Comments on: CD Ladders in a Low Interest Rate Environment

By: Al D'Anna

Al D'Anna — Fri, 08 May 2009 04:52:44 +0000

I am 62 and retired using a 5 yr CD ladder for income. As each CD matures I take out the money I need for income and put the rest in a new 5 yr CD. I always try to get the highest FDIC insured CD rate in the nation. The rate difference can mean the difference between 25,000 vs 40,000 per yr in income on 1,000,000 balance. When the interest rate environment is low I continue to use the same procedure. One of the main reasons to build a cd ladder is to free you from trying to time the interest rate market.

By: thomas

thomas — Sun, 22 Feb 2009 16:49:19 +0000

If you don’t have a ton of cash for CD investing, you probalby are better off going with a high yield account. Go check out some calculators online, but you may be only “making” a few dollars more, yet you will have spent a lot of time getting everything set up. If the return is $10 for a year, and it will take more than an hour to do it, what is the value? Go stand on a street corner spinning a sign and make more money if that is your goal.

I’m anxiously waiting for the days when savings accounts are 6%+ again.

By: MTBob

MTBob — Fri, 20 Feb 2009 22:51:34 +0000

I’m going long on 5 yr CD’s in the smallest increments that I can with a given institution. I’ve decided to capture the highest rate possible and use the early withdrawal call option if / when interest rates rise. The penalty is the interest rate loss (typically 6 months on 5 yr CD’s) due to the early withdrawal.
Classic variable time duration laddering makes no sense to me. I want to control the timing of my money deposits (within a 5 year window) based on interest rate changes. This approach minimizes the interest rate “surprise” that occurs with shorter duration periods. By using small CD deposits I can control the amount and time of CD conversion if/when the rates increase. In the mean time I’m enjoying the highest CD rates available. I’ve not chosen the 7 year CD’s because the early withdrawal penalty typically doubles for that duration (1 year). It’s true that eventually my 5 year CD’s will mature at about the same time, if interest rates haven’t risen enough to convert to a higher rate. But, in the mean time I have established an interest rate floor for the 5 year duration.

By: cemccon

cemccon — Fri, 20 Feb 2009 19:05:04 +0000

FNBO Direct and GMAC Bank have better rates on their savings accounts than many folks have on their CDs. Of course, these two outfits have some good CD rates, too, but, for me, the slight rate increase isn’t worth locking my money up for that long (I.E., 12 months). Consider just parking your money in one of these accounts, until CD rates go up.

By: Stephen

Stephen — Fri, 20 Feb 2009 16:37:33 +0000

Glenn,

I was going to post something similar.

I started a CD ladder a couple months ago and was doing the rate-chasing game as well until I found a local bank that pays 5.01% up to $20K. So all my funds will be directed there (I even closed the CDs early and took the penalty as it will pay out much higher over the length of time the CDs would’ve taken to mature).

Of course, you need to be disciplined having all your money readily available, but the risk is worth it considering I’ll be making $40-$50 in March on interest alone. That’s my water bill and then some!

By: Glenn

Glenn — Fri, 20 Feb 2009 16:08:44 +0000

It depends on how much money you have in CDs. There are other options besides CDs and saving accounts. I currently am making 5% and the money is fully liquid. Take a look at high interest checking. Sure you have to use a debit card 10-12 times a month, but that is easy to do. I just run the card through 10 times for $.10 each when I normally fill up my car. Of course the bank will only give you that great rate up to $25K, but you could always do multiple accounts.

By: Kev

Kev — Fri, 20 Feb 2009 14:53:39 +0000

“The problem here is that savings account interest rates are typically even lower than CD rates”

From what I’ve seen, most CDs with a term < 5 yrs cannot touch FNBO or Dollar Savings Direct. Maybe I need to shop around a little more…

By: Dan

Dan — Fri, 20 Feb 2009 14:31:14 +0000

Keep the ladder, and go long. My medium-term money is laddering in 5-year CDs. If rates rise substantially, you can always pull your money and take the penalty of 180 days interest or whatever. But until then, you get a significantly higher rate… up to the low 4% range if you shop around. Economists are very very mixed on whether rates will be going up or down in the near future… the risks of inflation versus deflation being relatively balanced at the moment. So sitting on the sidelines could be a very bad move indeed. Think of the option to pull your money as just that – an “option” that protects you in the case of higher rates.

By: SuburbanDollar

SuburbanDollar — Fri, 20 Feb 2009 13:34:11 +0000

The only advice I would give is that sitting and waiting for rates to go up doesn’t make you any money. If you are running a 5 year CD ladder you are getting a better return on your CD than just about any other place right now, and would still have a CD maturing every year in case the rates do go up.