Current CD rates and online banking

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dachshund
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Current CD rates and online banking

Post by dachshund » Fri Aug 07, 2015 4:49 pm

Where are the best current CD rates and is online banking safe?

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LAlearning
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Re: Current CD rates and online banking

Post by LAlearning » Fri Aug 07, 2015 4:52 pm

iono, you can search for them.

yes, within reason.
I know nothing!

dachshund
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Re: Current CD rates and online banking

Post by dachshund » Fri Aug 07, 2015 5:02 pm

What's the best way to search?

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Toons
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Re: Current CD rates and online banking

Post by Toons » Fri Aug 07, 2015 5:09 pm

"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Phineas J. Whoopee
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Re: Current CD rates and online banking

Post by Phineas J. Whoopee » Fri Aug 07, 2015 5:11 pm

Best current CD rates; and safety of online banking.

Sorry, I don't mean to come across harshly, but there's a strain here of not wanting to do other peoples' research when it's simple and straightforward for them to do it for themselves.

PJW

dachshund
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Re: Current CD rates and online banking

Post by dachshund » Fri Aug 07, 2015 5:16 pm

I just found a site listing Synchrony Bank for 5-year at rate=2.23, APY=2.25. Does anyone know about Synchrony Bank or about better rate?

dachshund
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Re: Current CD rates and online banking

Post by dachshund » Fri Aug 07, 2015 5:19 pm

Sorry. I thought this site was to help us novices not to admonish us. But anyway--sorry.

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Phineas J. Whoopee
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Re: Current CD rates and online banking

Post by Phineas J. Whoopee » Fri Aug 07, 2015 5:32 pm

dachshund wrote:Sorry. I thought this site was to help us novices not to admonish us. But anyway--sorry.
Sorry for a second time. I had hoped I wasn't admonishing, and I didn't intend to be mean to a new poster.

One good place to find CD rates is depositaccounts.com, where the highest 5-year APY listed is from Eloan.com, at 2.45%, if you can commit $10,000.

The FDIC says online banking is generally OK but gives some tips to keep yourself safe:
The Federal Deposit Insurance Corporation wrote:...
The Internet offers the potential for safe, convenient new ways to shop for financial services and conduct banking business, any day, any time. However, safe banking online involves making good choices - decisions that will help you avoid costly surprises or even scams.

This brochure offers information and tips to help you if you are thinking about or already using online banking systems. We will tell you how to:

Confirm that an online bank is legitimate and that your deposits are insured
Keep your personal information private and secure
Understand your rights as a consumer
Learn where to go for more assistance from banking regulators
...
Hope that's more helpful.

PJW
Last edited by Phineas J. Whoopee on Fri Aug 07, 2015 5:52 pm, edited 1 time in total.

123
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Re: Current CD rates and online banking

Post by 123 » Fri Aug 07, 2015 5:51 pm

Some investors that intend to hold a CD to maturity may decide to buy a brokered CD through a brokerage account at a firm like Schwab, Fidelity, or Vanguard. With brokered CDs you do not have an early withdrawal penalty option, if you want out early your CD must be resold, possibly at a substantial discount depending on how interest rates have moved.

Brokered CDs can allow an investor to have multiple CDs "live" in a brokerage account for simplicity. Most of the time the interest rate on a brokered CD is less then getting one directly from the bank involved. Once in awhile you can get the same rate on a brokered CD as you can on a direct CD from the same bank but that is rare.
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john94549
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Re: Current CD rates and online banking

Post by john94549 » Fri Aug 07, 2015 6:36 pm

I would second the nod to Ken Tumin's blog (www.depositaccounts.com/blog) for helpful information about CDs in general, and the best rates in particular. Every couple of weeks, in the blog, you'll see a posting for "best CD rates" by rate and availability. For example, some rates are available nationally, some are not.

dachshund
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Re: Current CD rates and online banking

Post by dachshund » Fri Aug 07, 2015 7:47 pm

Dear PJW: Thank you for your second response. I will visit the links you provided when I have more time. I'm really not asking for anyone to do all the work for me. It's just that I'm uncertain how to investigate. Again, thank you. If anyone has a favorite CD institution though, I'd be glad to hear it. I don't know if there is any prohibition in these forums against giving that kind of info or not.

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Kevin M
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Re: Current CD rates and online banking

Post by Kevin M » Fri Aug 07, 2015 7:54 pm

Yes, DepositAccounts is my go-to source for good CDs, and yes, online banking generally is safe, and yes, the Synchrony Bank CD is a good one. I specifically discuss a purchase of this CD in an IRA in this blog post: Synchrony Bank 5-Year CD. Does that help?

I very recently bought another Synchrony Bank 5-year CD, and published a blog post on that too, but the emphasis of that one is doing an IRA transfer out of a maturing CD at another bank.

EDIT: I post extensively about buying CDs from banks and credit unions on this forum. You can find these posts with a Google search like:

"Kevin M" CD site:bogleheads.org

You have come to the right place!

Kevin
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kaneohe
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Re: Current CD rates and online banking

Post by kaneohe » Fri Aug 07, 2015 8:00 pm

google is your friend https://www.google.com/?gws_rd=ssl#q=highest+cd+rates

Not all the sites will always be up-to-date but you should get close if you visit a few of them.
You may want to pay attention to early withdrawal penalties as well as the yields. Synchrony Bank
has 6 mo EWP but you may want to convince yourself that you can really get out at a time of your choosing.........

john94549
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Re: Current CD rates and online banking

Post by john94549 » Fri Aug 07, 2015 8:14 pm

dachshund wrote: If anyone has a favorite CD institution though, I'd be glad to hear it.
It gets complicated. For example, for those with IRA CDs and who are of a certain age (over 59 1/2), StateFarmBank and/or PenFed might be optimal. EWPs are waived for partial withdrawals. For others, the key is the rate versus the EWP.

Not to say CDs are the "wild wild west", like they used to be, but there is still a lot out there. FDIC/NCUA insurance is the key. I pause not worrying about where my funds are being used, so long as I am insured.

For example, no dispute that some depository institutions utilize my CD money unwisely (in my view). That's their call. If PenFed wants to pay me 300 basis points more on my CD than they collect on an auto loan, so be it.
Last edited by john94549 on Fri Aug 07, 2015 8:33 pm, edited 3 times in total.

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Rob5TCP
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Re: Current CD rates and online banking

Post by Rob5TCP » Fri Aug 07, 2015 8:18 pm

Still another endorsement of Depositaccounts.com
When there was a 3% account that you could add to; it was heavily discussed at that site. It was only for 3 months last year.
Right now 2.25-2.5 seems to be the best currently. Periodically PenFed or several other banks briefly offer 3% CD's.
When they become available; I jump, especially if they have a reasonable early withdrawal penalty (EWP).

dachshund
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Re: Current CD rates and online banking

Post by dachshund » Sat Aug 08, 2015 4:27 am

Wow! Thanks everyone! I will investigate all those links. May I be permitted to veer off course (I will relate back to CDs later)? If so, my understanding of bonds includes the following (correct my feeble understanding wherever wrong): 1. Should an event occur so as to cause a flight to safety, U.S. Treasuries would likely benefit. This would occur because the influx of new money would lead to lower yields which would lead to higher prices. Is this true, and, if so, is it true across the yield curve or are short-term, interest-rate bonds (funds) a different animal? With yields already low, how much impact would the flight have in lowering yields and raising prices? 2. U.S. corporates probably would not benefit and might possibly suffer in this flight. Therefore funds like VBIRX and VBILX would gain in respect to the treasuries they hold but might suffer in the corp. portion? 3. I have read several articles stating that (historically) current bond yields are generally predictive of future yields over the next decade. Again, is this true for all durations, or are short-terms different? I ask these questions because 2.5% beats the 3-yr average of 1.12 for VBILX and the 2.23 for VBIRX. If there's not much to expect from these bond funds for maybe the next decade, Why am I holding them vs. a 5-yr CD ladder (I realize the yield for the initial 1-, 2-, 3- and 4-yr CDs won't be 2.5%). Please remember I am a novice, but where has my thinking led me astray?

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Re: Current CD rates and online banking

Post by camaro327 » Sat Aug 08, 2015 7:09 am

I would search the forum for topics such as Bonds vs CDs. There have been several recent threads related to this topic.

