yea or nay to 5 years CDs

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
B0gle7979
Posts: 94
Joined: Wed Sep 03, 2014 1:31 pm

yea or nay to 5 years CDs

Post by B0gle7979 »

I have 50k emergency fund (12 months, maybe more but that's what my number is).

This 50k is for the goal of a general savings vehicle and not part of a fixed income strategy. Currently it is all in a FDIC high yield savings account (taxable) @ ~1%.

In an effort to eek out better returns, I'm proposing to leave 25k in the high yield savings. With the remaining 25k, open 5 separate CD's at a 5 year duration with 5k in each @ 2.0% with Ally bank.

The early withdrawal penalty is 150 days of interest. A quick excel spreadsheet shows that at about 10 months, it's even money to break the CD and pay the penalty versus leave it in the savings account at ~1%. Money held longer in each CD is gravy.

If interest rates raise, I break one or more accounts. If they stay neutral, maybe I ladder. If they drop, I sit.

Yay or nay? Any other general savings vehicles to consider?

Thanks!
PNW_Hunter
Posts: 69
Joined: Thu Mar 26, 2015 11:34 am

Re: yea or nay to 5 years CDs

Post by PNW_Hunter »

Are you willing to go non-FDIC insured into a taxable brokerage account, or are you committed to keeping with the FDIC insured options?
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: yea or nay to 5 years CDs

Post by ogd »

Yea. Two observations:

1) You can get slightly higher rates, see http://depositaccounts.com , at the cost of a little complexity with an extra account. On the other hand, it diversifies the banks so if Ally gives you trouble breaking a CD, you've got another option. And there's nothing wrong with replacing more fixed income than just the EF right now, either. These things beat Treasuries handily, with lower risk.

2) "eke" :mrgreen: Since it's a sign of the times.
DIY 2.6
Posts: 3
Joined: Thu Apr 16, 2015 1:49 am

Re: yea or nay to 5 years CDs

Post by DIY 2.6 »

Build out your CD ladder starting with 6 months and build out to 5 years. Don't be afraid to buy CDs from corporations or international banks. Just make sure they are investment grade. You can find much better rates and can spread your money out. What's better to you, getting 5% and taking a $5,000 risk of AT&T or the Central Bank of China failing in the next 5 years, or getting .5%?
john94549
Posts: 4638
Joined: Tue Jul 26, 2011 8:50 pm

Re: yea or nay to 5 years CDs

Post by john94549 »

As a general rule, a five-year ladder of five-year CDs beats just about any fixed-income, guaranteed, no ifs ands or buts, out there. I might shop around, but anywhere from 2 to 2.25% is within reason.

Check my historic posts on this issue.
User avatar
nisiprius
Advisory Board
Posts: 52216
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: yea or nay to 5 years CDs

Post by nisiprius »

For the last fifteen years, I've been trying to cut down on the number of different financial institutions I use.

It is an amazingly difficult struggle. It's two steps forward, one step back; the last step back occurred when the Treasury discontinues paper I bonds and I "needed" to add a Treasury Direct account.

I think you really need to give serious consideration--it shouldn't dominate everything else but serious consideration--to the effect of adding numerous accounts and financial institutions to your portfolio. If you shop for the best rates, every couple of years you will probably be buying CDs from a different place. If you get all your CDs at one place, in a couple of years the places with the best rates will probably have reverted to the mean.

I also think you need to assess the possibility of a bank refusing to allow early withdrawal. If you ladder thoughtfully, it might not be a problem. And it might not be a problem anyway. But what of the "what-ifs" of CDs is "what if I have to hold them to maturity." I've only had a break a CD once in my life, and it was no big deal (but I found the penalty surprisingly painful psychologically, even though the dollar amount wasn't important).

