New PenFed CD rates!

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
goodenoughinvestor
Posts: 295
Joined: Fri Aug 09, 2013 10:33 am

Re: New PenFed CD rates!

Post by goodenoughinvestor »

surfer1 wrote:
goodenoughinvestor wrote:no--I did it all online. First I joined by clicking on the "join Penfed" tab. Once I had opened a "regular share" account (by paying $5 and joining one of the non-profit veteran-support orgs) I used my user name and password to enter the site. Then I clicked on the "open account/certificate" tab and followed the directions. Note: I wasn't creating IRA accounts--maybe the process is different for those.
Ah, I see. So just to be clear, you click "Join Penfed" just one time, to get a share account. After that, you open a new CD every day using the same login, by clicking "open account/certificate" tab each day? Or are you actually clicking "Join Pedfed" every day, opening up a separate share account each time?
I'm using the same login, not "joining" every day. Only opened one share account.
goodenoughinvestor
Posts: 295
Joined: Fri Aug 09, 2013 10:33 am

Re: New PenFed CD rates!

Post by goodenoughinvestor »

sperry8 wrote:I'm already a member. Do they require anything at all in writing from you/me? Or is it 100% online? I'm traveling overseas and if they send me mail it'll be difficult to get.
Yes. They follow up by sending you a form you need to sign. It seems to take a few business days for the form to arrive by mail. I don't know what the deadline would be for sending it back to them.
sscritic
Posts: 21853
Joined: Thu Sep 06, 2007 8:36 am

Re: New PenFed CD rates!

Post by sscritic »

goodenoughinvestor wrote:
goodenoughinvestor wrote:So you're not adding more money to the existing CD but rather opening new and separate CD's ? All online without speaking to anyone ?
Yes! So far, so good. I did this online every day this past week except for Thanksgiving. By Friday I had received two separate mailings for the first two accounts--signature cards, basically, that came with (postage paid!) return envelopes.
I talk to myself as well. I find I have better conversations that way.
goodenoughinvestor
Posts: 295
Joined: Fri Aug 09, 2013 10:33 am

Re: New PenFed CD rates!

Post by goodenoughinvestor »

I have no choice, no one else pays any attention
kaneohe
Posts: 6786
Joined: Mon Sep 22, 2008 12:38 pm

Re: New PenFed CD rates!

Post by kaneohe »

john94549 wrote:It is my understanding that the "no EWP" on partial withdrawals applies to IRA CDs.
.
I think you have to be 59.5 for the "no EWP" on partial withdrawals for IRA CDs.
User avatar
mephistophles
Posts: 3110
Joined: Tue Mar 27, 2007 2:34 am

Re: New PenFed CD rates!

Post by mephistophles »

sscritic wrote:[I talk to myself as well. I find I have better conversations that way.

I appreciate your sentiment sscritic. In my case, it all depends on which self I am talking to at any particular time!!!
ole meph
User avatar
frugaltype
Posts: 1952
Joined: Wed Apr 24, 2013 9:07 am

Re: New PenFed CD rates!

Post by frugaltype »

sscritic wrote:
lazyday wrote:Do you have a better alternative for fixed income?
Not really. I just don't get excited and shout "Woo-hoo!!" when I discover the least worst of several bad choices.

[worst, worster, and worstest were my choices here: I chose worst as the least worst grammatically]
bad, worse, worst.
least bad of several bad choices.
best of several bad choices.
lazyday
Posts: 3849
Joined: Wed Mar 14, 2007 10:27 pm

Re: New PenFed CD rates!

Post by lazyday »

Kevin M wrote:considering doing early withdrawals of some of my Ally 2.4% 5-year CDs (EWP 60 days of interest), but they mature in about two years, so they are really 2.4% 2-year CDs. On $100K (less penalty) that's only about $800 more in pre-tax interest after two years with the PenFed 3% CD, and would earn about $2K less if I broke the PenFed CD after two years. I guess I'm leaning against this. Inputs?
With only a 60 day penalty, you might consider this more like "cash with a 2 day delay" than 2 year CDs. Since you closed other CDs early, maybe you don't have large cash accounts, and (some of) these 2.4% CDs could supplement cash. Or replace a cash account you were thinking of building.
Topic Author
Happy2BeFree

Re: New PenFed CD rates!

