When you’re in the process of building savings for retirement during your working years, it’s a good idea to invest your money in stocks and other assets that are likely to grow.

As retirement nears, it’s smart to scale back on stocks due to their high risk profile, and shift over to more stable assets.

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It’s also important to keep a decent amount of cash on hand — ideally, 12 to 24 months’ worth. This gives you some options in case your investments lose value at a time when you need savings on top of Social Security to cover your expenses.

If you’re 65 years old with $609,000 in savings, you’re in pretty good shape for retirement. That’s the average retirement account balance among 65- to 74-year-olds as of 2022, according to the Federal Reserve.

But now that the Fed is cutting interest rates, safer options like savings accounts and certificates of deposit (CDs) will pay less interest. And that raises the question: Where should you park your retirement savings now?

Why rate cuts are happening now

On Sept. 18, 2024, the Federal Reserve lowered its benchmark interest rate by half of one percentage point. And that rate cut is likely to be the first of several.

The Fed raised interest rates numerous times in 2022 and 2023 to bring high inflation back to a more moderate level. And its efforts have paid off.

In August, the Consumer Price Index, which tracks changes in the cost of consumer goods and services, measured annual inflation at 2.5%. That’s fairly close to the Fed’s 2% annual inflation target over, which helps explain why the agency opted for a relatively aggressive rate cut in September.

Meanwhile, as long as inflation continues to cool, the Fed will no doubt seek to bring its benchmark interest rate down to pre-hike levels. Future cuts should make borrowing money less expensive, but they’re also apt to lead to lower interest rates for products like savings accounts and CDs. That’s not the best news for someone close to retirement looking for safer options for their money.

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Smart places to put your money as retirement nears

Even though stocks tend to be volatile, they’re still an appropriate investment for at least some of your savings during retirement. The more your portfolio grows during your senior years, the more money you can afford to withdraw on a yearly basis to fund your lifestyle. So depending on your personal risk tolerance, you may want to keep a significant portion of your long-term savings in stocks when you’re on the cusp of retirement.

As for the remainder of your savings, it should be a mix of lower-risk investments and cash. Although interest rates are falling, savings account and CD rates are still attractive.

You don’t want to tie up all of your cash in CDs, though, because there’s typically a penalty for early withdrawals. Keep at least one year’s worth of cash in a regular savings account, even though there’s a good chance its interest rate will fall steadily over the next year or so.

Meanwhile, because CD rates are still pretty strong, it’s a good time to set up a CD ladder. Consider terms that range from 12 to 60 months, with a portion of your money maturing every year for added flexibility.

Short-term bonds or bond funds are another option you can look at. You shouldn’t expect the same returns as you’d get from stocks, but bonds are less volatile.

Also look at municipal bonds for steady income; they’re a great investment option without the tax headache. The interest you collect from municipal bonds is always federally tax-exempt. And if you buy bonds issued by your state of residence, you typically won’t pay state or local taxes, either.

Bonds tend to have an inverse relationship to interest rates. So when interest rates are expected to decrease, which is the case today, bonds can be a good bet because their value is likely to go up.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.