Also, both bankrate and depositaccounts.com have several articles about online banking safety.

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Kevin M
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Re: Current CD rates and online banking

Post by Kevin M » Sat Aug 08, 2015 6:17 pm

dachshund wrote:1. Should an event occur so as to cause a flight to safety, U.S. Treasuries would likely benefit. This would occur because the influx of new money would lead to lower yields which would lead to higher prices. Is this true, and, if so, is it true across the yield curve or are short-term, interest-rate bonds (funds) a different animal? With yields already low, how much impact would the flight have in lowering yields and raising prices?
This probably is correct. US Treasuries did very well in 2008, as well as in the 2000-2002 bear market. However, long-term Treasuries did not do much better, or even did a little worse, than short-term Treasuries (cash) in some previous bear markets, like in the 1930s.

Long-term, the correlation of the 10-year Treasury to US stocks is about 0 (meaning about the same as cash), but in recent years the correlation has been negative when stocks declined a lot. Some people think recent years are more relevant, so expect the flight-to-safety benefit of Treasuries to continue. However, one can imagine a scenario where both stocks and Treasuries decline, for example, in a period of rising rates.

With respect to the "across the yield curve" question, longer-term Treasuries went up a lot more than intermediate-term Treasuries in late 2008, and short-term Treasuries went up the least. So you get more flight-to-safety benefit from longer term, but you also take more term risk, and could get hurt more if/when rates increase much. But since the yield curve fluctuates, short-term rates could rise while long-term rates remained stable, in which case you could lose more on shorter-term Treasuries.

Current low yields place an upper limit on how much you can benefit from falling rates, assuming rates don't fall too far below 0%, but intermediate-term rates still are high enough to give you a nice bump if rates decline during a flight-to-safety episode.
dachshund wrote:2. U.S. corporates probably would not benefit and might possibly suffer in this flight. Therefore funds like VBIRX and VBILX would gain in respect to the treasuries they hold but might suffer in the corp. portion?
Correct, subject to the caveats noted above. Corporate bonds fell in value during 2008, since the credit risk tied to corporations gives them an equity-like risk component. This is why some investment advisors and Bogleheads say "take your risk on the equity side", basically meaning to stick with Treasuries or other safe assets for fixed income, and not extend maturities too far out (up to about five years is a common recommendation).
dachshund wrote:3. I have read several articles stating that (historically) current bond yields are generally predictive of future yields over the next decade. Again, is this true for all durations, or are short-terms different?
Yes, yield to maturity typically is used as a predictor of expected return. For an individual Treasury, the return if held to maturity will be very close, varying only based on the reinvestment rates. For a bond fund, it is less reliable, since there is no maturity date, but it still typically is used as the best estimate for subsequent 5-year to 10-year return--at least for intermediate-term funds.

An oft-stated statistic is that the correlation of initial yield to maturity (YTM) and subsequent 10-year return for the aggregate US bond market is about 90%. However, high correlation doesn't mean high precision. I've posted some of my own analysis on the forum showing that subsequent 5-year or 10-year annualized returns can vary by as much as +/-1% or even more from initial SEC yield (an approximation of YTM after costs for a bond fund). So with an initial SEC yield of 2%, maybe you'll earn 3% or maybe you'll earn 1% over the next 10 years.
dachshund wrote:I ask these questions because 2.5% beats the 3-yr average of 1.12 for VBILX and the 2.23 for VBIRX. If there's not much to expect from these bond funds for maybe the next decade, Why am I holding them vs. a 5-yr CD ladder (I realize the yield for the initial 1-, 2-, 3- and 4-yr CDs won't be 2.5%).
Exactly. If you read the blog post I linked above (on the Synchrony Bank CD), you'll see that this is exactly the kind of reasoning that leads me to hold about 70% of my fixed income in direct CDs, and only 25% in bond funds. The bond funds I use have higher yields than the CDs, giving my some exposure to the potential reward of taking some term risk and credit risk, but with the CDs limiting this risk significantly. The bond funds also provide somewhat better liquidity than CDs, especially in IRA accounts.

Also, rather than a ladder, I just buy 5-year CDs, since you usually earn more in doing an early withdrawal after one or two years than by holding shorter-term CDs. If you shift from bond funds to CDs gradually, as I did between late 2010 and 2014, you'll end up owning kind of a ladder anyway, but even if you go all in now, I would only use a ladder if I really thought it was likely that I might absolutely need the money before the CD matured, and this is only to hedge against the possibility (in my opinion not great, but others may disagree) that the bank or CU changes their terms or takes advantage of existing terms to disallow an early withdrawal, or perhaps changes the early withdrawal terms on existing CDs.

Hope this helps,

Kevin
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dachshund
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Re: Current CD rates and online banking

Post by dachshund » Sat Aug 08, 2015 6:56 pm

Dear Kevin: Thanks so much for a very helpful reply! I haven't had time to explore the links you and others have provided, but I will do so ASAP. I have read many of the forums on CDs vs. bonds, but I don't seem to see a succinct listing of the pros and cons. Both can work as diversifiers to equities, I know. But vis-à-vis one another what are the advantages/disadvantages? From my limited knowledge, I see CDs as having the pros of being easy to understand, having the potential to be insured, being safe from default with the cons of low rates of return and possible liquidity issues with EWPs. Bonds (actually funds, as I own no individual bonds) have the pros of POSSIBLE higher returns (but not currently and maybe not for a long time??) and possible negative correlation with equities but with cons of interest rate risk, higher default risk (with corporates) and higher volatility. I am 70 yo and 2 yrs in to retirement. My current portfolio is 33% cash/cash equivalents, 31% bonds and 35% equity mutual funds. I am low on equities because I am concerned about sequence of returns risk during the first half of retirement. I plan to use an accelerated equity glide path as proposed in articles by Wade Pfau and Michael Kitces by using cash for RMDs such that my equity portion rises by 2% per year (depending of course on how the markets fare). I will stop when the equity part gets to about 60% (but this may be altered by personal or market circumstances). Another big concern is interest rate risk for my bond funds, especially given the current (and perhaps for a relatively long time) low yield situation. That's why I'm considering moving my bond portion to CDs. Am I thinking correctly?

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Re: Current CD rates and online banking

Post by Kevin M » Sat Aug 08, 2015 9:28 pm

dachshund wrote:Dear Kevin: Thanks so much for a very helpful reply!
You're welcome!
dachshund wrote:I have read many of the forums on CDs vs. bonds, but I don't seem to see a succinct listing of the pros and cons.
I don't know if it's succinct or comprehensive enough for you, but I hit many of the main points in the linked blog post (Synchrony Bank 5-Year CD).
dachshund wrote:I see CDs as having the pros of being easy to understand, having the potential to be insured, being safe from default with the cons of low rates of return and possible liquidity issues with EWPs.
Hopefully the blog post will clarify this more for you. I disagree about low rates of return, since the rate on a good CD is higher than a Treasury of same maturity. To get a higher rate, you have to take more risk, and you can even take more risk but still not get as high of a return; after all, you are taking more term risk (interest-rate risk) with a 5-year Treasury, but getting a lower yield. Even with taking a lot more term risk with a 10-year Treasury, as of today, at 2.18%, you're not getting even as much yield as on a 5-year CD at 2.25%.
dachshund wrote:Bonds (actually funds, as I own no individual bonds) have the pros of POSSIBLE higher returns (but not currently and maybe not for a long time??) and possible negative correlation with equities but with cons of interest rate risk, higher default risk (with corporates) and higher volatility.
Seems like a pretty good understanding.
dachshund wrote:I am 70 yo and 2 yrs in to retirement. My current portfolio is 33% cash/cash equivalents, 31% bonds and 35% equity mutual funds. I am low on equities because I am concerned about sequence of returns risk during the first half of retirement.
You are an ideal candidate for direct CDs! I don't spend much time talking about them with younger folks who have high equity allocations, but for us older folks in or approaching retirement, they're a great option for a large portion of our fixed income.

