With inflation still high, which is best for your long-term retirement strategy?
When deciding where to store your money, it’s important to consider if your options will keep up with inflation. Bank CDs and keeping cash at home may not be the wisest choices.
For those planning for long-term retirement, navigating investment strategies amidst economic shifts, particularly inflation, is crucial. This article evaluates the effectiveness of traditional bank Certificates of Deposit (CDs), the ill-advised practice of keeping cash at home, and the historical performance of the stock market as hedges against inflation.
Understanding Inflation’s Impact
Inflation signifies an increase in the general level of prices for goods and services, leading to a decrease in purchasing power over time. Conversely, deflation is a decrease in prices. Historically, U.S. inflation averaged 3.3% between 1914 and 2022. While it reached highs of 23.7% in June 1920 and lows of -15.8% in June 1921, the recent landscape has evolved.
As of May 2025, the Consumer Price Index (CPI) for all items rose 2.4% over the last 12 months. The core inflation rate (excluding volatile food and energy components) was 2.8% for the same period. This marks a significant decline from the 6.0% recorded in February 2023 and is closer to the Federal Reserve’s long-term target of 2%.
The impact of inflation on your money is profound. At a 3% inflation rate, $100 today would be worth $67.30 in 20 years and just $34.44 in 35 years. This erosion of purchasing power highlights the importance of strategic investment.
Bank CDs: A Closer Look
Certificates of Deposit (CDs) are time deposit accounts offered by banks, providing a fixed interest rate for a predetermined period. These accounts are insured by the FDIC or NCUA, offering security. Nearly four decades ago, CDs were considered excellent investments, with average annual percentage yields exceeding 11%. However, after a decade of rates hovering below 1%, they have seen some fluctuations.
Current CD Rate Environment
As of July 14, 2025, national average APYs for CDs are:
- 1-year CD: 2.02%
- 3-year CD: 1.68%
- 5-year CD: 1.70%
While these national averages are relatively low, top-yielding CDs can offer more attractive rates. For instance, some institutions are currently offering up to 4.60% for a 6-month CD, 4.40% for a 1-year CD, 4.25% for a 3-year CD, and 4.20% for a 5-year CD. Notably, these top rates currently outpace the general inflation rate.
The Federal Reserve’s benchmark interest rate, which influences CD rates, was held at 4.25-4.5% in June 2025. The inverted yield curve, where short-term CD rates are higher than long-term rates, persists. While higher interest rates generally benefit investors, short-term CD rates have largely kept pace with recent inflation, and long-term rates remain lower, possibly in anticipation of continued lower future inflation.
The Stock Market: A Long-Term Growth Vehicle
Most financial professionals concur that the stock market, particularly through a diversified index like the S&P 500, offers an average annual return of approximately 10% over the long term. From 1957 to 2022, the S&P 500 averaged 10.67%. However, it’s essential to consider inflation-adjusted returns, which typically run 3-4 percentage points lower, bringing the long-term inflation-adjusted average closer to 6-7%.
Recent Stock Market Performance
The stock market has demonstrated strong performance recently:
- The 2-year return for the S&P 500 as of June 2025 is 39.43%.
- The S&P 500 delivered an average return of 23% in 2024 and 24% in 2023.
- Year-to-date in 2025, the return is about 7.18%.
Looking at longer periods, the average annualized stock market return (adjusted for inflation) for the last 5 years (2019-2024) was 8.9%, and for the last 10 years (2014-2024) was 8%. These figures consistently show that even after accounting for inflation, the stock market has provided positive and significant returns over various periods.
The “Shoebox” Strategy: A Zero-Return Path
Keeping money under a mattress or in a shoebox offers a guaranteed 0% return over any period. This method ensures that your money’s purchasing power is directly eroded by inflation, making it the least advisable approach for long-term financial security.
Navigating Investment Choices for Financial Well-being
While bank CDs might serve specific, short-term financial needs (e.g., saving for a down payment or for those nearing retirement who prioritize capital preservation), they are generally not recommended as a primary component of a long-term retirement strategy, as their rates may not consistently outpace inflation over extended periods. Storing cash at home is an even less effective method for wealth preservation.
Historically, the stock market has consistently demonstrated its ability to outpace inflation, CD yields, and cash savings over the long term. For those aiming to grow their wealth and maintain purchasing power in retirement, investing in the stock market remains a foundational strategy. It is crucial to consider your individual risk/reward tradeoffs, personal financial goals, and time horizons. Consulting with a qualified financial advisor before making investment decisions is always recommended.