How Are CD Ladders Used in Retirement

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Kookaburra
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How Are CD Ladders Used in Retirement

Post by Kookaburra »

Hi Bogleheads

This is a probably dumb question, but here goes. When people refer to using a CD ladder in retirement, how does this work as part of a spending plan. I imagine there are differences between individuals, but what is most typical or recommended?

Do they:

1. Upon maturity, spend the proceeds of each CD (principal plus interest) to meet expenses and then sell investments (e.g., equities from their portfolio) to buy a new CD to keep the ladder going perpetually?

2. Upon maturity, just spend the interest earned and use the principal to buy a new CD to keep the ladder going?

3. Other?

Thanks
sailaway
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Re: How Are CD Ladders Used in Retirement

Post by sailaway »

It is usually described as 1a, once the ladder has completely matured, you have spent the money and made it beyond the sequence of returns risk period, so can live off the rest of your portfolio.

In reality, I would hope that when each one matures the owner looks at current rates available and the performance of the rest of their portfolio and makes a considered decision.

What my parents do is constantly roll over their CDs to new CDs and live off SS and a small pension.

What we have decided to do is just keep money in bond funds and pull from stocks or bonds according to our asset allocation. Slightly riskier, but much more simple.
wanderer
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Re: How Are CD Ladders Used in Retirement

Post by wanderer »

We use a ladder as a bridge to SS, so mostly #1, but we have done #2.

We retired from a typical mega-corp paycheck life, no pension, and we were stressed with the prospect of selling retirement assets to cover expenses, especially in a down market. We were also retiring before age 62, so SS was not an option. We set up both a CD ladder and a AAA municipal bond ladder as a bridge to SS and to cover our budgeted "essential" expenses. This took away a lot of the stress when stepping into retirement. Somehow CDs seemed more familiar and secure than our "investments".

We are seven years in, past age 62, still keep a significant cash position, but have adapted. Now we can see the CDs as just another investment in the overall retirement portfolio. Nothing "special". We have cashed CDs/muni's for expenses and, when the timing and rates seemed favorable, we re-invested, using other investments (cash-like and typical stocks/bonds funds) for our spending needs. CDs and muni's are now a small portion of our overall retirement assets. We now feel comfortable selling assets as needed to cover expenses. I just go in quarterly and check our cash positions and sell as needed to re-direct towards our target AA.
Last edited by wanderer on Sat Sep 05, 2020 1:17 pm, edited 1 time in total.
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Stinky
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Re: How Are CD Ladders Used in Retirement

Post by Stinky »

I’ve just set up a ladder myself.

I see the ladder as giving me “options”. If the equity market isn’t depressed when the contract expires, I’ll probably just roll the proceeds into a new one, and liquidate equities for spending money. However, if the equities market is depressed at that time, I have the “option” of spending the proceeds, thereby avoiding pulling money out of equities at a bad time.
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Dandy
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Re: How Are CD Ladders Used in Retirement

Post by Dandy »

I used a variety of cash type products including CDs to fund the wait to collect SS at age 70. I also roughly follow Dr. Wm Bernstein's idea of having X years of draw down dollars in "safe" products. So, I have used CDs, Savings, Money Markets and short term bond funds to secure funding of my draw down need to age 90.

When it comes to withdrawals I don't necessarily tap these "safe" assets. I usually withdraw from both the "safe" and "risk" assets unless the "risk" assets have bad performance. So, my "safe" assets are more like insurance than an ATM.

I currently have 2 CD ladders. One in my TIRA and one in our taxable account. I have always had them mature rather than cash them in before maturity.
MikeG62
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Re: How Are CD Ladders Used in Retirement

Post by MikeG62 »

I have many CD's of varying term and yield. First, I consider CD's as part of the short-end of our fixed income exposure, and in that regard, I use ladders largely to hedge the risk of changes in future interest rates. For example, if I only bought 5-year CD's (at current rates that may be as low as 1.5% or lower) and rates increase considerably in a year or two years or three years, I'd have money locked up at an uninspiring yield that is not readily deployable (well not without penalty) to take advantage of the better yields. So by having CD's mature every year, I am keeping open the option to redeploy the proceeds at better rates. Of course, it rates remain this low for years and years, then I'd probably wish I had purchased the longer-term CD's as the yield there would have been better (although based upon the current yield curve, not all that much better) than the yield for the shorter-term rungs of the CD ladder. The future is of course unknowable, so you have to accept that risk.