Post by Happy2BeFree »

frugaltype wrote:
sscritic wrote:
lazyday wrote:Do you have a better alternative for fixed income?
Not really. I just don't get excited and shout "Woo-hoo!!" when I discover the least worst of several bad choices.

[worst, worster, and worstest were my choices here: I chose worst as the least worst grammatically]
bad, worse, worst.
least bad of several bad choices.
best of several bad choices.
It's called making the most best of the least worst situation! :sharebeer
User avatar
VictoriaF
Posts: 20122
Joined: Tue Feb 27, 2007 6:27 am
Location: Black Swan Lake

Re: New PenFed CD rates!

Post by VictoriaF »

Happy2BeFree wrote:
frugaltype wrote:
sscritic wrote:
lazyday wrote:Do you have a better alternative for fixed income?
Not really. I just don't get excited and shout "Woo-hoo!!" when I discover the least worst of several bad choices.

[worst, worster, and worstest were my choices here: I chose worst as the least worst grammatically]
bad, worse, worst.
least bad of several bad choices.
best of several bad choices.
It's called making the most best of the least worst situation! :sharebeer
The worst is the enemy of bad enough.

Victoria
Inventor of the Bogleheads Secret Handshake | Winner of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
User avatar
Bustoff
Posts: 2033
Joined: Sat Mar 03, 2012 5:45 pm

Re: New PenFed CD rates!

Post by Bustoff »

What do you guys think is better, reinvesting or taking the monthly dividends ? (I didn't major in math)
Over 3 -5 years will it matter that much at these rates ?
User avatar
G-Money
Posts: 2867
Joined: Sun Dec 09, 2007 6:12 am

Re: New PenFed CD rates!

Post by G-Money »

Bustoff wrote:What do you guys think is better, reinvesting or taking the monthly dividends ? (I didn't major in math)
Over 3 -5 years will it matter that much at these rates ?
Reinvesting. Where would you reinvest the dividends that would have a higher expected rate of return for the same risk?

Exceptions: if you are bumping up against NCUA insurance limits, have the dividends distributed. If you are planning on living off of the income, have the dividends distributed.
Don't assume I know what I'm talking about.
camaro327
Posts: 302
Joined: Fri Dec 21, 2012 10:04 am

Re: New PenFed CD rates!

Post by camaro327 »

Bustoff wrote:What do you guys think is better, reinvesting or taking the monthly dividends ? (I didn't major in math)Over 3 -5 years will it matter that much at these rates ?
I would also set to reinvest, however I believe with Penfed you may be able to change the dividend reinvestment during the CD term. Hopefully someone can confirm this.
learning_head
Posts: 844
Joined: Sat Apr 10, 2010 6:02 pm

Re: New PenFed CD rates!

Post by learning_head »

Kevin M wrote:Am considering doing early withdrawals of some of my Ally 2.4% 5-year CDs (EWP 60 days of interest), but they mature in about two years, so they are really 2.4% 2-year CDs. On $100K (less penalty) that's only about $800 more in pre-tax interest after two years with the PenFed 3% CD, and would earn about $2K less if I broke the PenFed CD after two years. I guess I'm leaning against this. Inputs?
I have a similar question: I currently have 1.85% CDs with Penfed that mature in 2 years. Here is my logic: my 180-day penalty would be ~1.85%/2 or ~0.92% (pre-tax). Over the next 2 years, 3.04% CD would get the extra rate of (3.04% - 1.85%), or about 1.19% * 2 years, or 2.4% (pre-tax). With ordinary tax rate of ~40%, it's a difference of (2.4-0.92) * 0.6 = ~1.48% * 0.6 = 0.89% after tax.

This assumes I could find 3% CDs in 2 years. If CD rates are higher in 2 years, I probably should hold current CD. If not, I should switch... Or maybe I should just switch to get ~0.9% extra for sure?

