brokered CDs from fidelity/vanguard, bank reputation?

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blackwhisker
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brokered CDs from fidelity/vanguard, bank reputation?

Post by blackwhisker » Thu Jun 06, 2019 5:13 pm

I am thinking about buying brokered CDs from Fidelity or Vanguard. Do I need to worry about the reputation of the banks where the CDs come from? Are there any risks? They all seem to be FDIC insured.

I am usually more comfortable buying my CDs directly from Ally. But this time I need to buy CDs in my existing Fidelity IRA account. I am not sure how long it will take to move money from my Fidelity IRA to my Ally IRA account, and if it is worth the trouble. Anyone has experience?

Another option is that I can just buy treasury in my Fidelity account. But the yield of treasury doesn't seem so attractive right now.

Thank you.

jebmke
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by jebmke » Thu Jun 06, 2019 5:17 pm

Were there specific banks that worried you? I purchased a bunch of brokerage CDs back in the late summer last year - most of the quotes that came up were major banks.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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FelixTheCat
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by FelixTheCat » Thu Jun 06, 2019 6:15 pm

I have purchased brokered CDs through Fidelity. FDIC insured is good enough for me. :D
Felix is a wonderful, wonderful cat.

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alpenglow
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by alpenglow » Thu Jun 06, 2019 6:25 pm

As others have mentioned, FDIC insured is FDIC insured. However, just be aware of buying CDs at a premium to get a certain rate. If the bank fails, you'll eat that part.

LISD
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by LISD » Thu Jun 06, 2019 6:46 pm

you can always check the health of the bank at bankrate.com, and ensure they are in good standing with the FDIC at the FDIC website.

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AAA
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by AAA » Thu Jun 06, 2019 7:31 pm

blackwhisker wrote:
Thu Jun 06, 2019 5:13 pm
I am thinking about buying brokered CDs from Fidelity or Vanguard. Do I need to worry about the reputation of the banks where the CDs come from?
My understanding is that this would only be a factor if you ever wanted to sell the CD early on the secondary market. Large CD brokers who buy and sell such things are likely over FDIC limits for any bank and so the rating of the bank is a factor in the pricing.

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blackwhisker
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by blackwhisker » Fri Jun 07, 2019 2:10 am

Thank you everyone! Your replies are very helpful!

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petercooperjr
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by petercooperjr » Fri Jun 07, 2019 7:14 am

One thing to keep in mind about FDIC insurance and CDs, particularly longer-term CDs, whether via a brokerage or directly through the bank, is that if a bank failure occurs, your interest rate is no longer locked-in. From the FDIC site on "When a bank fails", under "How does a bank closing affect interest accruing on my deposits?":
The FDIC's insurance coverage includes principal and interest through the date of the bank failure up to applicable insurance limit for each deposit. The accrual of interest ceases on all accounts once the bank is closed. If an open bank acquires deposits from the failed bank, the acquiring bank becomes responsible for re-establishing interest rates and beginning the accrual of interest after the date of the failure of the bank. The acquiring bank may change the interest rate on the acquired deposits, but the depositor may withdraw their insured funds without penalty if they chose to do so. If no acquiring bank is found for the deposits and the FDIC pays the depositors directly for their insured amounts, interest does not accrue past the date of failure.
So if you chase yields and get a bank that fails, the CD can be "broken" by the acquiring bank (or if there is no acquiring bank, then will be broken when FDIC pays directly), and if they change the rate you can just accept the new (presumably lower) rate or take your money out at that point, but you're no longer guaranteed the rate you started out with. All that FDIC guarantees is the principal and accrued interest up to the date of the failure, and after that you're on your own.

This isn't all that likely, mind you. Most of the time, the bank that assumes the deposits keeps the same terms. It just can happen, and it has happened in the past.