I've had quite a large dollar amount of CD's mature over the last 5-6 months (with yields of ~2.5%+/-) and have redeployed the vast majority of the proceeds to other CD's. In some cases, I've actually redeployed to other CD's with a higher yield than the maturing CD (this being for funds I've added to two add-on CD's I opened with a PA credit union last fall with rates at 3.0% and 3.25%). In other cases, I've opened new CD's at somewhat lower rates than the maturing CD's. I do look around for promotions and do not simply accept the yields at banks and CU's I currently do business with. Recent examples (in the month of August), including opening a 15-month 1.70% CD at a local(ish) bank and two CD ladders (one taxable and the second in an IRA) at a Louisiana CU (at rates ranging from 1.45% on the 12-month rung to 2.10% on the 60-month rung).

I also sometimes use a portion of the proceeds from maturing CD's (supplementing our interest and dividends) to fund our retirement expenses.
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eldinerocheapo
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Re: How Are CD Ladders Used in Retirement

Post by eldinerocheapo »

This is a great question, and one we've worked on for years. After we maxed out our Roth contributions, and the 401k's were financed at 20% of annual income, we decided to set up cd's from one to five years to contemplate budgets, emergencies, and to pay the taxes directly on Roth conversions from the TIRA's in retirement. We currently have 20 of them outstanding, and the idea is to pull $15k to $20k each year. Despite the low renewal rates with Ally, it seems to be working, and has really helped in delaying SS while allowing smaller amounts to be distributed from the TIRA monthly.

So far it has worked as a safety valve in meeting our projected $40k a year in fixed expenses.
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KingRiggs
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Re: How Are CD Ladders Used in Retirement

Post by KingRiggs »

Ladders are useful when one has several long-term CDs, each maturing at differing times.

It appears that there is currently little advantage for long-term CDs (Ally currently 1% on 5-year CD) vs no-penalty CDs (current rate 0.75% at Ally).

I would just go the no-penalty route, giving up a little yield for much more simplicity. If the rate environment changes, you can break the CD for no penalty and alter your strategy.
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patrick013
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Re: How Are CD Ladders Used in Retirement

Post by patrick013 »

A five year ladder, CD's or TRSY's, is good to target date
expenses for five years if so desired. One year of expenses
for each years' maturity.

Here's another post which applies to CD ladders as well :

individual bonds vs bond funds
age in bonds, buy-and-hold, 10 year business cycle
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Kevin M
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Re: How Are CD Ladders Used in Retirement

Post by Kevin M »

As you can see from the replies, there is no one size fits all approach that most people follow.

For much of the time since 2010, I bought mainly direct CDs with 5-year to 7-year maturities and low early withdrawal penalties (EWPs), like six months of interest. Often you could earn more if doing an early withdrawal from a 5-year CD after say two years than from a 3-year CD bought at the same time, so there wasn't much point in doing a ladder. However, if you gradually build your CD portfolio this way, you'll end up with something like a ladder.

Early withdrawal penalties have generally increased, so it's harder to find high-yield CDs with EWPs of six months of interest, but more likely now charge one year of interest, and some even more--perhaps much more. This might make a ladder more attractive.

I never targeted either the interest or the return of capital upon maturity for any particular spending needs. I never did an early withdrawal from a direct CD except a few times to reinvest at a rate that was high enough to more than compensate for the EWP. When a CD matures, I might keep some of the proceeds in cash for spending, I might use some to rebalance into stocks if the timing is right, I might buy a brokered CD or individual Treasury if the yields are competitive with direct CDs (they are not now), or I might reinvest some or all of it in another direct CD.

Unfortunately, a bank or credit union (CU) that was offering great CD deals five years ago may not be doing so today, so transferring to another bank or CU may be required to keep getting competitive rates. This is easy enough in a taxable account, but is a bit more of a pain with IRAs, as additional paperwork and time is required.