Potential downside for switching is that new penalty for 5yr CD is 1-year worth of interest. If rates keep rising and I switch for the 0.9% after-tax 2-year return today, and then 2 years later want to switch to the then-higher cd rate, calculations above would not be correct (since I would need to deduct 3% pretax or ~1.8% after-tax penalty for such scenario).

Anything I am missing?

Kevin, for your case, penalty is ~2.4% * (2 / 12) = ~0.4% and over 2 years you'd get extra 0.6% * 2 = 1.2%, so overall benefit is ~0.8% (pre-tax) which is probably less than my case.
Last edited by learning_head on Mon Dec 02, 2013 3:04 pm, edited 1 time in total.
User avatar
dm200
Posts: 23214
Joined: Mon Feb 26, 2007 1:21 pm
Location: Washington DC area

Re: New PenFed CD rates!

Post by dm200 »

goodenoughinvestor wrote:Penfed allows you to join if you make a one-time donation to one of the two veteran's non-profit organizations they have listed on their website. I think the cost is $20 or $25. So, basically, anyone can join.
This technique, being made available by many credit unions, of having one (or more) of these kinds of 'associations' qualify its member as being eligible for credit union membership (while considered 'proper' by regulators) is being attacked by bankers as improper (under statutes/regulations - as the bankers interpret them) - here is one of them http://creditunionwatch.blogspot.com/20 ... cruit.html

While predicting the future is impossible, my seat of the pants opinion is that there may be some limitations, restrictions or other changes down the road on the way some credit unions (such as PenFed) allow such eligibility for membership. NOTE: I am NOT saying that this is improper - just that it may be changed down the road.
User avatar
Kevin M
Posts: 15789
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: New PenFed CD rates!

Post by Kevin M »

learning_head wrote:
Kevin M wrote:Am considering doing early withdrawals of some of my Ally 2.4% 5-year CDs (EWP 60 days of interest), but they mature in about two years, so they are really 2.4% 2-year CDs. On $100K (less penalty) that's only about $800 more in pre-tax interest after two years with the PenFed 3% CD, and would earn about $2K less if I broke the PenFed CD after two years. I guess I'm leaning against this. Inputs?
I have a similar question: I currently have 1.85% CDs with Penfed that mature in 2 years. Here is my logic: my 180-day penalty would be ~1.85%/2 or ~0.92% (pre-tax). Over the next 2 years, 3.04% CD would get the extra rate of (3.04% - 1.85%), or about 1.19% * 2 years, or 2.4% (pre-tax). With ordinary tax rate of ~40%, it's a difference of (2.4-0.92) * 0.6 = ~1.48% * 0.6 = 0.89% after tax.

This assumes I could find 3% CDs in 2 years. If CD rates are higher in 2 years, I probably should hold current CD. If not, I should switch... Or maybe I should just switch to get ~0.9% extra for sure?

Potential downside for switching is that new penalty for 5yr CD is 1-year worth of interest. If rates keep rising and I switch for the 0.9% after-tax 2-year return today, and then 2 years later want to switch to the then-higher cd rate, calculations above would not be correct (since I would need to deduct 3% pretax or ~1.8% after-tax penalty for such scenario).

Anything I am missing?

Kevin, for your case, penalty is ~2.4% * (2 / 12) = ~0.4% and over 2 years you'd get extra 0.6% * 2 = 1.2%, so overall benefit is ~0.8% (pre-tax) which is probably less than my case.
Yes, as I mentioned, about $800 on $100K in two years--about 0.8% pre-tax.

As to your decision (and my decision on my 2.4% CDs), it depends on the tradeoffs between interest-rate risk, the value to you of cheaper liquidity, and the expected return (yield).