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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by Call_Me_Op » Fri Jun 07, 2019 7:41 am

blackwhisker wrote:
Thu Jun 06, 2019 5:13 pm
I am thinking about buying brokered CDs from Fidelity or Vanguard. Do I need to worry about the reputation of the banks where the CDs come from? Are there any risks? They all seem to be FDIC insured.

I am usually more comfortable buying my CDs directly from Ally. But this time I need to buy CDs in my existing Fidelity IRA account. I am not sure how long it will take to move money from my Fidelity IRA to my Ally IRA account, and if it is worth the trouble. Anyone has experience?

Another option is that I can just buy treasury in my Fidelity account. But the yield of treasury doesn't seem so attractive right now.

Thank you.
The only issue for the small investor is that only principal is FDIC insured, not interest. Therefore, by investing in a bank with a lower rating, you are accepting in effect a form of "call risk." This is more of a concern for a longer-term CD. If you really want to lock-in that rate, you would want to invest in a non-callable CD issued by a highly-rated bank.

I would also note that brokered CDs are much less liquid than treasuries, so plan to hold until maturity.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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blackwhisker
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by blackwhisker » Fri Jun 07, 2019 11:18 am

Call_Me_Op wrote:
Fri Jun 07, 2019 7:41 am
blackwhisker wrote:
Thu Jun 06, 2019 5:13 pm
I am thinking about buying brokered CDs from Fidelity or Vanguard. Do I need to worry about the reputation of the banks where the CDs come from? Are there any risks? They all seem to be FDIC insured.

I am usually more comfortable buying my CDs directly from Ally. But this time I need to buy CDs in my existing Fidelity IRA account. I am not sure how long it will take to move money from my Fidelity IRA to my Ally IRA account, and if it is worth the trouble. Anyone has experience?

Another option is that I can just buy treasury in my Fidelity account. But the yield of treasury doesn't seem so attractive right now.

Thank you.
The only issue for the small investor is that only principal is FDIC insured, not interest. Therefore, by investing in a bank with a lower rating, you are accepting in effect a form of "call risk." This is more of a concern for a longer-term CD. If you really want to lock-in that rate, you would want to invest in a non-callable CD issued by a highly-rated bank.

I would also note that brokered CDs are much less liquid than treasuries, so plan to hold until maturity.
Thank you for the sage advice Call_Me_Op!!

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blackwhisker
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by blackwhisker » Fri Jun 07, 2019 11:19 am

petercooperjr wrote:
Fri Jun 07, 2019 7:14 am
One thing to keep in mind about FDIC insurance and CDs, particularly longer-term CDs, whether via a brokerage or directly through the bank, is that if a bank failure occurs, your interest rate is no longer locked-in. From the FDIC site on "When a bank fails", under "How does a bank closing affect interest accruing on my deposits?":
The FDIC's insurance coverage includes principal and interest through the date of the bank failure up to applicable insurance limit for each deposit. The accrual of interest ceases on all accounts once the bank is closed. If an open bank acquires deposits from the failed bank, the acquiring bank becomes responsible for re-establishing interest rates and beginning the accrual of interest after the date of the failure of the bank. The acquiring bank may change the interest rate on the acquired deposits, but the depositor may withdraw their insured funds without penalty if they chose to do so. If no acquiring bank is found for the deposits and the FDIC pays the depositors directly for their insured amounts, interest does not accrue past the date of failure.
So if you chase yields and get a bank that fails, the CD can be "broken" by the acquiring bank (or if there is no acquiring bank, then will be broken when FDIC pays directly), and if they change the rate you can just accept the new (presumably lower) rate or take your money out at that point, but you're no longer guaranteed the rate you started out with. All that FDIC guarantees is the principal and accrued interest up to the date of the failure, and after that you're on your own.

This isn't all that likely, mind you. Most of the time, the bank that assumes the deposits keeps the same terms. It just can happen, and it has happened in the past.
Thank you petercooperjr!

