guaranteed to last for the duration of the CD term. The savings account rates aren't guaranteed to last, as they are variable and subject to change at any time.

If the Federal Reserve lowers interest rates (which is widely expected to happen soon once inflation cools a bit further), the high yields that savings accounts are currently offering will fall. But seniors who have opened a CD at a competitive rate can keep that rate for the rest of the term -- whether it's one year or five.

For retirees on a fixed income, getting a guaranteed great rate on "safe" investments is really attractive. Especially since you can't usually lose money on a CD since they are FDIC insured. There's a big caveat, though.

Buying a CD isn't right for all seniors

Here's the problem. You have to agree to leave your money invested until the CD matures. This could take anywhere from three months to five years with most CDs. If you don't, you'll get hit with penalties. This actually could lead to losses in your principal if you withdraw your funds early before you've earned enough interest to cover the penalty.

Because of this penalty, retirees who might need to access their "safe" money soon absolutely should not open CDs with it. So, you should only consider following Orman's advice if you actually have multiple years of living expenses and an emergency fund available to you right now.

Sadly, for many retirees, this isn't the reality. If you have only enough in cash to cover a few months, or even a year or so of expenses, you don't want to tie it up in CDs. That's especially true because the economy is really uncertain right now. You don't want to be stuck having to pay a CD penalty or withdraw money from your investment accounts because things go south.

So, what should you do?

The bottom line is this:

• If you are retired and have three to five years of living expenses in cash (plus an emergency fund for big surprise costs), keep around one to two years of that safe money in a savings account where you can access it any time and invest the rest in a CD that matures in one to two years. This way, you'll always have accessible cash.
• If you don't have that much liquid cash, keep any that you do have in savings. You'll earn a competitive rate right now, and probably for months in the future, but won't risk a penalty if the economy goes south and you need to use your funds.

This means listening to Orman can make sense, but only for the limited number of seniors who've also followed her advice on having lots of liquid cash.

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