The interest-rate risk manifests as the higher EWP on the new CD along with the longer term to maturity. Seems to me that this is similar to the tradeoff folks make in deciding on the maturity/duration of their bond funds, except of course the downside risk is limited and fixed and there is no upside "risk" if interest rates fall. So your existing CDs have a yield of 1.85%, a term of two years, and a downside risk of 0.92%. The PenFed CD has a yield of 3%, less the EWP on the current CD, so say roughly 2.8%, a term of five years, and a downside risk of 3%. So you're getting roughly 100 basis points more in yield, which is more than 30 basis points per year for the additional three years maturity. I think this is well above guidelines from folks like Larry Swedroe for extending maturity, and it seems to me that you're increasing risk quite a bit less than extending maturity by three years for a bond fund. I think that would support going for the PenFed 3% CD.

Regarding liquidity, that depends on your situation. Since I'm retired, the cheap liquidity of an Ally CD with an EWP of 60 days of interest is quite valuable, and 2.4% for a two-year CD is 100 basis points higher than the new rate-leading PenFed 2-year 1.4% CD. Your 1.85% is good for a two-year CD, but only 45 basis points higher than the PenFed 2-year, and the liquidity of your existing CD is more expensive (than my Ally CDs) at 180 days of interest.

I just broke a Barclays CD that was somewhere in between: 1.85%, more than four years to maturity, and an EWP of 90 days of interest. For me it was an easy call to break this CD to either help replenish the cash I used for the PenFed CD I bought, or to buy another PenFed 3% CD (or some of each).

Kevin
If I make a calculation error, #Cruncher probably will let me know.
DetroitRed
Posts: 184
Joined: Tue May 17, 2011 4:16 pm

Re: New PenFed CD rates!

Post by DetroitRed »

Re: Early withdrawal penalty

Keep in mind that you can deduct the CD early withdrawal penalty on your federal tax return, even if you don't itemize (it's an "above the line" deduction). Last year it was line 30 on the Form 1040.

You should take this into account when calcing how much in interest you'll forfeit by breaking the CD early.
mall0c
Posts: 1145
Joined: Fri May 16, 2008 11:04 pm

Re: New PenFed CD rates!

Post by mall0c »

DetroitRed wrote:Re: Early withdrawal penalty

Keep in mind that you can deduct the CD early withdrawal penalty on your federal tax return, even if you don't itemize (it's an "above the line" deduction). Last year it was line 30 on the Form 1040.

You should take this into account when calcing how much in interest you'll forfeit by breaking the CD early.
I really do learn something new on here every day. Thanks.
FIRE'd. Mid-40s.
john94549
Posts: 4638
Joined: Tue Jul 26, 2011 8:50 pm

Re: New PenFed CD rates!

Post by john94549 »

Yes, the "no EWP" applies to IRA CDs when one is over 59 1/2. It is also limited to "partial" withdrawals, defined as any amount which does not reduce the principal to less than $1000. Ironically enough, this renders the 5-year IRA CD as liquid as a checking account, at least for those of a certain age. Hard to find a checking account paying 3% these days.
Topic Author
Happy2BeFree

Re: New PenFed CD rates!

Post by Happy2BeFree »

john94549 wrote:Yes, the "no EWP" applies to IRA CDs when one is over 59 1/2. It is also limited to "partial" withdrawals, defined as any amount which does not reduce the principal to less than $1000. Ironically enough, this renders the 5-year IRA CD as liquid as a checking account, at least for those of a certain age. Hard to find a checking account paying 3% these days.
Also, I found out that for inherited IRA CDs, RMDs can be taken without penalty, even if you're younger than 59 1/2.
Topic Author
Happy2BeFree

Re: New PenFed CD rates!

Post by Happy2BeFree »

mike_slc wrote:
DetroitRed wrote:Re: Early withdrawal penalty

Keep in mind that you can deduct the CD early withdrawal penalty on your federal tax return, even if you don't itemize (it's an "above the line" deduction). Last year it was line 30 on the Form 1040.

You should take this into account when calcing how much in interest you'll forfeit by breaking the CD early.
I really do learn something new on here every day. Thanks.
Thanks so much for this info, Mike! :happy
User avatar
BrandonBogle
Posts: 4467
Joined: Mon Jan 28, 2013 10:19 pm

Re: New PenFed CD rates!