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dm200
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by dm200 » Fri Jun 07, 2019 11:25 am

When I was purchasing Vanguard brokered CDs (for an organization I then managed part time), I concluded that I was not smart or skilled enough to accurately evaluate such risk or reputation, etc. I just bought within the FDIC limit at the best rate for the term I wanted. When there were multiple banks with the same rate, I chose the bank where we held the lowest dollar amount in such CDs.

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blackwhisker
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by blackwhisker » Fri Jun 07, 2019 3:58 pm

dm200 wrote:
Fri Jun 07, 2019 11:25 am
When I was purchasing Vanguard brokered CDs (for an organization I then managed part time), I concluded that I was not smart or skilled enough to accurately evaluate such risk or reputation, etc. I just bought within the FDIC limit at the best rate for the term I wanted. When there were multiple banks with the same rate, I chose the bank where we held the lowest dollar amount in such CDs.
Thank you dm200! Your strategy makes sense

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blackwhisker
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by blackwhisker » Fri Jun 07, 2019 4:10 pm

jebmke wrote:
Thu Jun 06, 2019 5:17 pm
Were there specific banks that worried you? I purchased a bunch of brokerage CDs back in the late summer last year - most of the quotes that came up were major banks.
Thanks jebmke. Do i need to worry about foreign banks might have different regulations? such as Bank of China, State Bank of India?

lakpr
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by lakpr » Fri Jun 07, 2019 5:12 pm

Those foreign banks must still comply with US rules if they intend to offer banking services in the USA. That includes FDIC coverage and paying premiums for that coverage. I don’t think you have anything to worry about.

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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by yobyot » Fri Jun 07, 2019 7:10 pm

blackwhisker wrote:
Thu Jun 06, 2019 5:13 pm
I am thinking about buying brokered CDs from Fidelity or Vanguard. Do I need to worry about the reputation of the banks where the CDs come from? Are there any risks? They all seem to be FDIC insured.

I am usually more comfortable buying my CDs directly from Ally. But this time I need to buy CDs in my existing Fidelity IRA account. I am not sure how long it will take to move money from my Fidelity IRA to my Ally IRA account, and if it is worth the trouble. Anyone has experience?

Another option is that I can just buy treasury in my Fidelity account. But the yield of treasury doesn't seem so attractive right now.

Thank you.
I'd be interested in why the OP thinks Treasuries aren't attractive.

I used to buy brokerage CDs through Fidelity. It's a good product -- but you have to be careful that you don't buy more than $250K from one bank in a single "capacity" or you lose the insurance above the limit. It's pretty easy to do in my case (I realize that's a blessing).

So I decided to teach myself how to participate in T-bill auctions. Starting last year, I moved about 50% of my total assets across taxable and retirement accounts into a variety of T-bills bought at auction. Now, I'm buying 26 week T-bills exclusively. (I never buy other than at auction.) And while it's more work than the brokerage CD's, I really like it for a bunch of reasons:
  • While T-bills aren't insured, I'm happy with the risk. Because US treasury :-)
  • They cost nothing to buy OR sell. I sold a brokerage CD at E*Trade in an I401(k) account and took a beating
  • Sometimes, like now, when the Fed is making moves, you can do a little better, if you work at it
  • Federal State income tax free in my taxable accounts
  • These are zero coupon bills; so you get the discount up front. I typically reinvest the difference between the face value and the discounted cost in something really inexpensive like ITOT or FZROX
  • After about a year of this, it's like a bond ladder with 26 week bills expiring every month.
It may just be me but I really like being able to buy T-bills in a transparent market (that's my big issue with the bond market -- the dealers) and at the same rate as the big guys. Here's a link to the Treasury Direct auction schedule page: https://www.treasurydirect.gov/instit/i ... m?upcoming

At Fidelity, they post the the upcoming CUSIPs that are announced on Tuesday by Thursday afternoon. You have until Monday to submit an auction order (really, a GTC order). The trade executes by noon on the Monday of the auction (for 26 week bills).

