INOVA 6-Year CD

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Kevin M
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INOVA 6-Year CD

Post by Kevin M »

I just posted a long article on the INOVA 6-Year CD in my modest, non-commercial, family-and-friends-type blog. If you're interested, click on the little globe symbol to the right of the PM symbol to access the blog. If interested, but you don't want to click through to the blog, or just want the highlights, here is a summary (including a few items not in the blog post).

Features
  • Term: six years.
  • APY = 2.50% in taxable (2.40% with a one time rate "step up" option), 2.60% in IRA (2.50% with the step up option)
  • EWP (Early Withdrawal Penalty): 180 days of interest.
  • Partial withdrawals allowed (according to branch rep; did not see in terms and conditions).
  • Federally insured by National Credit Union Share Insurance Fund (NCUSIF); standard limits, e.g., $250K for an IRA account.
Comparison to Other CDs I Like

I think this CD is better than the current PenFed 5- or 7-year CDs and the Allly Bank 5-year CD (unless you do an early withdrawal from the Ally CD in less than about 1.5 years).

I chose the step-up CD and gave up 10 basis points in yield. I think the price is right for this feature, which will let me do one rate increase without having to do an early withdrawal.

What I am Doing and Why

I am transferring funds currently held in IRA money market accounts (paying almost no interest) at Vanguard and Fidelity into INOVA IRA Step Up 6-year CDs. My reasons are:
  • The interest rate on the CD is much higher than a comparable bond fund.
  • There is no risk of decline in value of the CD if interest rates rise (unlike a bond fund).
  • If rates rise enough, I can use the one-time step up option to increase my rate, and if rates rise more, I can do an early withdrawal, pay the EWP and reinvest at a higher rate.
  • If an early withdrawal is disallowed, I still am likely to come out ahead of a comparable bond fund over the next six years.
  • I still have plenty of my fixed-income allocation in bond funds and deposit accounts for rebalancing and spending (I'm retired).
  • I already have CDs at Ally Bank and PenFed that will approach the federal insurance limits if held to term (but I probably would go for the INOVA CD anyway).
The Account Application and Transfer Process

In summary, the process of becoming a member of INOVA credit union has been a bit more cumbersome and time consuming than my experiences with Ally Bank or PenFed Credit Union, but the process of transferring the money from Vanguard and Fidelity to INOVA has been easy and quick. There has been more application paperwork than usual, and some disconnects between the online application and the paperwork that followed. However, for me it has been worth it due to the great features of the CDs. Also, the service I have received from the branch representative, Rebecca, has been outstanding.

One hassle: you have to get the account application notarized.

Also, they do a credit check (not sure if hard or soft pull; I just got an alert that they had checked my credit).

As with some other CUs, like PenFed, you can become a member by paying a small fee to join a not-for-profit organization (if you don't meet any of the other criteria).

Tip: Do not bother with the 800 number listed on the INOVA website, other than to get the phone number of the branch closest to you. The rep I got at the 800 number was unable to answer any of my questions.

By contrast, the rep at the branch near me (about 40 miles away), Rebecca, was extremely knowledgeable, was able to answer all of my questions, and has been extremely diligent and helpful throughout the process. Everything has been handled by phone, email and mail (I did not drive 40 miles to the branch!).

One of my concerns was rates dropping before the transfers from Vanguard and Fidelity had been completed. This happened to my Mom in doing an IRA transfer to PenFed. I was pleasantly surprised when Rebecca told me that they would guarantee the rate before even starting the transfer (not indefinitely of course).

I give a blow-by-blow account of the entire process in the blog post.

Hope this is useful,

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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tfb
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Re: INOVA 6-Year CD

Post by tfb »

Great info. Thank you for sharing. By the way I have Kevin On Investing in my RSS reader and I was hoping that Kevin would post more often but I never realized that you are the Kevin in Kevin On Investing. We should add you to the list of Bogleheads blogs on the wiki.
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Re: INOVA 6-Year CD

Post by Kevin M »

tfb wrote:Great info. Thank you for sharing. By the way I have Kevin On Investing in my RSS reader and I was hoping that Kevin would post more often but I never realized that you are the Kevin in Kevin On Investing. We should add you to the list of Bogleheads blogs on the wiki.
I am extremely flattered! I don't post to my blog often because I spend so much time posting here, and the only feedback I get on the blog is from family and a few friends, so I assume not many people are reading it (I get spam comments daily though). I just want to help spread the word on investing wisely and not getting ripped off by the financial industry machine. Whatever forum allows me to do that most effectively is the one I will use.