As I may have mentioned, my stock/fixed allocation is 30/70 (so a little less risky than yours, and I am a few years younger), and direct CDs are 70% of my fixed income, so about 50% of portfolio. I have about 25% of fixed income (about 18% of portfolio) in bond funds, at least intermediate-term with a little long-term, using investment-grade in IRAs and tax-exempt in taxable. The bond funds give me some exposure to the the term risk and credit risk which may pay off (as it has since I started shifting into CDs almost five years ago), with the CDs giving me the really safe foundation not exposed to these risks.

I don't see the point in using an intermediate-term or short-term Treasury fund, since the CDs provide higher yields with less risk. Similarly, I don't use something like Total Bond because it holds lots of Treasuries. Essentially my bond funds provide some credit risk like the corporate bonds in TBM, and some term risk like the longer term bonds in TBM, but I replace the short-to-intermediate-term government bonds in TBM with CDs. I could see an argument for including a dab of long-term Treasury fund for the potential negative correlation with equities in a financial crisis, as in 2008, but I personally choose not to take that much term risk in exchange for the possible insurance (that may or may not pay off).
dachshund wrote:I plan to use an accelerated equity glide path as proposed in articles by Wade Pfau and Michael Kitces by using cash for RMDs such that my equity portion rises by 2% per year (depending of course on how the markets fare). I will stop when the equity part gets to about 60% (but this may be altered by personal or market circumstances). Another big concern is interest rate risk for my bond funds, especially given the current (and perhaps for a relatively long time) low yield situation. That's why I'm considering moving my bond portion to CDs. Am I thinking correctly?
I personally subscribe more to the Liability Matching Portfolio (LMP) concept that I learned about from William Bernstein's Ages of the Investor booklet, and also here on the forum. I highly recommend that you read it if you haven't yet.

I don't have a strong opinion about the positive equity glide path idea, but I wouldn't mind increasing equity allocation as long as I had enough safe assets to meet my expected remaining-lifetime residual expenses. As we get older, our expected lifetime decreases, so less safe assets required. So if the market gods cooperate, I could see increasing my equity allocation in later years.

However, my policy is to not increase my equity allocation above 30% unless we experience a steep, scary stock market decline, because I don't want to overestimate my willingness to take risk. I like to think it has increased since 2008, based on experience and learning, but I won't really know for sure until the *&^% hits the fan again. If I feel brave enough to go beyond rebalancing back to target, and actually increase my equity allocation when the blood is running in the streets, then that's when I'll do it.

Kevin
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Miriam2
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Re: Current CD rates and online banking

Post by Miriam2 » Sat Aug 08, 2015 10:49 pm

Phineas J. Whoopee wrote:Sorry, I don't mean to come across harshly, but there's a strain here of not wanting to do other peoples' research when it's simple and straightforward for them to do it for themselves.PJW
dachshund wrote:Sorry. I thought this site was to help us novices not to admonish us. But anyway--sorry.
dachshund -
This site IS to help novices (like me)!
One thing Phineas may have meant was you could search via our dedicated Boglehead google search engine - on the upper right of the Forum page - to search for previous posts and threads on your topic of on-line banking. This subject is discussed frequently. Since it is a dedicated Boglehead search, you will pick up a treasure trove of previous threads on your topic - good reading :happy And you don't have to wade through the regular google site picking up articles of marginal relevance.

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Re: Current CD rates and online banking

Post by Kevin M » Sat Aug 08, 2015 11:12 pm

Miriam2 wrote:Since it is a dedicated Boglehead search, you will pick up a treasure trove of previous threads on your topic - good reading :happy And you don't have to wade through the regular google site picking up articles of marginal relevance.
The Boglehead search box is just a shortcut to appending the filter site:Bogleheads.org to a standard Google search:

online banking - Google Search

This is a handy filter to keep in mind whenever you want to restrict your search to a specific site. For example, I often use site:irs.org when searching for federal tax information, or site:thefinancebuff.com when searching for a specific blog post by forum member tfb, who by the way also is a fan of direct CDs, and has written a few good blog posts about them, which you can find with this search:

CD site:thefinancebuff.com

Or you can find my blog posts about CDs with this search:

cd site:kevinoninvesting.com

Kevin
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Re: Current CD rates and online banking

Post by obgyn65 » Sun Aug 09, 2015 8:20 am

For what it's worth, I buy all my CDs with Edward Jones. This way, I never have to worry to FDIC limits, and I get one statement per year for tax purposes.
dachshund wrote:If anyone has a favorite CD institution though, I'd be glad to hear it. I don't know if there is any prohibition in these forums against giving that kind of info or not.
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Re: Current CD rates and online banking

Post by skepticalobserver » Sun Aug 09, 2015 8:36 am

obgyn65 wrote:For what it's worth, I buy all my CDs with Edward Jones. This way, I never have to worry to FDIC limits, and I get one statement per year for tax purposes.
Why would you not be concerned with FDIC insurance limits? As I understand it those limits for each bank ($250,000 per SSN, possibly $500,000 for joint brokerage accounts) apply to brokered CDs. Also, interest payments above and beyond the limits will not be covered. Look at the CD disclosure documents..

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Re: Current CD rates and online banking

Post by dachshund » Sun Aug 09, 2015 9:48 am

Dear Kevin: Your posts have been really helpful. I wish some bond advocates would weigh in and show me how I'm wrong, but perhaps this thread is too meager to garner wide interest. Of course my thinking about switching from bond funds to CDs is motivated by my interest rate risk concern. However, if I understand correctly, the anticipated 10-yr inflation rate is currently low. I have read that the spread between nominal and TIPS 10-yr yields reflects this, and that this spread was 1.79 % in July. If so, does that mean there will not be great pressure on the Fed to raise interest rates much? And, if so, does that mean my concern is for naught? The reason I thought about initially switching to 20% each in 1-,2-,3-,4- and 5-yr CDs and then reinvesting the 1- thru 4-yrs into 5 yrs as each matured was to allow for capture of possible increasing rates, but if above is true (low inflation) maybe I would do better with 100% in 5-yr CD. I should not need to withdraw early as I have enough (barring a catastrophe) in cash equivalents to pay for expenses.

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Re: Current CD rates and online banking

Post by Kevin M » Sun Aug 09, 2015 1:23 pm

dachshund wrote:Dear Kevin: Your posts have been really helpful. I wish some bond advocates would weigh in and show me how I'm wrong, but perhaps this thread is too meager to garner wide interest.
There have been many, many threads on this topic, with lots of inputs from "bond advocates". If you use the Google search method I showed (or just use the search box at the top right of Bogleheads), you can find them. There is even a currently active thread on the topic, which I've been posting in. You could start by looking there. I could give you the link, but let's use the search method for practice. Because I happen to know that this thread is specifically about CDs vs Treasury bonds, I typed in:

cd treasury

in the BH search box, and it generated this query:

cd treasury site:bogleheads.org

The link to the current thread is the fourth result (there also are other useful links, including one to a Wiki article on bonds vs. CDs, although that article doesn't go into as much depth as the forum discussions). The thread title is "CDs vs. treasury bonds". Did you find it? Did you read it? Did it help? I can provide links to other BH threads on the topic, but you can easily find many yourself.

Incidentally, that other current thread has 3,798 views and 63 replies. This thread has 2,090 views and 24 replies. So it's not as if folks aren't seeing your thread, but the other one happens to have more activity at this point.
dachshund wrote:Of course my thinking about switching from bond funds to CDs is motivated by my interest rate risk concern. However, if I understand correctly, the anticipated 10-yr inflation rate is currently low. I have read that the spread between nominal and TIPS 10-yr yields reflects this, and that this spread was 1.79 % in July. If so, does that mean there will not be great pressure on the Fed to raise interest rates much? And, if so, does that mean my concern is for naught?
People, including me, have been concerned about this for the last five years or so when the federal funds rate was lowered to 0%, and especially after the rounds of QE. Yet rates, other than short-term, continued to decline further, surprising even "the experts". So holding onto some bonds has paid off over the last few years, but the closer rates get to 0%, the less upside there is from rates declining further. In other words, the term risk has increasingly asymmetrical payoff characteristics, with increasingly less upside and a lot more downside.