The latter is what I'm currently facing with an CU IRA CD that matures about the middle of this month. They are offering only 0.80% on a 5-year and 0.30% on a 1-year, so I probably will transfer the IRA to another bank or CU. Even Ally offers 0.80% on a 1-year CD. Several credit unions are offering about 1% for a 1-year, but I'm not sure I want to mess around joining another credit union for an extra 20 basis points for one year.

For larger portfolios with high fixed-income allocations, FDIC/NCUA deposit insurance limits are a concern, and while there are ways to get more than $250K coverage at one bank or CU for taxable accounts, there is no way to do so for an IRA, so multiple banks or credit unions are required. I know at least one of my CUs has some additional deposit insurance on top of the NCUA coverage, adding an additional $250K of coverage, but not federally backed.

Kevin
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unbiased
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Re: How Are CD Ladders Used in Retirement

Post by unbiased »

I am personally fond of this proposal https://www.cbsnews.com/news/build-your-own-annuity/:
momvesting
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Re: How Are CD Ladders Used in Retirement

Post by momvesting »

I have a few relatives who engage in a bit of market timing. For example, about 2 years ago when CD rates were in high 2s and low 3s and the market was doing well, they sold some stocks and created an IRA CD ladder to match annual RMDs. That way if the market did not do well, they were not required to sell anything for RMDs, but rather just took the CD distributions as the CDs expire. At least that was my understanding of what they did.
BoneSpec
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Re: How Are CD Ladders Used in Retirement

Post by BoneSpec »

momvesting wrote: Sun Sep 06, 2020 6:47 pm I have a few relatives who engage in a bit of market timing. For example, about 2 years ago when CD rates were in high 2s and low 3s and the market was doing well, they sold some stocks and created an IRA CD ladder to match annual RMDs. That way if the market did not do well, they were not required to sell anything for RMDs, but rather just took the CD distributions as the CDs expire. At least that was my understanding of what they did.
I did the same before I got into investing in stocks. I had $120k in "dead money" from life insurance settlement that was earning .25% interest. Moved it into ladder setup of 36/48/60 months with 2.85%/3.00%/3.25% rates. Which right now makes me look like a genius, it was just dump luck I guess.

When they mature in 2021/2022/2023 I might move them to VTSAX and set and forget.
Dottie57
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Re: How Are CD Ladders Used in Retirement

Post by Dottie57 »

Stinky wrote: Sat Sep 05, 2020 1:17 pm I’ve just set up a ladder myself.

I see the ladder as giving me “options”. If the equity market isn’t depressed when the contract expires, I’ll probably just roll the proceeds into a new one, and liquidate equities for spending money. However, if the equities market is depressed at that time, I have the “option” of spending the proceeds, thereby avoiding pulling money out of equities at a bad time.
Great way to look at it.

I have been using CDs and living off them - nearly tax free - and then doing Roth conversions.
hudson
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Re: How Are CD Ladders Used in Retirement

Post by hudson »

Kookaburra wrote: Sat Sep 05, 2020 12:19 pm Hi Bogleheads

This is a probably dumb question, but here goes. When people refer to using a CD ladder in retirement, how does this work as part of a spending plan. I imagine there are differences between individuals, but what is most typical or recommended?

Do they:

1. Upon maturity, spend the proceeds of each CD (principal plus interest) to meet expenses and then sell investments (e.g., equities from their portfolio) to buy a new CD to keep the ladder going perpetually?

2. Upon maturity, just spend the interest earned and use the principal to buy a new CD to keep the ladder going?

3. Other?

Thanks
Kookaurra,
I use CDs, but I don't do a ladder. When I have money to invest, I shop around and go for the best available 5-7 year CD.
I don't reinvest interest except in a credit union IRA CD.
For a brokered CD in an IRA, I opt to send the interest to a settlement account.
At maturity, if I don't need the money, I'll probably reinvest in a new new CD. I would first look around. I might buy individual TIPs or go for a TIPS fund or etf. TIPs may or may not fit your situation, but they may fit mine.

Bottom Line: For CD investing, I prefer to take the best available 5-7 year CD. I didn't go with a ladder because I hoped that I could make more interest with longer CDs.
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