Thanks!

Kevin
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Re: INOVA 6-Year CD

Post by Anon1234 »

I read on their site that "there is no fee for closing a roth ira account within 7 days of receiving the disclosure forms." Were you able to find the roth account closure fee after the 7 day period?

Thanks for the heads up on the 2.5% CDs!
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Re: INOVA 6-Year CD

Post by Kevin M »

Anon1234 wrote:I read on their site that "there is no fee for closing a roth ira account within 7 days of receiving the disclosure forms." Were you able to find the roth account closure fee after the 7 day period?

Thanks for the heads up on the 2.5% CDs!
No, I searched on "7 days" "seven days" and "Roth" and didn't find anything in the disclosure form about this. Are you thinking you might close the account if you don't like what you see in the disclosures? I think they would just send you the disclosures document if you request it.

Kevin
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Anon1234
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Re: INOVA 6-Year CD

Post by Anon1234 »

Kevin M wrote:
Anon1234 wrote:I read on their site that "there is no fee for closing a roth ira account within 7 days of receiving the disclosure forms." Were you able to find the roth account closure fee after the 7 day period?

Thanks for the heads up on the 2.5% CDs!
No, I searched on "7 days" "seven days" and "Roth" and didn't find anything in the disclosure form about this. Are you thinking you might close the account if you don't like what you see in the disclosures? I think they would just send you the disclosures document if you request it.

Kevin
I'm not worried about the disclosure, but I would transfer back to vanguard if the TBM yield exceeds the CD rates by 0.25-0.5%
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Re: INOVA 6-Year CD

Post by Kevin M »

Anon1234 wrote: I'm not worried about the disclosure, but I would transfer back to vanguard if the TBM yield exceeds the CD rates by 0.25-0.5%
Hmm, how likely is it that TBM yield will increase by over 60 basis points in the next ten days (assuming you start the process now)? I have gotten a really good feeling of trust in working with Rebecca, so if she verified this policy, I would trust her. In verifying the rate guarantee (during the transfer process), she told me she had checked with her superiors to make sure that they would honor it.

Kevin
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Anon1234
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Re: INOVA 6-Year CD

Post by Anon1234 »

Let me try again. From here: http://www.inovafcu.org/accounts-servic ... -iras.html
No penalty to close a Roth IRA if done within seven (7) days of receiving disclosures.

So, the fee applies if the account is closed after disclosure + 7 days. I was considering the 6 year CD and thinking "what if, 2 or 3 years from now, TBM yield is back to 3.5%. I'd want to break the CD and move my money back to my vanguard Roth IRA, into TBM admiral, VBTLX. What would the INOVA account closure fees be?"

I'll probably just wait until tomorrow and call them.

Cheers!
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Re: INOVA 6-Year CD

Post by Kevin M »

Anon1234 wrote:Let me try again. From here: http://www.inovafcu.org/accounts-servic ... -iras.html
No penalty to close a Roth IRA if done within seven (7) days of receiving disclosures.

So, the fee applies if the account is closed after disclosure + 7 days. I was considering the 6 year CD and thinking "what if, 2 or 3 years from now, TBM yield is back to 3.5%. I'd want to break the CD and move my money back to my vanguard Roth IRA, into TBM admiral, VBTLX. What would the INOVA account closure fees be?"

I'll probably just wait until tomorrow and call them.

Cheers!
I don't understand your confusion. The thing you're referring to is a seven day thing, not a 2-3 year thing. If you break the CD in 2 or 3 years, you will pay the EWP of 180 days of interest = 1.25% of principal. Very straightforward.