So my policy has been to gradually move into CDs as rates declined, and then stop when rates stopped declining or increased. I happened to end up at 70% of fixed income in CDs at that point. If and when rates climb back to more historically normal levels (I'm anchored on 5% for any particular maturity, although this may be entirely irrational), I'll probably start shifting back into bond funds, since the term risk will have more upside payoff potential.
dachshund wrote:The reason I thought about initially switching to 20% each in 1-,2-,3-,4- and 5-yr CDs and then reinvesting the 1- thru 4-yrs into 5 yrs as each matured was to allow for capture of possible increasing rates, but if above is true (low inflation) maybe I would do better with 100% in 5-yr CD. I should not need to withdraw early as I have enough (barring a catastrophe) in cash equivalents to pay for expenses.
I think you're missing the point that you're likely to do better by taking an early withdrawal from a 5-year CD to reinvest at a higher rate after one or two years (or three or four) than by holding lower-maturity CDs. And if rates don't rise, you're definitely better off with all 5-year CDs. If the bank or CU you're considering doesn't allow partial withdrawals, just buy multiple 5-year CDs, which is what I've done. Even if the bank says they allow it, I might buy multiple CDs, as I recently had a friend do at Synchrony Bank, even thought the rep told me they allow partial withdrawals (I couldn't find it explicitly in the terms and conditions).

Let me illustrate a bit more about this. I know there's an early withdrawal calculator on the deposits.com website, so I'll use this Google search to find it:

early withdrawal calculator site:depositaccounts.com

The first result returned is what I want, and it takes me here: CD Early Withdrawal Penalty Calculator. The calculator is conveniently pre-populated with 5-year CDs from Ally Bank, Synchrony Bank, and CIT Bank. Due to the slightly lower EWP of five months of interest, Ally Bank wins at one year, even though the rate is lower at 2.00%. Synchrony Bank wins at all other years, with a rate of 2.25% and an EWP of six months of interest. Now compare these rates to the best rates you can find on shorter-term CDs at one bank or credit union (unless you want to use more than one, in which case look for the best anywhere). What do you see?

Now, there is the possibility, not very great IMO, that an early withdrawal will be disallowed, so also factor this into your thinking.

Kevin
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Re: Current CD rates and online banking

Post by obgyn65 » Sun Aug 09, 2015 1:28 pm

I am not concerned because my contact at edward jones always chooses the highest 10-year rates from those institutions where I have less than the FDIC limit. They take care of that, I don't.
skepticalobserver wrote:
obgyn65 wrote:For what it's worth, I buy all my CDs with Edward Jones. This way, I never have to worry to FDIC limits, and I get one statement per year for tax purposes.
Why would you not be concerned with FDIC insurance limits? As I understand it those limits for each bank ($250,000 per SSN, possibly $500,000 for joint brokerage accounts) apply to brokered CDs. Also, interest payments above and beyond the limits will not be covered. Look at the CD disclosure documents..
"The two most important days in someone's life are the day that they are born and the day they discover why." -John Maxwell

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Re: Current CD rates and online banking

Post by dachshund » Sun Aug 09, 2015 5:23 pm

Kevin, you are an excellent teacher. You explain thoroughly and you don't "talk down" to me! Your last post caused a light to go on in my head about going all in with a 5-yr CD. I can get a higher return immediately vs 1- thru 5-yr CD combo AND I can harvest interest rate increases as they occur by comparing new interest rate vs (?) break-even point in the existing 5-yr, which factors in the EWP. However, my limited financial knowledge prevents me from fully understanding what I look for on the EWP calculator. If I understand correctly, the calculator indicates that for the Synchrony 5-yr, if I WD at 1 year, my effective yield will be 1.13%. Is this correct? How do I determine when it would make sense to switch to a new CD paying an interest rate of say 2.5% or 3.25%? I'm sorry I'm so dense. I got to the "CDs vs treasury bonds" thread. I've printed it (I have a difficult time reading lengthy articles on the screen), and I will read it. Thanks. You mention you have "direct" CDs which I assume mean non-brokered ones. Do yours allow for PARTIAL WDs without EWP for RMDs? You also talk about interest rate risk and term risk, and I seem to understand they are the same? You also stated in an earlier post that bond funds "provide some what better liquidity than CDs, especially in IRA accounts." I assume this is because of EWPs, but why "especially in IRA accounts"? Finally, you stated that you are "anchored on 5% for any particular maturity" when talking about returning to bonds when rates are more normal. Would you please tell me what that phrase means? Thank you for your patience. I hope you will continue to answer my questions.

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Re: Current CD rates and online banking

Post by antiqueman » Sun Aug 09, 2015 8:30 pm

"I personally subscribe more to the Liability Matching Portfolio (LMP) concept that I learned about from William Bernstein's [i]Ages of the Investor[/i] booklet,..."



Kevin, do you in your LMP ladder each year with " X" amount of CD's and do you have a separate Portfolio for your excess investments after the LMP is funded? If so , is your 30 percent of stocks you mention in this thread 30 percent of the non LMP portfolio?



Or do you simply look at all of your investments as ONE portfolio and keep 70 % in fixed income ( with 50% of that in CD's) and the remaining 30 % in stocks?

Thanks.

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Re: Current CD rates and online banking

Post by john94549 » Sun Aug 09, 2015 8:47 pm

antiqueman wrote:


Or do you simply look at all of your investments as ONE portfolio and keep 70 % in fixed income ( with 50% of that in CD's) and the remaining 30 % in stocks?

Thanks.
I can't speak for others, but this is what we do. Given market fluctuations, that 30% might float up to 40% from time-to-time, but we generally have had a decided tilt to fixed income since I retired, with a tilt therein to IRA CDs.

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Re: Current CD rates and online banking

Post by Kevin M » Mon Aug 10, 2015 12:29 am

dachshund wrote:Kevin, you are an excellent teacher. You explain thoroughly and you don't "talk down" to me! Your last post caused a light to go on in my head about going all in with a 5-yr CD. I can get a higher return immediately vs 1- thru 5-yr CD combo AND I can harvest interest rate increases as they occur by comparing new interest rate vs (?) break-even point in the existing 5-yr, which factors in the EWP.
Glad you're finding value in my replies, and yes, you now are starting to understand the concept of comparing an early-break strategy to a ladder strategy. If you look at the weekly blog update on CD rates published by Ken Tumin at DepositAccounts, you'll see that he includes early-break rates as well as shorter-maturity rates. He always includes something like this in the introduction to the post:
An alternative to short-term CDs is long-term CDs that have mild early withdrawal penalties. Two banks with top 5-year CD rates and a mild early withdrawal penalty are Synchrony Bank and Barclays. Both have very competitive 5-year CDs with an early withdrawal penalty of only 6 months of interest. I included the effective yields of these CDs when closed early in the tables below. If you want to compare the effective yields of other CDs after the early withdrawal penalties, please refer to our CD early withdrawal penalty calculator.

The risks of planning for early withdrawals of long-term CDs were highlighted by the deposit agreement change at Ally. The risks have also been seen at credit unions which have raised the early withdrawal penalties on existing CDs. I have more details in this blog post.
dachshund wrote:However, my limited financial knowledge prevents me from fully understanding what I look for on the EWP calculator. If I understand correctly, the calculator indicates that for the Synchrony 5-yr, if I WD at 1 year, my effective yield will be 1.13%. Is this correct?
Yes!
dachshund wrote:How do I determine when it would make sense to switch to a new CD paying an interest rate of say 2.5% or 3.25%? I'm sorry I'm so dense.
You are not dense at all, and this is an excellent question. I recommend that you put off trying to learn the details of this now, and perhaps come back to it when you think it might be worth considering actually doing. But here are a some thoughts on it anyway, which maybe you can file away for later.

First, you can consider obvious cases. For example, if you earn back the EWP in a year or two on an alternative CD, especially if you are early in the term of the existing CD, then it probably makes sense to break and reinvest at the higher rate.

A no-brainer for me was doing an early withdrawal from a 2% CD with an EWP of 2-months or 3-months of interest (Ally Bank used to have a 2-month penalty, and Barclays Bank used to have a 3-month penalty) to buy a 5-year CD with a 3% rate. I gave up 2/12 * 2% = 0.33% or 3/12 * 2% = 0.5% to earn 1% more per year, so I earned back the penalty in lass than six months, and after even the first year I had earned more than if I didn't break the CD.

