CD Ladder or Treasuries ?

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AZOLDTIMER
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CD Ladder or Treasuries ?

Post by AZOLDTIMER »

Hello,

I would like to build a risk free portfolio for retirement income. I am trying to choose between CD's and Treasuries. I would welcome any comments or suggestions. When researching yields, safety of principal and ease of purchase there doesn't seem to be much difference between the two options. The Ladder will be held in an IRA.



Questions I am considering:

1.) Safety of Principal?

2.) Yield factors?

3.) Purchasing through Vanguard Brokerage Account or go through Banks (CD's) and Treasury Direct (Treasuries)?

4.) Ladder Time Frame ( Length and Mix of Various Maturities) considering present rising interest rates. What would be the best options right now? How far out would the longest maturity CD or Treasury go?

I would respectfully ask to keep the discussion focused on only these two options as I am not interested in Annuities or Equities at this time.

Thank you for any and all comments.
invst65
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Re: CD Ladder or Treasuries ?

Post by invst65 »

In regards to safety of principal I don't think CD's and Treasuries are equal. The latter is 100% backed by the full faith and credit of the U.S. government. The former is only insured by the same entity through FDIC but with limits on liability. In a SHTF scenario which do you think the government will allow to fail first?
Last edited by invst65 on Fri Feb 09, 2018 4:52 pm, edited 3 times in total.
sport
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Re: CD Ladder or Treasuries ?

Post by sport »

There is no such thing as a "risk free portfolio". Even the money in your pocket has the risk of inflation. There is also opportunity risk. If your money is tied up in a CD and a better investment becomes available, you cannot take advantage of the opportunity. So, while you get to choose the type of risk you incur, and you can minimize risk, you cannot eliminate it altogether.
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saltycaper
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Re: CD Ladder or Treasuries ?

Post by saltycaper »

Look into TIPS (Treasury Inflation-Protected Securities). The inflation protection is important if your primary focus is to reduce risk.

Re: CDs versus nominal treasuries, this is largely a yield question for me. I leaned toward CDs for a long time, but treasuries are starting to get comparably attractive, and I'll likely be adding more.

Re: Where to hold, note a brokered CD that you would buy at Vanguard, Fidelity, etc. trades like a bond, so I would need additional yield to compensate for the lack of a "put" (ability to redeem a direct CD early, assuming the bank lets you).

Note the CD interest isn't guaranteed in the event of a bank failure, so the treasuries are "safer" in that respect.

I used to favor the 5-10 range, but the curve has flattened somewhat, and the 2-5 range looks more appealing than it used to. I'm not sure if I'll change anything though.
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Rainier
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Re: CD Ladder or Treasuries ?

Post by Rainier »

saltycaper wrote: Fri Feb 09, 2018 4:26 pm Look into TIPS (Treasury Inflation-Protected Securities). The inflation protection is important if your primary focus is to reduce risk.

Re: CDs versus nominal treasuries, this is largely a yield question for me. I leaned toward CDs for a long time, but treasuries are starting to get comparably attractive, and I'll likely be adding more.

Re: Where to hold, note a brokered CD that you would buy at Vanguard, Fidelity, etc. trades like a bond, so I would need additional yield to compensate for the lack of a "put" (ability to redeem a direct CD early, assuming the bank lets you).

Note the CD interest isn't guaranteed in the event of a bank failure, so the treasuries are "safer" in that respect.

I used to favor the 5-10 range, but the curve has flattened somewhat, and the 2-5 range looks more appealing than it used to. I'm not sure if I'll change anything though.
CDs may price like a bond, but they certainly don't trade like treasuries. They are very illiquid and hard to sell at the correct price. I wouldn't want to be a forced seller of bank CDs at the wrong time, you would get hosed.

Also, the interest is guaranteed by the FDIC, at least until the time of failure. In 2008 I had brokered CDs from failed banks. I got all my principal back plus accrued interest. At the time E-Trade messed up on the interest calculation and I made them fix it....they did.
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tigerman3
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Re: CD Ladder or Treasuries ?

Post by tigerman3 »

I have both. I have a 5 year CD ladder for which I'm starting to add Treasuries if the rate is comparable or better. Right now, 1 year Treasuries are at about 2%, which is better than CD's from a state taxation standpoint depending on where you live.
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oldcomputerguy
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Re: CD Ladder or Treasuries ?