If you're interested in this, ask the Fidelity fixed income specialists for a tutorial. There are plenty of gotchas on their website to get this done. When I first started, I kept making a newbie mistake: purchasing re-issues in the secondary market. The Treasury will "reissue" a CUSIP at auction and if you aren't careful and enter just a plain old buy order, you'll get the secondary bill -- and probably forgo any profit on the zero due to dealer markups.

IMHO, interest rates are paltry across the board so a few basis points in a CD isn't worth tying up my funds for nine months to a year. IOW, the choice is between losing money in cash or losing a little less in real terms in ultra-safe, ultra-low cost T-bills. I like the liquidity of the T-bills and the fact that what you buy at auction for free you can sell any market day for free, too, if you suddenly need the cash.
Last edited by yobyot on Sun Jun 09, 2019 2:43 pm, edited 1 time in total.

123
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by 123 » Fri Jun 07, 2019 9:14 pm

I would encourage you to buy brokered IRA CDs through Fidelity/Vanguard rather than opening another IRA account at a bank and transferring funds etc.

I made the mistake of opening a traditional IRA account at an outside bank. transferring significant funds, and buying multi-year CDs. I figured I was clearing a couple of thousand dollars in additional interest (large CD) by doing so so it would be silly for me not to do it. Yes it was easy for me because I know the family accounts inside-out. After a few months it dawned on me how I had complicated the situation if I wasn't around when those CDs matured. We've got a lot of accounts between 401ks, Traditional IRAs, Roth IRAs, taxable accounts, inherited IRA accounts, etc and I had made the situation worse. I realized I had made the situation potentially much more complicated for my surviving spouse. I decided that account simplification was worth the early withdrawal penalties so I closed the CDs at the external bank and consolidated the IRA funds back to their initial accounts. In my search for a "more perfect" account return I had lost sight of Taylor Larimore's caution that the search for a perfect plan can be an enemy of going with a good plan.
The closest helping hand is at the end of your own arm.

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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by LISD » Fri Jun 07, 2019 9:30 pm

"if you aren't careful and enter just a plain old buy order, you'll get the secondary bill -- and probably forgo any profit on the zero due to dealer markups."

yobyot, are you saying that if your intent is to buy a new issue' T-bill, and you aren't careful, you could mistakenly buy a T-Bill on the secondary market and thus pay brokerage fees?

I'm really surprised that Fidelity would make this so unclear.

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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by petercooperjr » Fri Jun 07, 2019 9:46 pm

yobyot wrote:
Fri Jun 07, 2019 7:10 pm
  • Federal income tax free in my taxable accounts
I assume you mean to say that T-Bill interest is state income tax free. You still pay Federal taxes.
LISD wrote:
Fri Jun 07, 2019 9:30 pm
yobyot, are you saying that if your intent is to buy a new issue' T-bill, and you aren't careful, you could mistakenly buy a T-Bill on the secondary market and thus pay brokerage fees?

I'm really surprised that Fidelity would make this so unclear.
Well, Fidelity doesn't charge brokerage fees for secondary Treasuries (though I believe they make money on the bid-ask spread). But if you just put the CUSIP in you'll get to the page to trade in the secondary market, and if you go to the page for Auctions you'll get to the place with the list of announced treasuries you can buy at auction.

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blackwhisker
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by blackwhisker » Sat Jun 08, 2019 10:34 am

123 wrote:
Fri Jun 07, 2019 9:14 pm
I would encourage you to buy brokered IRA CDs through Fidelity/Vanguard rather than opening another IRA account at a bank and transferring funds etc.