I even broke a Barclays CD that had an EWP of six months of interest to buy more of the 3% CD (Barclays raised its EWP after I bought my first CD there). So in this case I gave up 6/12 * 2% = 1% to earn 1% more in a year, so it took a year to earn back the EWP. Since this CD was very early in its 5-year term, that seemed like a pretty good move, since I broke even after one year and was earning 1% more per year for another four years.

As I've mentioned in this thread and/or in other threads, it took about five minutes on the phone to break the CDs, the proceeds were in my savings account the same day or next day, and I bought each 3% CD online at PenFed in about five minutes using ACH transfer. This was in a taxable account; it would take more time and some paperwork in an IRA.

If the CD is closer to maturity, you have to consider that you're earning a higher rate on a shorter-term CD. So I had some CDs with 5-year original terms and rates lower than 3%--let's say 2.5%--but they had say two years to maturity, so I was really earning 2.5% on 2-year CDs. Not knowing where rates were headed (as always), and not knowing what kind of liquidity I might require in the next two years, say for spending or rebalancing, I could not come close to beating 2.5% on a 2-year CD, so I chose to keep those.

A more sophisticated way to do the analysis is to compute the present value of the future cash flows for each scenario, including the EWP as a negative cash flow in the break/reinvest scenario. Absent all other considerations, such as liquidity, alternative uses of the money when the CD matures, etc., you pick the scenario with the higher PV. We've already had some discussions about this here, but If/when interest rates rise significantly, I'm sure there will be a lot more.

As always, Google is your friend, and you can find forum discussions and/or Wiki articles about this topic with searches like this:

break CD site:bogleheads.org
dachshund wrote:You mention you have "direct" CDs which I assume mean non-brokered ones. Do yours allow for PARTIAL WDs without EWP for RMDs?
Yes, some of us use the term "direct" to refer to CDs purchased directly from banks or credit unions, as opposed to purchased through a broker. Some allow for partial withdrawals, like PenFed, and others do not, like Ally Bank. Usually, if not always, you can withdraw interest without a penalty. Usually there are limited options for any withdrawals of principal without a penalty, such as death or RMDs (for IRA CDs). A few allow penalty-free early withdrawals if age 59 1/2 or older for IRA CDs, such as PenFed; Synchrony Bank previously allowed this, but have since changed their terms for new CDs to not allow it.
dachshund wrote:You also talk about interest rate risk and term risk, and I seem to understand they are the same?
Yes, "term risk" just requires less typing, but same thing. You take more interest-rate risk by increasing the term to maturity. There is essentially no interest-rate risk in a very short-term security.
dachshund wrote:You also stated in an earlier post that bond funds "provide some what better liquidity than CDs, especially in IRA accounts." I assume this is because of EWPs, but why "especially in IRA accounts"?
Yes, the EWP is a known cost of early withdrawal, whereas for a bond fund, you could lose money or make money by withdrawing at any particular time, but there is no fixed cost for selling (assuming no commissions or bid/ask spread, which is the typical case for a mutual fund, but there could be a bid/ask spread and possibly a commission for an ETF or individual bond).

And with a bond fund, you can do a same day exchange into a stock fund, whereas with a direct CD it might take a day or two to break, then transfer the proceeds to buy the stock fund (in a taxable account), although you can do a same-day purchase at Vanguard from a linked savings or checking account at a bank or CU.

The issue with IRAs is that you must do an IRA transfer, which requires mailing a form to the receiving institution, them mailing it to the sending institution, then the sender mailing a check to the receiver, plus all the internal processing at both ends. This can take 2-3 weeks.
dachshund wrote:Finally, you stated that you are "anchored on 5% for any particular maturity" when talking about returning to bonds when rates are more normal. Would you please tell me what that phrase means?
Don't take this too seriously. Anchoring is a well-known behavioral/cognitive bias, which you can Google and read about. I may be twisting the meaning of it a bit, but basically I was able to earn 5% or more even in a money market fund for most of my adult life (as I remember anyway). And the last brokered CDs I bought had a 5% coupon. So I kind of am comfortable taking more term risk in bonds if I can get a 5% yield, which I refer to as being anchored on 5% yields.

So, for example, I plan to rebalance back to a specific target dollar amount in my long-term investment-grade bond fund if/when SEC yield hits 5%, which it briefly did a year or two ago, but by the time I noticed, it had dropped. So I'm kind of making fun of myself, since cognitive biases tend to lead to irrational decisions, but this gives me something to hang my hat on in terms of a policy for starting to shift some from CDs back into bonds.
dachshund wrote:Thank you for your patience. I hope you will continue to answer my questions.
You're welcome. Hopefully these thoughts will benefit others as well as you. Many of us obviously derive satisfaction in sharing what we've learned with others here, and we all get to keep learning together!

Kevin
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Re: Current CD rates and online banking

Post by Kevin M » Mon Aug 10, 2015 12:55 am

antiqueman wrote: Kevin, do you in your LMP ladder each year with " X" amount of CD's and do you have a separate Portfolio for your excess investments after the LMP is funded? If so , is your 30 percent of stocks you mention in this thread 30 percent of the non LMP portfolio?
I came to my allocation using the ability, willingness, and need to take risk framework that many of us learned about from Larry Swedroe. When I learned about the LMP/RP paradigm here and in the writings of William Bernstein, I realized that I kind of had that as well, although not structured in that exact way.

The more formal way to do it would be with a TIPS ladder or inflation-adjusted annuities. I think TIPS are too expensive now, so my preference is to stick with safe, nominal fixed income with minimal term risk and decent yields (relatively speaking); direct CDs fit the bill. I also don't think I have to annuitize to be safe, and annuities also are relatively expensive now due to low rates. If I did partially annuitize, I'd do it when I was older, and hopefully at higher rates (higher discount rate = cheaper annuity).

The thinking, and I'm not alone in this, is that safe, short-term, nominal fixed-income tends to keep up with inflation, because interest rates tend to move with inflation, and the short-term securities can be rolled over as rates and inflation increase. Although a 5-year CD isn't exactly short-term, the early withdrawal option of a direct CD limits the loss from rolling into higher yields if rates rise, and in the meantime, we're earning a significantly higher rate than on short-term Treasuries.

The bottom line is that I'm almost certain that I have enough safe assets to more than cover my residual living expenses for my remaining lifetime, and I'm not concerned enough about unexpected inflation to pay the high cost to insure against that with TIPS.

But I do like I Bonds a lot, because of almost no term risk (just no sale in first year and the EWP of three months of interest between years 1 and 5), and yields that match much longer maturity TIPS. Unfortunately, the annual purchase limit limits their usefulness in larger portfolios. As of now, with inflation running at about 0%, a 2.5% CD is earning a higher real yield than a 0% I Bond, but the I Bond provides at least some hedge against unexpected inflation. As a single person with a living trust, I can buy $20K per year, so at least work on building a ladder of inflation-hedged securities that will partially fund future, residual living expenses. And if TIPS rates increase enough, I would sell I Bonds to buy TIPS.
antiqueman wrote:Or do you simply look at all of your investments as ONE portfolio and keep 70 % in fixed income ( with 50% of that in CD's) and the remaining 30 % in stocks?
Hopefully I've clarified that I look at it both ways. I think you get to the same point with either the ability, willingness and need to take risk paradigm, or the LMP/RP paradigm. Although I arrived at it with the former, I also like to think about it in the latter framework. So I manage it as one 30/70 portfolio, but definitely consider the CDs as part of an LMP, and the stocks as part of the RP. The bonds are mostly in the LMP, but are riskier than the CDs, so also partially in the RP.

I think a more pure LMP/RP approach would be to only consider a TIPS ladder or annuities as the LMP, and the stocks and bonds as part of the RP. But stocks have so much more risk than short-to-intermediate-term, high quality bonds, that it seems like the bonds fit somewhat into each. You probably can even consider stocks partially in the LMP, due to the dividends, which only dropped by 50% in the great depression; so maybe consider 50% of you stock dividend yield as part of the LMP, and even this is being way more risk-averse than most Bogleheads.