Post by oldcomputerguy »

saltycaper wrote: Fri Feb 09, 2018 4:26 pm Look into TIPS (Treasury Inflation-Protected Securities). The inflation protection is important if your primary focus is to reduce risk.
Or perhaps I bonds...
dalmatiandan
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Re: CD Ladder or Treasuries ?

Post by dalmatiandan »

tigerman3 wrote: Fri Feb 09, 2018 6:02 pm I have both. I have a 5 year CD ladder for which I'm starting to add Treasuries if the rate is comparable or better. Right now, 1 year Treasuries are at about 2%, which is better than CD's from a state taxation standpoint depending on where you live.
Hello! Basic question that I somehow have not been able to correctly visualize in my head.

How do I calculate the effective rate of a Treasury while taking into account the lack of state tax on interest? Is it as simple as interest rate x (1+state tax)? Or is there a second calculation to consider that shows the drag from federal tax?

Thanks!
Dan
Olemiss540
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Re: CD Ladder or Treasuries ?

Post by Olemiss540 »

dalmatiandan wrote: Sat Feb 10, 2018 7:45 am
tigerman3 wrote: Fri Feb 09, 2018 6:02 pm I have both. I have a 5 year CD ladder for which I'm starting to add Treasuries if the rate is comparable or better. Right now, 1 year Treasuries are at about 2%, which is better than CD's from a state taxation standpoint depending on where you live.
Hello! Basic question that I somehow have not been able to correctly visualize in my head.

How do I calculate the effective rate of a Treasury while taking into account the lack of state tax on interest? Is it as simple as interest rate x (1+state tax)? Or is there a second calculation to consider that shows the drag from federal tax?

Thanks!
Dan
You have it right. You do not worry about the drag of fed taxes as you would account for that by increasing rate of non fed taxes products to account for the rate differential (like a muni bond fund).
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
dalmatiandan
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Re: CD Ladder or Treasuries ?

Post by dalmatiandan »

Olemiss540 wrote: Sat Feb 10, 2018 7:52 am
dalmatiandan wrote: Sat Feb 10, 2018 7:45 am
tigerman3 wrote: Fri Feb 09, 2018 6:02 pm I have both. I have a 5 year CD ladder for which I'm starting to add Treasuries if the rate is comparable or better. Right now, 1 year Treasuries are at about 2%, which is better than CD's from a state taxation standpoint depending on where you live.
Hello! Basic question that I somehow have not been able to correctly visualize in my head.

How do I calculate the effective rate of a Treasury while taking into account the lack of state tax on interest? Is it as simple as interest rate x (1+state tax)? Or is there a second calculation to consider that shows the drag from federal tax?

Thanks!
Dan
You have it right. You do not worry about the drag of fed taxes as you would account for that by increasing rate of non fed taxes products to account for the rate differential (like a muni bond fund).
Okay then. What about if we are calculating the after tax rate of deductible student loan interest? Is it as simple as interest rate * (1 - federal marginal rate)?

I’m trying to compare a 1.95% student loan refinancing opportunity with a 2%+ Treasury.

Thanks.

Dan
Olemiss540
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Re: CD Ladder or Treasuries ?

Post by Olemiss540 »

dalmatiandan wrote: Sat Feb 10, 2018 8:23 am
Olemiss540 wrote: Sat Feb 10, 2018 7:52 am
dalmatiandan wrote: Sat Feb 10, 2018 7:45 am
tigerman3 wrote: Fri Feb 09, 2018 6:02 pm I have both. I have a 5 year CD ladder for which I'm starting to add Treasuries if the rate is comparable or better. Right now, 1 year Treasuries are at about 2%, which is better than CD's from a state taxation standpoint depending on where you live.
Hello! Basic question that I somehow have not been able to correctly visualize in my head.

How do I calculate the effective rate of a Treasury while taking into account the lack of state tax on interest? Is it as simple as interest rate x (1+state tax)? Or is there a second calculation to consider that shows the drag from federal tax?

Thanks!
Dan
You have it right. You do not worry about the drag of fed taxes as you would account for that by increasing rate of non fed taxes products to account for the rate differential (like a muni bond fund).
Okay then. What about if we are calculating the after tax rate of deductible student loan interest? Is it as simple as interest rate * (1 - federal marginal rate)?

I’m trying to compare a 1.95% student loan refinancing opportunity with a 2%+ Treasury.

Thanks.

Dan
I am not very familiar with student loans, but if it was a fully deductible (24k in other itemized deductions) home mortgage, the after tax rate would be calculated that way. For a deductible loan it is a reduction in rate, but for deductible income it is an increase in rate. Keep in mind that if you are comparing a deductible loan to a non deductible income (treasury fed taxes) you have to equalize this into an after tax rate.

