How term deposit laddering could help you manage money in retirement

Reaching retirement is a huge achievement. You’ve completed your time in the workforce and can now enjoy the fruits of your labour however you choose. But managing money in retirement requires careful thought. During your working life, you have an income to rely on and may view savings and investments with a longer-term time horizon. By the time you reach retirement, you need to make sure your finances are set up to provide cashflow and security on an ongoing basis.

Term deposits are a popular low risk investment for retirees, and a strategy known as laddering offers a way to take advantage of fixed interest rates while still maintaining regular access to your cash. If you’re retiring with a lump sum of money, either from a retirement pay-out or personal savings, term deposit laddering could be useful for you. Here’s how it works.

What is term deposit laddering?

Term deposits are low-risk savings products that involve depositing a lump sum for a fixed term, for a fixed rate of interest paid upon maturity. For example, if you put $5,000 into a term deposit with a 5 per cent interest rate for 12 months, you will be paid out $5250 on maturity. Typically, term deposits cannot be accessed ahead of maturity without penalties.

Term deposit laddering involves splitting a lump sum into multiple term deposits with staggered maturity dates. This ensures you get periodic access to your funds should you need them. When each term deposit matures, you can either reinvest and start the clock again, or withdraw, and enjoy the interest you’ve earned.

For example, if you have $100,000, you could split this up into 7 term deposits, known as ‘rungs’, with maturity dates ranging from 3 months to 36 months.

Pros of term deposit laddering

• Rolling access to funds while still earning interest. Rather than having to leave large sums sitting in savings accounts, term deposits allow you to earn interest without having to add to your balance. The laddering aspect means your money becomes periodically available should you need it.
• Manage interest rate environments. When rates are higher, you can lock in some of your funds for longer term growth while still maintaining periodic access to some of your money. If rates go up over time, your regularly maturing deposits can be reinvested at higher rates.
• Cashflow management over time. Transitioning to retirement can take some getting used to, and it may take you some time to find a rhythm for your new lifestyle. Term deposit laddering ensures your money is working for you while you make decisions about your retirement finances and regularly presents options at each maturity date.

Considerations of term deposit laddering

• Locked in funds may miss out on interest rate opportunities. While you’re rarely ever able to be earning the absolute maximum interest on every dollar all the time, term deposits do require you to lock in funds for a set term, which can mean your money is missing out on higher interest if rates rise significantly.
• Early withdrawals may incur penalties. Laddering offers periodic maturity so you can access your funds often. But if you need your money in before enough has matured, you may pay early exit fees.
• Some term deposits have minimum deposit amounts. Be sure to check minimums before creating your laddering plan.
• Funds over $250,000 may not be guaranteed by the FCS. The Financial Claims Scheme (FCS) in Australia protects deposits up to a limit of $250,000 per account holder, per authorised deposit-taking institution (ADI). If you have more than $250,000, you may need to explore multiple term deposit providers to maintain your protection.

Ready to create your term deposit laddering strategy? Learn more about term deposits or explore Bendigo Bank term deposits rates and terms.