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Re: Current CD rates and online banking

Post by Kevin M » Mon Aug 10, 2015 1:36 pm

dachshund wrote:How do I determine when it would make sense to switch to a new CD paying an interest rate of say 2.5% or 3.25%? I'm sorry I'm so dense.
Also, I recalled that DepositAccounts has a Keep or Break CD Calculator, and quickly found it with a Google search: When to Break a CD Calculator - Is the improved interest worth an early withdrawal penalty?.

The math to figure this out yourself isn't too hard (it's easy to replicate the calculator with a simple spreadsheet), but you might as well use the calculator if you don't want to do math or use a spreadsheet.

Keep in mind though that this calculator assumes you continue to hold the new CD, as opposed to doing an early withdrawal at the end of the term of the original CD. So if you have a 5-year CD with 2 years remaining until maturity, and you think it's likely that you'll want/need the money for something else in two years, you must also factor in the EWP after two years on the new CD in your calculation.

To illustrate with one of my examples from the previous post, the calculator tells me that with $10,000 in a 2.5% APY CD with two years (24 months) remaining until maturity, and an EWP of two months of interest, I should break the CD to reinvest in a new CD at 3% APY, because I will be ahead by $59.18 at the end of two years. But if I wanted/need the money at the end of two years, I would need to break the new CD (which in my case has an EWP of one year of interest), which would result a loss of 248.55 by breaking the old CD, reinvesting in the new CD, then breaking the new CD after two years.

Also, the calculator doesn't factor in the possibility than at the end of the original term, you may not be able to reinvest at a rate as high as the new CD currently available. For example, if I use the same numbers as above, but increase the EWP from two months to six months of interest, the calculator tells me that I should not break and reinvest, because I would lose $27.43 at the end of two years. What it doesn't tell me is that I would be ahead by $136.41 at the end of five years by breaking/reinvesting if I were only to reinvest at the 2.5% rate when the original CD matured in two years.

As a final note, the calculator may not be giving exact results, since it uses APY, and EWP in months of interest in all calculations, whereas EWP usually is specified in days of interest, and the CD may be compounded daily, in which case you need to use nominal interest rate and days of interest in the calculation. However, the results are very close, so I think the calculator is good enough.

Kevin
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Re: Current CD rates and online banking

Post by dachshund » Mon Aug 10, 2015 6:18 pm

Thanks again! In the meantime I have read the thread CDs vs treasuries (along with your Synchrony article, 2 articles by tfb on CDs vs bonds and Ken Tumin's article re potential refusal of early WDs). In the BH thread you write "The fixed term and early withdrawal option pretty much eliminate sequence of returns risk....The early withdrawal option also minimizes inflation risk and term risk." I know I should probably be able to extract the meaning of that from your 1st post today, but I can't. I understand the EW option can limit the effect of rising interest rates because it allows one to break and re-invest at the higher rate, but I don't understand the rest. Would you please explain? What is an ACH transfer? What does "RP" mean? You state that TIPs are too expensive now. How does one determine when they are more reasonably priced? Is it merely when the yield has increased to a certain level? You wrote "If I did partially annuitize...(higher discount rate = cheaper annuity)." I don't understand the part in (). My understanding is that current SPIAs are paying less monthly income because of the current low yield environment and that this means it cost one more to purchase a given payout than it would if yields (and therefore payouts) were higher. Am I correct. In one of your posts today you used 0% inflation rate currently. Does that refer to anticipated rate?

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Re: Current CD rates and online banking

Post by dachshund » Mon Aug 10, 2015 6:37 pm

I think I need to follow your suggestion and read W. Bernstein's book re LMP. I need to have a basic understanding of why I'm doing what I'm doing in terms of my portfolio. I am currently 35% equities for inflation hedge. The 65% FI is split about 50/50 in cash (mostly money market) and ST/IT bond index funds. I hold the large cash position because I 1. Want to diversify the stocks and 2. I am concerned about sequence of returns during the first half of my retirement (2nd yr). After reading your advice and the other articles mentioned in my previous post, I am going to transfer my bonds (TIRAs) to CDs. My analysis of my needs includes SS as providing 70% of my current needs (not factoring in upcoming need to replace my 14 yo Honda with a new car) and that HOPEFULLY I will need to withdraw about 2.5%/yr from my portfolio. I do not have LTI and, of course, other catastrophes can and do occur. I figure I could survive on SS alone (probably less) if needed. I am 70 yo and have longevity on 1 side but average on the other. I realize this is off the subject, but I would appreciate any comments.

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Re: Current CD rates and online banking

Post by dachshund » Mon Aug 10, 2015 6:44 pm

FINALLY (at least for today), Kevin I used the When to Break Calculator and I see your results for the change from 2.5% to 3% for both 2- and 6- month EWPs. However, I do not follow you on the "But if I wanted/need the money...." and the "What it doesn't tell me...." Therefore, I don't understand the principles involved. Will you please help?

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Re: Current CD rates and online banking

Post by patrick013 » Mon Aug 10, 2015 10:12 pm

I love the Boglehead strategy for stock funds but am still high
on using CD's and/or individual bonds for fixed income.

I can routinely have 1 and 3 and 5 year bonds or CD's and when those
mature go long or short term based on low or high interest rates
currently available. Low rates short term, high rates longer term.
So I always have something mature every two years or so and have
to make a decision regarding that. Logical, works, and I'm used to
it. And doesn't require alot of analysis. I may sell at a gain but
not a bond that's "anchored". :D

Like Kevin said, annuity's can be expensive, TIPS need better than the
current 0% inflation. When rates are higher and expected to be variable
my special bond would be GNMA.

Anyway, this site will send you an email for national rate CD's.
Rate Brain Top CD Rates
age in bonds, buy-and-hold, 10 year business cycle

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Re: Current CD rates and online banking

Post by Seattlenative » Tue Aug 11, 2015 12:11 am

One serious drawback to investing in a CD with most banks is the "automatic rollover" feature. This benefits the bank, not you.

Historically, a CD was considered a "Time Deposit". At the end of the Time Deposit's term, it was cashed out. You either received a check from the bank, or on request the funds could be deposited into your checking or savings account at that institution. Nowadays, most banks and CUs require that you agree to an"automatic rollover". When the maturity day arrives, the maturing CD automatically "rolls over" into a new CD for the same term but at whatever "standard rate/APY" is being offered, which usually is NOT a high "promotional" rate. You have a few days (depending on the bank, this could be as little as six calendar days) of "grace period" to cash out the brand-new rollover CD. You can see how this benefits the bank, and it's a big advantage to investing in brokered CDs rather than investing in a CD directly from a bank or CU. You can ask the bank if they would specifically waive the "automatic rollover" feature.

A drawback to brokered CDs, besides the rates which might be a bit lower than promo CD APYs at some banks and credit unions, is that there is no interest compounding during the term. The interest simply is added to your brokerage cash sweep account. If you need to sell the CD before maturity, the value of the CD may have dropped and along with the broker's commission, your net proceeds might be lower than if you had invested in a similar CD directly from the institution.

One more thing: when you purchase a CD directly from a bank or CU, bear in mind that they will be advertising the Annual Percentage Yield (APY), not the actual rate. APY reflects the compounding of interest. A seven-year CD advertised as "3%" may actually pay a rate of 2.96%. Buying the same CD from a broker, you would only be quoted a rate because there is no compounding and therefore no APY as such, just an interest rate.

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Re: Current CD rates and online banking

Post by Kevin M » Tue Aug 11, 2015 2:25 am

dachshund wrote:In the BH thread you write "The fixed term and early withdrawal option pretty much eliminate sequence of returns risk....The early withdrawal option also minimizes inflation risk and term risk." I know I should probably be able to extract the meaning of that from your 1st post today, but I can't. I understand the EW option can limit the effect of rising interest rates because it allows one to break and re-invest at the higher rate, but I don't understand the rest. Would you please explain?
Sure.

Your subsequent post indicates that you understand sequence of returns risk. This could show up as having to take bond fund distributions in the early years of retirement when bond values had declined due to rising rates. With a liability-matching ladder of fixed-term bonds, ideally inflation protected, you don't have that risk, since although the values of the further-out bonds in the ladder decrease, you don't have to sell them at the depressed values.