I made the mistake of opening a traditional IRA account at an outside bank. transferring significant funds, and buying multi-year CDs. I figured I was clearing a couple of thousand dollars in additional interest (large CD) by doing so so it would be silly for me not to do it. Yes it was easy for me because I know the family accounts inside-out. After a few months it dawned on me how I had complicated the situation if I wasn't around when those CDs matured. We've got a lot of accounts between 401ks, Traditional IRAs, Roth IRAs, taxable accounts, inherited IRA accounts, etc and I had made the situation worse. I realized I had made the situation potentially much more complicated for my surviving spouse. I decided that account simplification was worth the early withdrawal penalties so I closed the CDs at the external bank and consolidated the IRA funds back to their initial accounts. In my search for a "more perfect" account return I had lost sight of Taylor Larimore's caution that the search for a perfect plan can be an enemy of going with a good plan.
Thank you for sharing 123! I appreciate it.

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blackwhisker
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by blackwhisker » Sat Jun 08, 2019 10:37 am

petercooperjr wrote:
Fri Jun 07, 2019 9:46 pm
yobyot wrote:
Fri Jun 07, 2019 7:10 pm
  • Federal income tax free in my taxable accounts
I assume you mean to say that T-Bill interest is state income tax free. You still pay Federal taxes.
LISD wrote:
Fri Jun 07, 2019 9:30 pm
yobyot, are you saying that if your intent is to buy a new issue' T-bill, and you aren't careful, you could mistakenly buy a T-Bill on the secondary market and thus pay brokerage fees?

I'm really surprised that Fidelity would make this so unclear.
Well, Fidelity doesn't charge brokerage fees for secondary Treasuries (though I believe they make money on the bid-ask spread). But if you just put the CUSIP in you'll get to the page to trade in the secondary market, and if you go to the page for Auctions you'll get to the place with the list of announced treasuries you can buy at auction.
Thanks petercooperjr.

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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by kramer » Sat Jun 08, 2019 11:51 am

yobyot wrote: I'd be interested in why the OP thinks Treasuries aren't attractive.
I am not the OP, but I am guessing because the interest rates are usually much better for brokered CDs than for treasuries. At least when I was buying in February, CD's were offering over 1/2% more than comparable treasuries. Often, in an IRA, and especially for people who don't try to time markets, liquidity is not an issue at all. For instance, my whole IRA is in bonds and well over half of that is in a ladder of brokered CD's ... I don't plan to tap my IRA until RMDs around 2036 or so. So I just keep a ladder of CDs along with some liquidity for Roth conversions. My latest tranche, my largest purchase ever, was in February, I got around 6.5 year brokered CD at Vanguard for 3.3%. I think the comparable treasury was around 2.65% or so. Of course, that turned out to be a great buy, but I was not trying to time the market, since no one can predict interest rates.

By the way, this is also a subtle advantage of the main methods recommended for drawing down a portfolio in the decumulation stage in McClung's book, Living Off Your Money, a book I highly recommend. Using that decumulation method, you never buy stocks again (except with reinvested dividends) after you retire, so you never have to sell bonds to buy stocks to rebalance (you just occasionally harvest stocks when they are up and live off your bonds). So any bond liquidity requirements are normally known years in advance. Before I used this method, I would keep more bonds liquid so as to buy stocks when the market was down and there was a cost associated with that.

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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by Alan S. » Sat Jun 08, 2019 1:38 pm

alpenglow wrote:
Thu Jun 06, 2019 6:25 pm
As others have mentioned, FDIC insured is FDIC insured. However, just be aware of buying CDs at a premium to get a certain rate. If the bank fails, you'll eat that part.
With brokered CDs, if the bank is taken over by the FDIC, you will typically have your principal plus interest to the date of receivership back in your brokerage account within 2 weeks +/-. However, when interest rates are falling you will suffer from re pricing risk, having to accept a lower interest rate for the remaining term of the CD of the bank that went into receivership. Of course, if rates have risen, then you benefit for that period of time.
You also get no interest from the date of receivership to the date the FDIC payment is received.