Kevin
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Re: INOVA 6-Year CD

Post by Langkawi »

Kevin M wrote:I don't understand your confusion. The thing you're referring to is a seven day thing, not a 2-3 year thing. If you break the CD in 2 or 3 years, you will pay the EWP of 180 days of interest = 1.25% of principal. Very straightforward.
He's asking what will it cost when he wants to leave INOVA in the future. The EWP breaks the CD, it doesn't get the money out of INOVA.
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Re: INOVA 6-Year CD

Post by Kevin M »

Got it, I have asked if there is a fee to do a trustee-to-trustee transfer out of INOVA, and will post back when I get an answer.

Same question has occurred to me about Ally Bank and PenFed CU, but I didn't bother to ask, because to me the deals were so good (relatively speaking) that a reasonable fee to transfer out would not have deterred me.

Question didn't make sense to me because the quoted policy referred to waiving the penalty if you back out in 7 days or less (buyer's remorse clause of sorts); it didn't say anything about a fee.

Kevin
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Prudence
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Re: INOVA 6-Year CD

Post by Prudence »

Kevin - thank you. How does the one-time rate increase work? What are the limits on when you can exercise it and what would be the maximum increase?
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IRA transfer fee Re: INOVA 6-Year CD

Post by Kevin M »

Here is the answer on the IRA transfer (out) fee:
Rebecca wrote:We charge no fee to do a direct IRA transfer out of INOVA. There is no fee to close an IRA account after 90 days. If the IRA account is closed completely within the first 90 days, there is a $50 account closure fee.
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Re: INOVA 6-Year CD

Post by Kevin M »

Prudence wrote:Kevin - thank you. How does the one-time rate increase work? What are the limits on when you can exercise it and what would be the maximum increase?
Hi Prudence. The terms and conditions aren't explicit about this; this is all I see:
Variable Rate Information. These Accounts are subject to a Variable Rate. For the current
dividend rate and corresponding APY, refer to the separate page titled "Account Disclosure
Rate Supplement" which We have included with and made a part of this Disclosure.
One of the questions I asked initially was what the rate got stepped up to; i.e., to the then-current rate for a 6-year CD, or to the CD with the maturity closest to remaining term. The answer was the former (current 6-year CD rate).

The only limit that I know of is that you can only exercise it once during the term of the CD. No limits are stated on when, and I have not seen any statement about a max limit on the increase, so I assume there is none.

Kevin
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Re: INOVA 6-Year CD

Post by Kevin M »

I just published another blog post with some more information on INOVA Federal Credit Union. In it I cover:
  • The conclusion of the IRA transfer process
  • Contact information
  • Fees To Transfer Out of INOVA and Close Account (none after 90 days)
  • Early Withdrawal Penalty Waived if 59 1/2 or Older? (No)
  • Right to Change Terms (yep)
  • Problem Logging in With Google Chrome (resolved)
Click the globe symbol to the right if interested.

Hope this is useful,

Kevin
If I make a calculation error, #Cruncher probably will let me know.
whatever
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Re: INOVA 6-Year CD

Post by whatever »

Too late for the 2.6% APY, today (March 30) it's 2.1 APY for a INOVA IRA Step Up 6-year CD.
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Re: INOVA 6-Year CD

Post by Kevin M »

whatever wrote:Too late for the 2.6% APY, today (March 30) it's 2.1 APY for a INOVA IRA Step Up 6-year CD.
Yep, just saw that earlier today. Also noticed that INOVA CDs are not listed in the CD Rates pages on http://www.depositaccounts.com. Have asked why on the forum there. Even at around 2%, they still are competitive.

I mentioned the rate drop to Rebecca at INOVA, and she said it's likely that it has to do with a drop-off in loan activity. Maybe it will pick up and they'll increase the rate soon.

Kevin
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Re: INOVA 6-Year CD

Post by pc95 »

This is the problem with US CDs lately - considering inflation, their Rates are in the dirt and continue to move lower. The stagnation is beginning to resemble Japanese banks and slowly moving down - Japan last I looked has like 0.05% CDs. At my regular bank here, Chase, saw a "special" 10 Yr CD for 2% now as you walk in. I've given up on CDs recently and moved into much riskier value funds as a result. Had the AMEX online savings account at 1% and then they dropped it down to 0.75%. That pissed me off....alot of this has to do with propping up the mortgage industry imo. I'll probably move back into CDs more when/if rates double up.
Last edited by pc95 on Wed Apr 04, 2012 5:43 pm, edited 1 time in total.
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Re: INOVA 6-Year CD

Post by Kevin M »

I just posted an update to my blog. It is short, so I'll just copy it here.