The performance of the Vanguard Inflation-Protected Bond fund in 2008 provides a real example of this; its value went down, even though nominal Treasury fund values went up, so someone who had to take distributions from the fund then didn't do as well as someone who used a maturing individual TIPS to cover expenses. Bill Bernstein covers this in the book you're going to read.

Although a bunch of 5-year direct CDs isn't exactly a ladder, the early withdrawal option allows it to work kind of like a ladder, since you can earn about the same return, maybe a bit more, by taking early withdrawals as by using shorter-term CDs. The early withdrawal option also minimizes term risk, since you can do an early withdraw at a small cost, and reinvest at higher rates if rates increase, which you understand. And to the extent rates rise with inflation, which is typical, you minimize inflation risk.

So I'm thinking my portfolio of 5-year CDs, which happen to have somewhat unevenly staggered maturity since I bought them over a few years, are a reasonable substitute for a TIPS ladder, and provide higher yields with less risk than a TIPS ladder. A TIPS ladder would be closer to ideal, and that brings us to the cost issue. But first ...
dachshund wrote:What is an ACH transfer? What does "RP" mean?
ACH stands for Automated Clearing House, which is the network used to electronically transfer money between financial institutions. So "ACH transfer" means an electronic transfer between financial institutions using ACH. You might even see it show up this way on the transaction history for electronic transfers at some banks, credit unions, or brokerages.

RP stands for Risky Portfolio, as opposed to LMP for Liability Matching Portfolio. So basically risky assets vs. safe assets. You'll learn about this in the Bernstein book.
dachshund wrote:You state that TIPs are too expensive now. How does one determine when they are more reasonably priced? Is it merely when the yield has increased to a certain level? <snip> In one of your posts today you used 0% inflation rate currently. Does that refer to anticipated rate?
Yes, low yield = high price, so yes, I'd want to earn a higher yield to own TIPS. I think the term risk of intermediate-to-long-term TIPS is too high relative to the low yields (as opposed to I Bonds, that also have low yields, but almost no term risk, so I'm OK owning some of them).

I can't say exactly what yields I'd be OK with, as that will depend on various factors in the future, but I'm thinking somewhere in the 2%-3% real range for 10yr and 1%-2% range for 5yr TIPS would get my interest.

In the post where I referred to 0% inflation rate, I was referring to year over year inflation in recent months (basically this calendar year). Of course what we're rally interested in is future inflation, but I was basically just saying that a CD with a 2.25% rate has basically been earning 2.25% real lately. By comparison, my I Bonds have been earning 0% nominal and real lately.

Below is a chart that may help illustrate the above points. I'll walk through it a piece at a time.

Image

First, look at the blue line, which is for a TIPS maturing in 2028, and is included because its a TIPS for which I could get history back to 1998 (TIPS were introduced in 1997). It tracks the 10yr TIPS pretty well since 2003 (for which period data is available), but I didn't show the 10yr TIPS to reduce clutter. Note that it spent much of its history at or above 2%, dropping below 0% for a few months in 2012 and 2013, and ending up pretty close to the current 10yr TIPS rate of about 0.5%.

So as with my perhaps irrational anchoring on nominal bond yields of about 5%, I'm kind of anchored on real 10-year TIPS yields in the 2%-3% range because of their relatively short history. It's not entirely rational, and if we are doomed with low real rates for years to come, as some believe, then I may never buy TIPS, but then I should be OK with 5-year CDs, especially as long as they continue to offer a premium over nominal Treasuries.

Next, look at the brownish/red line, which is the 5-year TIPS, and note that it spent a fair amount of the short history shown above 1%, but now is not much above 0%, although it has been as low as about -1.5%.

I've included the 10yr nominal Treasury and year over year % change in CPI (inflation) for reference. It's interesting to visualize a fairly steady 2% - 2.5% CD rate over the last few years, and compare it to inflation and the various nominal and real rates.

EDIT: Also note the spike in TIPS yields (drop in prices) in late 2008, while the 10yr nominal Treasury yield dropped (price increased).
dachshund wrote:You wrote "If I did partially annuitize...(higher discount rate = cheaper annuity)." I don't understand the part in (). My understanding is that current SPIAs are paying less monthly income because of the current low yield environment and that this means it cost one more to purchase a given payout than it would if yields (and therefore payouts) were higher. Am I correct.
You basically have it.

Discount rate is the rate at which future cash flows are discounted to arrive at a present value of an annuity. The discount rate is in the denominator of each term on the right hand side of the equation (cash flow is in the numerator), so lower discount rate for a given cash flow results in larger present value of future cash flows.

But in straightforward terms, yes, with lower bond yields, the insurance company must pay higher prices for the bonds to fund the same annuity payments.

Kevin
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Re: Current CD rates and online banking

Post by Kevin M » Tue Aug 11, 2015 2:59 am

Seattlenative wrote:One serious drawback to investing in a CD with most banks is the "automatic rollover" feature. This benefits the bank, not you.
This is important to be aware of, but from perspective, is not a serious drawback, but at worst a minor inconvenience. I just put the maturity date in my calendar, and call them or online chat with them to instruct them what to do if I don't want the CD to rollover.

Or as I just did recently for an IRA CD, I opened a CD at another bank and did an IRA transfer with instructions to transfer the balance of the maturing CD to the other bank; I published a blog post on this: First bank-to-bank IRA transfer from a maturing IRA CD. This required absolutely no direct contact with the bank that held the maturing CD; you just need to make sure to initiate the paperwork enough in advance so that it arrives at the bank before the CD matures (or within the grace period, typically 10 days).

Also, Ally Bank sends me a couple of emails as the CD approaches maturity, so if I didn't already have it in my calendar, that reminds me to put it in.

I have multiple Ally Bank CDs maturing in the coming months. I may let some of them rollover, as the Ally Bank rate on CDs is decent (2%), although not the best that's easily and conveniently available (2.25% at Synchrony Bank, at which I already have accounts, so super simple to open new CDs).

There's also a 2-year 2.27% CD special going on at a credit union which forum member rrppve alerted me to, and which is listed at DepositAccounts: USAlliance Federal Credit Union Reviews and Rates. I don't know if my next CD will mature in time to take advantage of it, but maybe I can scrounge up the cash elsewhere, and replace it with the next maturing CD or two. It's limited to new members and $100K maximum.

At any rate, there's no doubt that managing a large portfolio of CDs at multiple banks and credit unions is more work than just owning a bond fund, and probably also more than managing brokered CDs at one brokerage, but to me, the benefits are worth it at this point. As I get older, I'll probably start to place a higher relative value on simplicity compared to extra yield/return, and the calculus is likely to change somewhat. Hopefully rates will be higher by then, so I can shift more to bond funds and maybe some in a TIPS ladder.

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Re: Current CD rates and online banking

Post by Kevin M » Tue Aug 11, 2015 3:26 am

dachshund wrote:FINALLY (at least for today), Kevin I used the When to Break Calculator and I see your results for the change from 2.5% to 3% for both 2- and 6- month EWPs. However, I do not follow you on the "But if I wanted/need the money...." and the "What it doesn't tell me...." Therefore, I don't understand the principles involved. Will you please help?
Bummer--I thought I had explained it well enough, but here are a few more words on it.

If you have a 5-year CD that you bought three years ago, you really now have a 2-year CD. If you break that to buy a new 5-year CD, you are essentially trading a 2-year CD for a 5-year CD. So the calculator tells you that you are ahead by breaking/reinvesting after two years. But what if another better deal comes along one year later, or I need to spend the money or use it for rebalancing then. Now I have to pay the EWP on the new CD after only one year, which wipes out all interest for one year (because of the higher EWP of one year of interest), and I am actually worse off than if I had kept the original CD for an additional year and paid an EWP of only six months of interest.

Or maybe I need the money two years later, at which point I could use the original CD when it matured, and pay no penalty, while I'd have to pay the penalty on the new CD, since it still had three years left to maturity.

Conversely, say the calculator tells me I should not break/reinvest a 2.5% CD with two years left to maturity to reinvest in a 3% 5-year CD, because I would be behind after two years by doing so. But after two years, the best 5-year CD I find has a 2.5% rate, or even a 2% rate. So after three more years, I would have been ahead with the 5-year CD at 3%, since I will more than make up the EWP I would have paid, plus earned more than the 2%-2.5% CD because of the higher rate.

