Should You Or Shouldn’t You Get CD’s?
You’re getting divorced. You’ve got some money tied up in certificates of deposits, also known as CDs. And you don’t really know what your next financial move should be. Wevorce.com asked accountant and certified divorce financial planner Noah Rosenfarb for some tips to help. Rosenfarb is the founder of Freedom Wealth Advisors, which helps divorcing women plan for their financial future. Read on for his recommendations.
Q: What should someone who is divorcing consider if they have CDs as investments?
A: CDs are used as a short-term investment for anyone who may want access to their money. Most financial planners see CDs as a short-term strategy, not a long-term one. You should know the penalties for surrendering your CD early and you should know if your CD is insured by the FDIC.
Q: How can CDs be used in a divorce?
A: The good news about CDs is generally, they are risk-free and you have access to the money if you need it, for instance when you are getting a divorce. CDs are easy to divide in a divorce. If you accumulate money during your marriage, different states have laws that vary about what you can keep and what you have to share. CDs can also be used to pay your litigation. If you have to move or go back to school after the divorce, tie that reserve cash in CDs. But it’s not the place to put half your assets for the next five to 10 years even in a bad market.
Q: What should someone who is already divorced understand about CDs?
A: After a divorce, it really becomes a question about what is your financial plan and does a CD become a valuable asset as part of your financial plan. CDs are valuable assets if you need reasons to have access to cash, say if college expenses are coming up or you are refurbishing your house or need to buy a new car. People tend to not use them as long-term investments.
Q: What kind of financial strategy should someone use when investing after a divorce?
A: Oftentimes after a divorce, people tend to want to be so conservative or aggressive because it it’s the first time in a long time they’ve had money to invest. Both strategies have pitfalls. The pitfall on the “All CD” strategy is the inflation risk becomes the most significant risk. Over time the money isn’t going to grow fast enough.
If you have a year like we just had and you invested all your money at once, it becomes difficult to get it back to even. If it goes down 40 percent, it needs to go up 65 to break even. Exposure to the stock market should be more cautious, so there’s some level of risk to make certain they have a secure future that’s not outpaced by inflation.
Q: What three tips can you offer someone who is divorced or divorcing and considering investments in CDs?
A: 1. Evaluate FDIC insurance rules. Make sure all your CDs are insured.
2. Don’t lock in your CDs for a longer period of time than you need to. Yes, the longer you lock up the CD the better rate, but if you need money early you will pay a penalty. The key is balancing the amount of time you invest the money with your need to get to it if you have to. You may want to consider a laddered portfolio of CDs (in which you invest your money in a series of CDs over a period of time) so you have access to your money.
3. Shop for rates. They vary significantly.
You have to evaluate corporate bonds, municipal bonds, equities…depends on level of assets to invest the risks you can tolerate if you have money you don’t plan to use or need for a number of years, you should evaluate other alternatives. If you need the money short term they are a great place.