My shortest blog post ever ... INOVA credit union recently dropped the rates on their 6-year CDs. They now match the rates on their 5-year CDs, so now I would go for the 5-year CDs unless you think rates are going to stay this low for more than five years. Here are the current rates (APY):

Taxable 5/6-Year CDs: 2.10%
Taxable 5/6-Year step up CDs: 2.00%
IRA 5/6-Year CDs: 2.20%
IRA 5/6-Year step up CDs: 2.10%

The rates are still competitive with the PenFed CU 5-year CD at 2.00% APY, and the Ally Bank 5-year CD at 1.74% APY. The PenFed CU 7-year CD is a better deal if you hold for at least about four years. The break even point with the Ally 5-year CD (if doing an early withdrawal) is about two years. The step-up option still is a nice sweetener. See my recent posts for more details on the INOVA CDs.

Kevin
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Re: INOVA 6-Year CD

Post by Kevin M »

pc95 wrote:considering inflation, they're Rates are in the dirt
What is your alternative for super-low-risk fixed income? I bonds are good for investors with fixed income in taxable accounts, but annual purchase limits limit their usefulness.
pc95 wrote:I've given up on CDs recently and moved into much riskier value funds as a result.
At least you acknowledge that are taking much more risk by doing this. Stocks are not fixed income. You are shifting your AA to a riskier portfolio stretching for return. Maybe that will work out for you, but most here do not do that kind of thing.

I have no reply to your other comments, which just seem to be blowing off steam. Doesn't bother me, but I don't see it contributing much to the dialog.

Kevin
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Erwin
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Re: INOVA 6-Year CD

Post by Erwin »

Kevin M wrote:I just posted a long article on the INOVA 6-Year CD in my modest, non-commercial, family-and-friends-type blog. If you're interested, click on the little globe symbol to the right of the PM symbol to access the blog. If interested, but you don't want to click through to the blog, or just want the highlights, here is a summary (including a few items not in the blog post).

Features
  • Term: six years.
  • APY = 2.50% in taxable (2.40% with a one time rate "step up" option), 2.60% in IRA (2.50% with the step up option)
  • EWP (Early Withdrawal Penalty): 180 days of interest.
  • Partial withdrawals allowed (according to branch rep; did not see in terms and conditions).
  • Federally insured by National Credit Union Share Insurance Fund (NCUSIF); standard limits, e.g., $250K for an IRA account.
Comparison to Other CDs I Like

I think this CD is better than the current PenFed 5- or 7-year CDs and the Allly Bank 5-year CD (unless you do an early withdrawal from the Ally CD in less than about 1.5 years).

I chose the step-up CD and gave up 10 basis points in yield. I think the price is right for this feature, which will let me do one rate increase without having to do an early withdrawal.

What I am Doing and Why

I am transferring funds currently held in IRA money market accounts (paying almost no interest) at Vanguard and Fidelity into INOVA IRA Step Up 6-year CDs. My reasons are:
  • The interest rate on the CD is much higher than a comparable bond fund.
  • There is no risk of decline in value of the CD if interest rates rise (unlike a bond fund).
  • If rates rise enough, I can use the one-time step up option to increase my rate, and if rates rise more, I can do an early withdrawal, pay the EWP and reinvest at a higher rate.
  • If an early withdrawal is disallowed, I still am likely to come out ahead of a comparable bond fund over the next six years.
  • I still have plenty of my fixed-income allocation in bond funds and deposit accounts for rebalancing and spending (I'm retired).
  • I already have CDs at Ally Bank and PenFed that will approach the federal insurance limits if held to term (but I probably would go for the INOVA CD anyway).
The Account Application and Transfer Process

In summary, the process of becoming a member of INOVA credit union has been a bit more cumbersome and time consuming than my experiences with Ally Bank or PenFed Credit Union, but the process of transferring the money from Vanguard and Fidelity to INOVA has been easy and quick. There has been more application paperwork than usual, and some disconnects between the online application and the paperwork that followed. However, for me it has been worth it due to the great features of the CDs. Also, the service I have received from the branch representative, Rebecca, has been outstanding.