For comparing a 1.95% deductible home mortgage and a 2% treasury, you can forget the state tax rate since it is not deductible in either situation and focus on the federal rate. You are only earning 2%*(1-fed marginal rate) on the treasury while paying 1.95*(1-fed marginal rate) on the loan. So you are earning .05% by keeping money in a 2% treasury.
Last edited by Olemiss540 on Sat Feb 10, 2018 8:42 am, edited 1 time in total.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
glock19
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Re: CD Ladder or Treasuries ?

Post by glock19 »

I certainly agree with all the statements above regarding risk factor and return. In the past I have used both CD's and Treasuries. I recently started formulating a 5 year ladder for the short term portion of my FI allocation. I went with treasuries mainly for the reason of liquidity.

Liquidating CD's from a bank will cause loss of interest. Liquidating brokered CD's on the secondary market will cost a fair amount of principal. The spread is insane!

IF the trend of rising rates continues, liquidating a treasury will probably result in a favorable return. If anyone disagrees with this please feel free to correct me.
petulant
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Re: CD Ladder or Treasuries ?

Post by petulant »

glock19 wrote: Sat Feb 10, 2018 8:40 am I certainly agree with all the statements above regarding risk factor and return. In the past I have used both CD's and Treasuries. I recently started formulating a 5 year ladder for the short term portion of my FI allocation. I went with treasuries mainly for the reason of liquidity.

Liquidating CD's from a bank will cause loss of interest. Liquidating brokered CD's on the secondary market will cost a fair amount of principal. The spread is insane!

IF the trend of rising rates continues, liquidating a treasury will probably result in a favorable return. If anyone disagrees with this please feel free to correct me.
In a rising interest rate environment, a treasury's market price will generally be less than what one paid for it.
scone
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Re: CD Ladder or Treasuries ?

Post by scone »

Treasuries are much more liquid than a bank CD, so I personally would want them for that reason alone.

There may be some estate planning considerations. I'm not sure how a bank CD in an IRA is treated when the holder dies-- can it be liquidated immediately without penalty? In case the holder is incapacitated, can a person with Power of Attorney roll over the CD or liquidate it?

BTW. Another thing about Treasuries, which doesn't apply to the OP but might to someone else reading this. Treasuries are not taxed at the state level, so in a state that taxes dividends and interest, a short duration Treasury fund might work in a taxable account. This also gives you something easy to rebalance with, if you also have stock funds in taxable.
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digit8
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Re: CD Ladder or Treasuries ?

Post by digit8 »

I think I Bonds make sense before Treasuries. Split your savings between I Bonds and CD's and you've got a pretty good "safe" portfolio.
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dbr
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Re: CD Ladder or Treasuries ?

Post by dbr »

The two conventional "risk free" approaches to retirement income are a TIPS ladder or inflation indexed annuities.

I bonds are a good thing but it takes a lot of preparation to accumulate enough savings in I bonds.

In any case even a secure income stream is not defense against the risk that one has underestimated the needed spending. Annuities are especially at risk for this and one cannot dare annuitize everything. Retirement is just as much at risk from insufficient return as from uncertainty. This means the best defense is diversity in having annuitized income, including Social Security, stable assets, and risky but high returning assets.
Atgard
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Re: CD Ladder or Treasuries ?

Post by Atgard »

I don't really consider treasuries or other bonds more "liquid" than CDs. You can sell either early if you want. If you sell a bond early, you get the current market price, which could be anything (I mean, it's probably not going to be 10% of the face value, but it could fluctuate a fair bit depending on what happened to interest rates). On the other hand, with a few clicks, I can break a CD early whenever I want and my "losses" are capped at losing the last 6 months of interest. (Different banks may have different early redemption rules & penalties.)

So from a risk perspective for my "safe" assets, I prefer the known 6-month penalty to the unknown market price fluctuation if I need to sell early. But that is personal preference, minimizing the maximum loss I can incur.
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Re: CD Ladder or Treasuries ?

Post by Call_Me_Op »

invst65 wrote: Fri Feb 09, 2018 4:15 pm In regards to safety of principal I don't think CD's and Treasuries are equal. The latter is 100% backed by the full faith and credit of the U.S. government. The former is only insured by the same entity through FDIC but with limits on liability. In a SHTF scenario which do you think the government will allow to fail first?
I have heard lawmakers threaten to stiff bondholders but never heard them threaten to stiff grandma.
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