I understand that many people don't feel that complexity is a serious problem.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Topic Author
B0gle7979
Posts: 94
Joined: Wed Sep 03, 2014 1:31 pm

Re: yea or nay to 5 years CDs

Post by B0gle7979 »

PNW_Hunter wrote:Are you willing to go non-FDIC insured into a taxable brokerage account, or are you committed to keeping with the FDIC insured options?
For the goal of general savings vehicle I am committed to FDIC insured.
Topic Author
B0gle7979
Posts: 94
Joined: Wed Sep 03, 2014 1:31 pm

Re: yea or nay to 5 years CDs

Post by B0gle7979 »

ogd wrote:Yea. Two observations:

1) You can get slightly higher rates, see http://depositaccounts.com , at the cost of a little complexity with an extra account. On the other hand, it diversifies the banks so if Ally gives you trouble breaking a CD, you've got another option. And there's nothing wrong with replacing more fixed income than just the EF right now, either. These things beat Treasuries handily, with lower risk.

2) "eke" :mrgreen: Since it's a sign of the times.

1. I checked out depositaccounts.com prior to posting, it's a great site.
-Synchrony bank offers 2.25% but has a 25k minimum so I lose flexibility on breaking with only 1 cd versus 5
-GE Capital offers 2.25% but has a 270d EWP which makes breaking way more expensive
-Barclays offers 2.25% but has a 180d EWP which makes breaking more expensive
-Ally has most lax 150d EWP and on the phone they stated I can break for any reason. Unless held nearly all 5 years the benefits of the extra 0.25% aren't great.

2. Oops, eke not eek. Thanks.
Topic Author
B0gle7979
Posts: 94
Joined: Wed Sep 03, 2014 1:31 pm

Re: yea or nay to 5 years CDs

Post by B0gle7979 »

nisiprius wrote:For the last fifteen years, I've been trying to cut down on the number of different financial institutions I use.

It is an amazingly difficult struggle. It's two steps forward, one step back; the last step back occurred when the Treasury discontinues paper I bonds and I "needed" to add a Treasury Direct account.

I think you really need to give serious consideration--it shouldn't dominate everything else but serious consideration--to the effect of adding numerous accounts and financial institutions to your portfolio. If you shop for the best rates, every couple of years you will probably be buying CDs from a different place. If you get all your CDs at one place, in a couple of years the places with the best rates will probably have reverted to the mean.

I also think you need to assess the possibility of a bank refusing to allow early withdrawal. If you ladder thoughtfully, it might not be a problem. And it might not be a problem anyway. But what of the "what-ifs" of CDs is "what if I have to hold them to maturity." I've only had a break a CD once in my life, and it was no big deal (but I found the penalty surprisingly painful psychologically, even though the dollar amount wasn't important).

I understand that many people don't feel that complexity is a serious problem.
Agreed. Complexity is the enemy of execution or the KISS principal apply here. My online savings is also with Ally so one less account seems like a big plus.

From my phone call with Ally, they will ask for a "reason" why breaking the account but will not deny my ability to do so based on that reason. I remain skeptical as always but we'll have to see how that plays out.
Topic Author
B0gle7979
Posts: 94
Joined: Wed Sep 03, 2014 1:31 pm

Re: yea or nay to 5 years CDs

Post by B0gle7979 »

john94549 wrote:As a general rule, a five-year ladder of five-year CDs beats just about any fixed-income, guaranteed, no ifs ands or buts, out there. I might shop around, but anywhere from 2 to 2.25% is within reason.

Check my historic posts on this issue.
Thanks. How do you feel about doing a proper ladder of 1, 2, 3, 4 and 5 year CD's versus five of the 5 year CD's.

Obviously, the proper ladder has a cash "drag" with the lower rates on years 1-4. Mathematically, I'm still working it out but it looks like breaking one of the 5 year CD on years 1, 2, 3 and 4 might be a better way to get that ladder.
User avatar
AAA
Posts: 1885
Joined: Sat Jan 12, 2008 7:56 am

Re: yea or nay to 5 years CDs

Post by AAA »

Ally recently added wording to their CD agreement, saying something like "you can, with our approval, make an early withdrawal from your CD account."