One hassle: you have to get the account application notarized.

Also, they do a credit check (not sure if hard or soft pull; I just got an alert that they had checked my credit).

As with some other CUs, like PenFed, you can become a member by paying a small fee to join a not-for-profit organization (if you don't meet any of the other criteria).

Tip: Do not bother with the 800 number listed on the INOVA website, other than to get the phone number of the branch closest to you. The rep I got at the 800 number was unable to answer any of my questions.

By contrast, the rep at the branch near me (about 40 miles away), Rebecca, was extremely knowledgeable, was able to answer all of my questions, and has been extremely diligent and helpful throughout the process. Everything has been handled by phone, email and mail (I did not drive 40 miles to the branch!).

One of my concerns was rates dropping before the transfers from Vanguard and Fidelity had been completed. This happened to my Mom in doing an IRA transfer to PenFed. I was pleasantly surprised when Rebecca told me that they would guarantee the rate before even starting the transfer (not indefinitely of course).

I give a blow-by-blow account of the entire process in the blog post.

Hope this is useful,

Kevin
Is 6 years not too long? Inflation is already higher that the CD rate and it is very likely that it will continue going up.
Erwin
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Re: INOVA 6-Year CD

Post by Kevin M »

mpt follower wrote: Is 6 years not too long? Inflation is already higher that the CD rate and it is very likely that it will continue going up.
What alternatives do you prefer if one wants to minimize interest-rate risk and credit risk for at least part of one's fixed income allocation? Assume you've already maxed out I Bonds.

The INOVA 5-year CD now has same rates as 6-year, so you can shorten up maturity a bit.

The one time rate increase option and and the early withdrawal option help with the increasing inflation scenario, assuming nominal rates increase as well.

TIPS also have negative real returns unless you go out far enough in maturity (10 years?). TIPS have significant interest rate risk.

To address your concerns you must take higher risk of some sort, which is fine as long as you understand that's what you're doing.

Thanks,

Kevin
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Erwin
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Re: INOVA 6-Year CD

Post by Erwin »

Kevin M wrote:
mpt follower wrote: Is 6 years not too long? Inflation is already higher that the CD rate and it is very likely that it will continue going up.
What alternatives do you prefer if one wants to minimize interest-rate risk and credit risk for at least part of one's fixed income allocation? Assume you've already maxed out I Bonds.

The INOVA 5-year CD now has same rates as 6-year, so you can shorten up maturity a bit.

The one time rate increase option and and the early withdrawal option help with the increasing inflation scenario, assuming nominal rates increase as well.

TIPS also have negative real returns unless you go out far enough in maturity (10 years?). TIPS have significant interest rate risk.

To address your concerns you must take higher risk of some sort, which is fine as long as you understand that's what you're doing.

Thanks,

Kevin
Right, in today's environment fixed income tools are not very attractive. My personal approach would be to commit to lower maturity bonds/CDs. My guess is that the Fed will not keep rates that low for that long and if that is the case, I may do better than this 6 year CD. Of course there is the risk that I may be wrong, but it is a risk that I am willing to take instead of settling for a 2-3% 6 year CD. Historically this strategy has paid off as it is well explained by Eugene Fama, see http://schwert.ssb.rochester.edu/a425/AER75_EFF.pdf
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Re: INOVA 6-Year CD

Post by Kevin M »

mpt follower wrote: My personal approach would be to commit to lower maturity bonds/CDs. My guess is that the Fed will not keep rates that low for that long and if that is the case, I may do better than this 6 year CD. Of course there is the risk that I may be wrong, but it is a risk that I am willing to take instead of settling for a 2-3% 6 year CD. Historically this strategy has paid off as it is well explained by Eugene Fama, see http://schwert.ssb.rochester.edu/a425/AER75_EFF.pdf
Are you missing the points about the one-time rate increase option and the early withdrawal option? These are what mitigate the interest-rate risk you are highlighting. Of course there's the risk that the bank or CU will change the early withdrawal terms, but that's a separate consideration.