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blackwhisker
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by blackwhisker » Sat Jun 08, 2019 7:35 pm

kramer wrote:
Sat Jun 08, 2019 11:51 am
yobyot wrote: I'd be interested in why the OP thinks Treasuries aren't attractive.
I am not the OP, but I am guessing because the interest rates are usually much better for brokered CDs than for treasuries. At least when I was buying in February, CD's were offering over 1/2% more than comparable treasuries. Often, in an IRA, and especially for people who don't try to time markets, liquidity is not an issue at all. For instance, my whole IRA is in bonds and well over half of that is in a ladder of brokered CD's ... I don't plan to tap my IRA until RMDs around 2036 or so. So I just keep a ladder of CDs along with some liquidity for Roth conversions. My latest tranche, my largest purchase ever, was in February, I got around 6.5 year brokered CD at Vanguard for 3.3%. I think the comparable treasury was around 2.65% or so. Of course, that turned out to be a great buy, but I was not trying to time the market, since no one can predict interest rates.

By the way, this is also a subtle advantage of the main methods recommended for drawing down a portfolio in the decumulation stage in McClung's book, Living Off Your Money, a book I highly recommend. Using that decumulation method, you never buy stocks again (except with reinvested dividends) after you retire, so you never have to sell bonds to buy stocks to rebalance (you just occasionally harvest stocks when they are up and live off your bonds). So any bond liquidity requirements are normally known years in advance. Before I used this method, I would keep more bonds liquid so as to buy stocks when the market was down and there was a cost associated with that.
Thank you Kramer!

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blackwhisker
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by blackwhisker » Sat Jun 08, 2019 7:35 pm

Alan S. wrote:
Sat Jun 08, 2019 1:38 pm
alpenglow wrote:
Thu Jun 06, 2019 6:25 pm
As others have mentioned, FDIC insured is FDIC insured. However, just be aware of buying CDs at a premium to get a certain rate. If the bank fails, you'll eat that part.
With brokered CDs, if the bank is taken over by the FDIC, you will typically have your principal plus interest to the date of receivership back in your brokerage account within 2 weeks +/-. However, when interest rates are falling you will suffer from re pricing risk, having to accept a lower interest rate for the remaining term of the CD of the bank that went into receivership. Of course, if rates have risen, then you benefit for that period of time.
You also get no interest from the date of receivership to the date the FDIC payment is received.
Thanks Alan!

student
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by student » Sat Jun 08, 2019 8:03 pm

So many good posts already!!! When I pick between two banks offering the same rate at a brokerage firm, I consult https://www.bankrate.com/rates/safe-sou ... earch.aspx

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blackwhisker
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by blackwhisker » Sun Jun 09, 2019 10:42 am

student wrote:
Sat Jun 08, 2019 8:03 pm
So many good posts already!!! When I pick between two banks offering the same rate at a brokerage firm, I consult https://www.bankrate.com/rates/safe-sou ... earch.aspx
Thank you student!

yobyot
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by yobyot » Sun Jun 09, 2019 2:46 pm

LISD wrote:
Fri Jun 07, 2019 9:30 pm
"if you aren't careful and enter just a plain old buy order, you'll get the secondary bill -- and probably forgo any profit on the zero due to dealer markups."

yobyot, are you saying that if your intent is to buy a new issue' T-bill, and you aren't careful, you could mistakenly buy a T-Bill on the secondary market and thus pay brokerage fees?

I'm really surprised that Fidelity would make this so unclear.
Yes, that's exactly correct. If the CUSIP for an auction is a "re-issue" and you don't go through a very specific screen workflow to order it, you'll be issuing a buy order for the previously-issued bill, not the re-issue auction bill.

And yes, it's not easy which is why I recommend that you have someone from Fidelity show you how to enter auction orders.

yobyot
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Re: brokered CDs from fidelity/vanguard, bank reputation?

Post by yobyot » Sun Jun 09, 2019 2:49 pm

petercooperjr wrote:
Fri Jun 07, 2019 9:46 pm
yobyot wrote:
Fri Jun 07, 2019 7:10 pm
  • Federal income tax free in my taxable accounts
I assume you mean to say that T-Bill interest is state income tax free. You still pay Federal taxes.
I stand corrected. Thanks!

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