So it's not guaranteed that you can break a CD if you wanted to.
User avatar
AAA
Posts: 1885
Joined: Sat Jan 12, 2008 7:56 am

Re: yea or nay to 5 years CDs

Post by AAA »

DIY 2.6 wrote:Build out your CD ladder starting with 6 months and build out to 5 years. Don't be afraid to buy CDs from corporations or international banks. Just make sure they are investment grade. You can find much better rates and can spread your money out. What's better to you, getting 5% and taking a $5,000 risk of AT&T or the Central Bank of China failing in the next 5 years, or getting .5%?
Just realize that the higher the rate, the less financially stable the institution. Advanta was offering great rates at one point on non-FDIC insured CD-type accounts. They went bankrupt a few years ago.
User avatar
nisiprius
Advisory Board
Posts: 52216
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: yea or nay to 5 years CDs

Post by nisiprius »

B0gle7979 wrote:...From my phone call with Ally, they will ask for a "reason" why breaking the account but will not deny my ability to do so based on that reason. I remain skeptical as always but we'll have to see how that plays out...
The problem is that the terms and conditions probably could change. They've already changed once: in 2011 Allan Roth noted that three words had been added to a disclosure document that now read, "If we consent to the redemption of a CD or IRA CD prior to the maturity date..." Ally reps told Roth that the actual policy hadn't changed. But they could, of course, change their actual policy from "always consenting" to "not always consenting."

You can always think about how to build the ladder. Can you live with the idea that "I can always get to 1/5th of my money within less than a year?" Or should you build the ladder at 6-month intervals so that "I can always get to 1/10th of my money within six months?" etc.

ING Direct used to have, and maybe all the online banks have, a cool tool that makes it very easy to build a CD ladder even if it has to have a lot of CDs in it, whereas I can imagine what the human rep across the desk at the local bank might say if I said "I'd like to open twenty CDs..."

The only time I broke a CD I was not asked for any "reason." As long as Ally claims to be disclosing their policy just for fun you might ask them what "reasons" they will consider acceptable.
Last edited by nisiprius on Thu Apr 16, 2015 3:58 pm, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
dbCooperAir
Posts: 1107
Joined: Tue Jan 07, 2014 9:13 pm

Re: yea or nay to 5 years CDs

Post by dbCooperAir »

My EM fund is about the same as yours, this was my take on it.

I keep a max of 20k in the checking account and the other $30k is in the process of being moved to Ibonds. I have not touched the EM pile in 20 years and with using ibonds I can just forget about it for the next 30 years and with any luck they will keep place with inflation, its a KISS deal.

Now my thinking has changed somewhat, I look at the ibonds as just part of the retirement pile and include them in my AA. If I have to sell the ibonds it not going to swing the AA enough for me to worry about it. I will likely have bigger issues at that point to worry about anyway.

I a big fan of using a short bond fund (VCSH) as well, this is not a bad place to keep some cash.

I would be a nay to CD's
Neither a wise man nor a brave man lies down on the tracks of history to wait for the train of the future to run over him. | -Dwight D. Eisenhower-
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: yea or nay to 5 years CDs

Post by Dandy »

I don't think it is a bad idea. But calculate the difference between the CD rates and the 1% savings. Don't you get the feeling that once you go the CD route the interest rates will jump? The beauty of bank CDs is that you know what it will cost to get out - that will tell you when a higher rate is a better deal. By the way the early redemption penalty is eligible for tax deduction.
User avatar
joe8d
Posts: 4545
Joined: Tue Feb 20, 2007 7:27 pm
Location: Buffalo,NY

Re: yea or nay to 5 years CDs

Post by joe8d »

Nay. Leave your Emergency Funds in a safe, easily accessible FDIC Online Savings account.
All the Best, | Joe
User avatar
Toons
Posts: 14467
Joined: Fri Nov 21, 2008 9:20 am
Location: Hills of Tennessee

Re: yea or nay to 5 years CDs

Post by Toons »

I would put 25k in Intermediate Term Tax Exempt. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
john94549
Posts: 4638
Joined: Tue Jul 26, 2011 8:50 pm

Re: yea or nay to 5 years CDs

Post by john94549 »

B0gle7979 wrote:
john94549 wrote:As a general rule, a five-year ladder of five-year CDs beats just about any fixed-income, guaranteed, no ifs ands or buts, out there. I might shop around, but anywhere from 2 to 2.25% is within reason.