If you are concerned about even more rapid increases in interest rates, then consider the Ally Bank 5-year CD with an EWP of 60 days of interest. See if you can find a short-term CD with a maturity of six months or greater that beats the Ally CD. At 1.74% APY, you earn more than 1% if break in six months, and about 1.45% if break in one year.

Kevin
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pc95
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Re: INOVA 6-Year CD

Post by pc95 »

The point is Kevin not only to vent, but to illuminate that CDs as "super-safe" are now a guaranteed loss, and they're moving downward with nothing to indicate otherwise in the near-term. I'd rather take a shot at a gain or a bigger loss than no chance of gain. If that means Value-funds, real-estate whatever.....erosion of purchasing power through meager CDs is an ill-fated plan.
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Re: INOVA 6-Year CD

Post by Kevin M »

pc95, so are you invested 100% in risky assets? I'm using "risky asset" in the standard finance theory sense. In other words, you have no fixed income of any sort?

If so, then of course CDs are of no interest to you, nor would short-term bonds be. My post is intended to share my thoughts with people who have an allocation to fixed income.

Kevin
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pc95
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Re: INOVA 6-Year CD

Post by pc95 »

Quite the contrary in fact, I've been investing in CDs for quite a few years against the usual advice, and got lucky with some promotional longer term ones recently with palatable rates comparatively still in effect. However, when rates are dipping into sub 2-percent annual returns for 10 years, enough is enough. I can stomach 3 % returns of course going up and that's why I mentioned Japan, where rates are so abysmal that some people will actually invest in .05% CDs. Protecting my income cannot always be my numero uno priority unless I'm one of the wealthy folks who probably wouldn't be reading this board anyway.
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Re: INOVA 6-Year CD

Post by Kevin M »

I see. So you have an allocation to fixed income, but are not adding to it now. Do you own any bond funds?

Actually you might be surprised at the wealth of many forum members. There was a poll done not long ago, and some interesting charts produced. I think someone was up at $40M net worth, but that was an outlier. Many members are in the millionaire's club.

Kevin
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Re: INOVA 6-Year CD

Post by pc95 »

Well the value funds I own have them by default and have so in the 401 as well. The CD rates really infuriate me right now. Feel like earnest savers are indirectly bearing the burden of the fools who over-borrowed or over-lent especially in housing by way of the rates.
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Re: INOVA 6-Year CD

Post by Kevin M »

By "value" funds do you mean "balanced" funds?

Value funds as understood on this forum are stock funds that invest in value stocks. Balanced funds are funds that own both stocks and bonds.

Do you own these funds, which I assume are balanced funds, in taxable or tax-advantaged accounts?

Venting your anger will not help you make wise investing decisions. Let's focus on what we can control.

Kevin
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Re: INOVA 6-Year CD

Post by Kevin M »

INOVA has slashed their CD rates. They no longer are competitive. PenFed 7-year is now the way to go if you expect rates to stay low for up to three years, otherwise Ally Bank 5-year is competitive. There are some CDs paying higher rates. You know where to look to find these.

Kevin
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Re: INOVA 6-Year CD

Post by tfb »

Kevin M wrote:INOVA has slashed their CD rates. They no longer are competitive. PenFed 7-year is now the way to go if you expect rates to stay low for up to three years, otherwise Ally Bank 5-year is competitive. There are some CDs paying higher rates. You know where to look to find these.

Kevin
Congratulations for snapping a good deal. Thank you for sharing it with the rest of us. It proves "you snooze, you lose."
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pc95
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Re: INOVA 6-Year CD

Post by pc95 »

NavyFed currently has a 7 year 2.7% yield - the best I can tell. I'd gone in on digital credit union 2.5% 5-year in January since their penalty was 6 months vs 1 yr for the others. DCU's rate had since gone down.
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Kevin M
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Re: INOVA 6-Year CD

Post by Kevin M »

pc95 wrote:NavyFed currently has a 7 year 2.7% yield - the best I can tell. I'd gone in on digital credit union 2.5% 5-year in January since their penalty was 6 months vs 1 yr for the others. DCU's rate had since gone down.
That does look to be the best rate (matched by a couple others), but my understanding is that it is harder to qualify for Navy Fed.

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