Playing It Safe With $1.2 Million in CDs Is Costing This Retiree $28,000 a Year

Susan is 67, recently widowed, and holds $1.2 million in a five-rung CD ladder yielding about 3.9%. That produces roughly $46,800 a year in interest income. She built this ladder during the last market drawdown, and sleeps well at night. The psychology is understandable, but is she playing it too safe?

This is the third time she has renewed the same structure, and each renewal could cost her real purchasing power across a retirement that may run 25 years or longer. Remaining life expectancy at 65 today averages 20.5 years, and a 67-year-old woman often outlives that average.

People born after 1960 routinely live well past their full retirement age of 67. Yet many conservative retirees anchor to instruments designed for a much shorter time horizon. The 2026 Social Security COLA came in at 2.8%, a reminder that the government indexes benefits to inflation while a fixed CD yield does not.

Why the ‘Safe’ Plan Is Costly

Three costs are hiding inside the CD ladder.

1. Opportunity cost. A diversified 60/40 stock and bond portfolio has historically produced long-run expected returns near 6.5%. Applied to $1.2 million, that is roughly $78,000 a year of expected total return versus the ladder’s $46,800. The gap is about $28,000 a year, and it compounds.
2. Tax character. CD interest is 100% ordinary income. Under the 2026 single-filer brackets, income above $50,400 is taxed at 22% and income above $105,700 at 24%. Qualified dividends and long-term capital gains are generally taxed at 0%, 15%, or 20%, and for a single retiree with modest income much of that can land in the 0% or 15% bands. The same dollar of return can carry a very different tax bill.
3. Inflation drag. At 2.5% to 3% annual inflation, the real value of her $1.2 million shrinks every year the ladder rolls.

Her 3.9% yield is well above what a typical bank pays today. The FDIC national average 12-month CD rate is only about 1.7%, down from roughly 1.8% a year earlier. Top online banks pay more, but the direction is clear. Meanwhile the 5-year Treasury yields about 4% and the 10-year almost 5%, and 10-year TIPS offer a real yield above 2%, a contractual return above inflation. I-Bonds currently pay a composite rate above 4%.

Run the same $1.2 million at 6.5% for 20 years and the ending value is nearly double the 3.9% path.

A Middle Path That Respects the Fear

Stocks fall, and Susan is right to respect that. The larger risk is treating CDs as riskless across a 25-year retirement.

One potential plan would be to keep five years of spending, roughly $250,000, in a short CD and Treasury ladder. Add a TIPS ladder locking in real yields above 2% for years 6 through 15. Invest the balance, perhaps $600,000 to $700,000, in a low-cost 60/40 fund for years 16 and beyond. The near-term money stays boring, but the long-term money is allowed to grow.

Separate the ladder into “spending in the next 5 years” and “everything else,” because those two buckets should not hold the same instrument. Second, look at the tax character of next year’s income: with the 2026 single standard deduction of $16,100, a portfolio tilted toward qualified dividends and long-term gains can produce similar spendable income at a lower tax rate than an all-CD plan.

This type of strategy would allow Susan to be conservative but still plan for long-term growth.

Contact [email protected] for any questions or corrections.