So bottom line is that the calculator only tells you which is better to the end of the term of the original CD assuming you do not break the new CD at that time, and it does not tell you which would be better if you cannot reinvest the original CD at a high enough rate when it matures. So it's a good input, but not the entire picture.

Like I said, I wouldn't worry too much about this until the time comes, then you can discuss it with me or other forum members who are into direct CDs. Trust me--that is likely to give you plenty of time to study this more and understand it better, and there are likely to be more forum discussions about it, because others will be facing a similar decision.

Hope this helps,

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Re: Current CD rates and online banking

Post by knowsnothing » Tue Aug 11, 2015 10:50 am

Warning: Mini-Hijack

If I wanted to deploy a number into 5 year CDs (say 20k) would there be any downside to deploying them into multiple CDs (say 5k increments) so I can cash out smaller chunks as needed / aka they can act as an emergency fund?

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Re: Current CD rates and online banking

Post by Phineas J. Whoopee » Tue Aug 11, 2015 11:06 am

knowsnothing wrote:...
If I wanted to deploy a number into 5 year CDs (say 20k) would there be any downside to deploying them into multiple CDs (say 5k increments) so I can cash out smaller chunks as needed / aka they can act as an emergency fund?
The only drawback I can think of is you might find some place offering a slightly higher interest rate for a higher minimum deposit, $10,000 for example, but barring that the plan seems sound.
PJW

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Re: Current CD rates and online banking

Post by Kevin M » Tue Aug 11, 2015 12:34 pm

knowsnothing wrote:If I wanted to deploy a number into 5 year CDs (say 20k) would there be any downside to deploying them into multiple CDs (say 5k increments) so I can cash out smaller chunks as needed / aka they can act as an emergency fund?
If the bank or credit union doesn't allow partial early withdrawals (some do, some don't), then that's what I'd do. That's actually what I did when first starting to buy CDs at Ally Bank, although the amounts were larger, but I've ended up with many CDs there.

One downside in an IRA, which I don't think is what you're talking about, is that if you want to do an IRA transfer out of the CDs into better CDs elsewhere at maturity, you'll probably need to use a separate transfer form for each one. Not that big of a deal; the form is only one page, and you can make a copy the common info, and then just fill in the couple of items that are different (like CD account number), but you also may need to get a signature guarantee on each one (Ally requires this), so a bit of a hassle.

The workaround, if all CDs mature at or about at the same time, is to have the maturing proceeds deposited into an IRA savings account at same bank/CU, then do a single transfer out of the savings account into a new CD at the other bank/CU.

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Re: Current CD rates and online banking

Post by knowsnothing » Tue Aug 11, 2015 8:00 pm

Thanks for the replies and your expertise gentlemen. :beer

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Re: Current CD rates and online banking

Post by dachshund » Tue Aug 11, 2015 8:52 pm

Kevin--let me see if I've got these issues right. 1. YOY inflation rate is the comparison of the inflation rate so far this year vs that of last year? 2. The reasons why "The fixed term and early withdrawal option pretty much eliminate sequence of returns risk" is that a. Both individual bonds and CDs have fixed terms (unlike bond funds). b. Holding either to maturity guarantees return of principal. c. Doing b. precludes selling at a loss (SOR risk). d. It is the provision of EWP that allows for "selling" the CD early (One retains principal-EWP). 3. If I break a 5-yr CD#1 of $10,000 @ 2.5% with EWP=2 mo interest for CD#2 @ 3% with EWP=1 yr interest at end of third year of CD#1 but then cash in CD#2 after 2 more yrs, I would be "ahead" $59.18 (for the change) but "behind" $300 (for the EWP on CD#2) with a net result of -$240.82? But you came up with -$248.55 (?). Can you recommend a good book about bonds which covers BASICS and advanced topics? I have read BH investment start-up kit, BH Guide to Investing and Russell Wild's Bond Investing for Dummies, and things didn't stick. I will re-read them also. Thanks!

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Re: Current CD rates and online banking

Post by patrick013 » Wed Aug 12, 2015 11:37 am

Here's a quick formula I might use.

EWP < marginal income of new CD

if so, do it. Also, compare that with doing nothing.
With both options rolling over to one renewal.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Current CD rates and online banking

Post by dachshund » Wed Aug 12, 2015 6:32 pm

Did knowsnothing just end this thread?

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Re: Current CD rates and online banking

Post by Kevin M » Wed Aug 12, 2015 7:06 pm

dachshund wrote:1. YOY inflation rate is the comparison of the inflation rate so far this year vs that of last year?
It is the CPI value for the selected month divided by the CPI value one year before the selected month; this is referred to as the annual inflation rate. So to calculate the inflation between any two periods, the equation is CPI2 / CPI1 - 1. If you do this calculation for two months one year apart (e.g., June 2015 and June 2014), that is the annual inflation rate as of the end of the later month (e.g., end of June 2015).

FRED is pretty easy to use, so you can verify this for yourself.
  • Start here: Federal Reserve Economic Data - FRED - St. Louis Fed.
  • Scroll down, and you'll see that CPI is shown in the "AT A GLANCE" section; note that it says +0.2%.
  • Click on CPI. This brings up a graph showing the raw CPI values. Click on 1yr to change the time period to one year.
  • Hover mouse over June 2015 (last point on graph), and note value is 237.786. Hover mouse over June 2014 (first point on graph), and note value is 237.348.
  • Calculate: 237.786/237.348 - 1 = 0.0018454 = 0.18454% ( approximately 0.2%).
  • Now under EDIT DATA SERIES 1, change Units to Percent Change from Year Ago.
  • Now hover mouse over last point on graph (June 2015, and note that it is 0.18454.
Small detail: this graph is for seasonally adjusted CPI. I usually use not seasonally adjusted, but values are very close.
dachshund wrote:2. The reasons why "The fixed term and early withdrawal option pretty much eliminate sequence of returns risk" is that a. Both individual bonds and CDs have fixed terms (unlike bond funds). b. Holding either to maturity guarantees return of principal. c. Doing b. precludes selling at a loss (SOR risk). d. It is the provision of EWP that allows for "selling" the CD early (One retains principal-EWP).
Sounds like a pretty good summary.
dachshund wrote:3. If I break a 5-yr CD#1 of $10,000 @ 2.5% with EWP=2 mo interest for CD#2 @ 3% with EWP=1 yr interest at end of third year of CD#1 but then cash in CD#2 after 2 more yrs, I would be "ahead" $59.18 (for the change) but "behind" $300 (for the EWP on CD#2) with a net result of -$240.82? But you came up with -$248.55 (?)
It's because the EWP is $307.73, not $300. You start out with 9,958.93 in the new CD (after paying the penalty on the old CD). After one year this grows to 10,257.70, so the penalty is the 1-year interest on this amount, so 3% * 10,257.70 = 307.73.

I have this set up in a spreadsheet, which calculates the bottom-line results without actually showing the EWP. I had to add the EWP calculation to explain it in the terms you used. It's easiest to set this up in a spreadsheet if you want to understand the details of the calculations. Do you know how to use a spreadsheet?
dachshund wrote:Can you recommend a good book about bonds which covers BASICS and advanced topics? I have read BH investment start-up kit, BH Guide to Investing and Russell Wild's Bond Investing for Dummies, and things didn't stick. I will re-read them also. Thanks!
Have you read Why Bother With Bonds: A Guide To Build All-Weather Portfolio Including CDs, Bonds, and Bond Funds--Even During Low Interest Rates (How To Achieve Financial Independence): Rick Van Ness, Carl Richards, Larry E. Swedroe: 9780985800406: Amazon.com: Books? I had forgotten about this book until another forum member reminded me in another post that I had actually recommended it fairly recently (with a brief review): Why Bother With Bonds? (book shout out).

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Re: Current CD rates and online banking

Post by dachshund » Wed Aug 12, 2015 7:46 pm

Kevin--thank goodness you're still tuning in and replying! I will get a copy of the bond book. No, I don't know how to use a spreadsheet (another of my many deficiencies). Is there a source you would recommend where I can learn to do so? In the future when I have further questions I hope you'll be available! I have read a number of threads in this forum, and you are the most understanding, patient, willing and comprehendible BH I've read.

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