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A short-term solution for a sudden influx of cash

Q: We just received $120,000 from a trust fund. We're already semi-retired but have not yet reached Social Security age. Rather than risk losing any of the legacy in this volatile market, we thought we would live on it for the next few years. Is that a wise plan? If so, how should the assets be held?
Name withheld, via e-mail

A: "Spending the money is swell, especially if it keeps you from tapping into tax-deferred retirements accounts, such as IRAs or 401(k) plans," says Gary Schatsky, an attorney and financial planner in New York.

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"Eat the money down," he says. But at the same time, try to get the most out of it through careful short-term investments.

"Find the highest paying, yet safe, money fund you can – and put some money in a short-term corporate bond fund, such as those offered through Vanguard," Mr. Schatsky says.

Finally, "put some of the money in a three-year bank CD, he says." Some banks are still paying about 5 percent interest.

Q: I know very little about certificates of deposit. Are long-term CDs more profitable than short-term CDs? Where should you buy a CD? If I put $500 into a CD now, what would it be worth when it comes to maturity?
J.S., Tamms, Ill.

A: Long-term CDs generally pay a higher interest rate than short-term certificates. Bank CDs are also federally insured.

But whether tying up your money in a CD for a long time period is more "profitable" depends on a number of factors.

They include how well stock and bond markets perform over the same time period, as well as the impact of inflation and changes in interest rates, both or either of which could reduce the value of your real earnings.

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"With CDs, you are always subject to interest-rate risk over long time periods, such as if rates suddenly rise and you are stuck with a lower rate," says Schatsky.

You might earn more by investing the same money in a stock or bond mutual fund, he says.

If you put $500 in a five-year CD earning 5 percent annually, you will earn at least $25 a year. Amounts vary depending on the rate formula used by the bank. But that income is subject to federal and state taxes.

To get the best deal on CDs, check out www.bankrate.com. You can always invest through the mail, sending the money to a bank that offers higher returns in another state.