Check my historic posts on this issue.
Thanks. How do you feel about doing a proper ladder of 1, 2, 3, 4 and 5 year CD's versus five of the 5 year CD's.
The 1,2,3,4,5 is an option, but the drag (as you noted) is obvious. For an emergency fund, five 5-yr CDs is an option, with the caveat that each CD is locked into today's rather marginal rates. With today's interest rates, the break penalty on one CD won't hurt too much. That said, the ideal is a rolling ladder of 5-yr CDs, where you buy a 5-yr this year, one next year, and so on, for five years. After five years, you have that "rolling ladder".

Moving beyond emergency funds, we have used a rolling ladder of CDs for many years as part of our retirement portfolio (IRA CDs). My wife thought it all dull and boring (which was true) until I showed her the statements. Compound interest is truly a wonder.
LeeMKE
Posts: 2233
Joined: Mon Oct 14, 2013 9:40 pm

Re: yea or nay to 5 years CDs

Post by LeeMKE »

I like the CDs offered at Fidelity. Very easy to buy from a variety of banks without having to open accounts all over town.

All FDIC insured, and every possible term. I built a one year ladder, and will probably extend it longer.
The mightiest Oak is just a nut who stayed the course.
User avatar
thedeadlybishop
Posts: 21
Joined: Wed Sep 17, 2014 1:44 am

Re: yea or nay to 5 years CDs

Post by thedeadlybishop »

If you do choose to go with Ally, they have 2 and 4 year CDs Raise Your Rate CDs. You can adjust the rate once for the 2 year and two times for the 4 year. That would give you some extra flexibility if you are concerned about interest rates going up. I am in the process of building a 4 year ladder with Ally so that all of my CDs there have the raise your rate option. You give up some yield not using the 5 year CD but gain some wiggle room if the rates change.
dolphinsaremammals
Posts: 2094
Joined: Tue Jul 22, 2014 4:18 pm

Re: yea or nay to 5 years CDs

Post by dolphinsaremammals »

B0gle7979 wrote:
From my phone call with Ally, they will ask for a "reason" why breaking the account but will not deny my ability to do so based on that reason. I remain skeptical as always but we'll have to see how that plays out.
I've only been asked that once and at a branch I usually do not use. I think the young woman thought I might be sending it to Nigeria or something. There have been very sad stories in the local papers from time to time about elderly people falling victim to those scams.
User avatar
Kevin M
Posts: 15789
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: yea or nay to 5 years CDs

Post by Kevin M »

I would use one or more 5-year CDs as long as you could get by somehow if the early withdrawal were disallowed. I think this is unlikely, but if I absolutely positively might have to access these particular funds before maturity I probably would not use a direct CD with maturity longer than my possible need.

I had absolutely no trouble doing early withdrawals from CDs at Ally and Barclays. Ally did ask why, but there was no pressure. Barclays did not ask any questions other than where I wanted the proceeds deposited. Both were done by phone in about five minutes. I think the concern is that if rates start increasing much, there will be more reluctance to allow early withdrawals at lower rates, but this is mostly speculation. The examples of early withdrawals being disallowed are few and far between (you can read about it on DepositAccounts.com).

Brokered CDs could be sold at any time, but what you get will depend on interest rates at the time, and you will take a significant haircut on the bid/ask spread (maybe less than the 1% early withdrawal penalty though).

Some banks and credit unions offer partial withdrawals (Ally does not, PenFed does), so ask about that before opening multiple CDs.

You come out ahead at the two-year mark with the 2.25% CD with an EWP of six months of interest relative to the Ally CD with an EWP of five months of interest. Check this out: CD Early Withdrawal Penalty Calculator

You can earn 2.20% at Synchrony Bank on less than $25K, but I would go with Barclays for smaller amounts for a taxable account (Barclays does not offer IRAs, Synchrony does).

An extra 0.25% is not much on this small amount of money ($62.50/year on $25K, before taxes), so I wouldn't worry too much about it. If you already have an Ally account, the convenience and slightly lower EWP may be worth that amount to you. If you don't already have an Ally account, I would consider Synchrony or Barclays instead.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
Post Reply