Post by BrandonBogle »

Happy2BeFree wrote:
john94549 wrote:Yes, the "no EWP" applies to IRA CDs when one is over 59 1/2. It is also limited to "partial" withdrawals, defined as any amount which does not reduce the principal to less than $1000. Ironically enough, this renders the 5-year IRA CD as liquid as a checking account, at least for those of a certain age. Hard to find a checking account paying 3% these days.
Also, I found out that for inherited IRA CDs, RMDs can be taken without penalty, even if you're younger than 59 1/2.
I thought that was a federal rule. Every cd I ever read the terms of (regardless of FI) allowed RMDs penalty-free. Perhaps I was just looking at the "friendlier" institutions though.
Topic Author
Happy2BeFree

Re: New PenFed CD rates!

Post by Happy2BeFree »

BrandonBogle wrote:
Happy2BeFree wrote:
john94549 wrote:Yes, the "no EWP" applies to IRA CDs when one is over 59 1/2. It is also limited to "partial" withdrawals, defined as any amount which does not reduce the principal to less than $1000. Ironically enough, this renders the 5-year IRA CD as liquid as a checking account, at least for those of a certain age. Hard to find a checking account paying 3% these days.
Also, I found out that for inherited IRA CDs, RMDs can be taken without penalty, even if you're younger than 59 1/2.
I thought that was a federal rule. Every cd I ever read the terms of (regardless of FI) allowed RMDs penalty-free. Perhaps I was just looking at the "friendlier" institutions though.
You're probably right—it would make no sense to penalize someone obeying IRS rules! :oops:
kaneohe
Posts: 6786
Joined: Mon Sep 22, 2008 12:38 pm

Re: New PenFed CD rates!

Post by kaneohe »

DetroitRed wrote:Re: Early withdrawal penalty

Keep in mind that you can deduct the CD early withdrawal penalty on your federal tax return, even if you don't itemize (it's an "above the line" deduction). Last year it was line 30 on the Form 1040.

You should take this into account when calcing how much in interest you'll forfeit by breaking the CD early.
.......but don't get too excited about this since your 1099-INT will report the gross amount (before penalty) as the interest you report normally. The deduction for the penalty simply produces the
net amount you received as the amont you are taxed on which seems the fair thing to do.
User avatar
VictoriaF
Posts: 20122
Joined: Tue Feb 27, 2007 6:27 am
Location: Black Swan Lake

Re: New PenFed CD rates!

Post by VictoriaF »

kaneohe wrote:
john94549 wrote:It is my understanding that the "no EWP" on partial withdrawals applies to IRA CDs.
I think you have to be 59.5 for the "no EWP" on partial withdrawals for IRA CDs.
Do you have to be 59.5 when you buy the CD or only when you are making a partial withdrawal?

Victoria
Inventor of the Bogleheads Secret Handshake | Winner of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
User avatar
VictoriaF
Posts: 20122
Joined: Tue Feb 27, 2007 6:27 am
Location: Black Swan Lake

Re: New PenFed CD rates!

Post by VictoriaF »

john94549 wrote:Yes, the "no EWP" applies to IRA CDs when one is over 59 1/2. It is also limited to "partial" withdrawals, defined as any amount which does not reduce the principal to less than $1000. Ironically enough, this renders the 5-year IRA CD as liquid as a checking account, at least for those of a certain age. Hard to find a checking account paying 3% these days.
If IRA withdrawals are so flexible why not to get a 7-year CD?

Victoria
Inventor of the Bogleheads Secret Handshake | Winner of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
User avatar
BrandonBogle
Posts: 4467
Joined: Mon Jan 28, 2013 10:19 pm

Re: New PenFed CD rates!

Post by BrandonBogle »

VictoriaF wrote:
john94549 wrote:Yes, the "no EWP" applies to IRA CDs when one is over 59 1/2. It is also limited to "partial" withdrawals, defined as any amount which does not reduce the principal to less than $1000. Ironically enough, this renders the 5-year IRA CD as liquid as a checking account, at least for those of a certain age. Hard to find a checking account paying 3% these days.
If IRA withdrawals are so flexible why not to get a 7-year CD?

Victoria
Simplicity. You still have to leave $1k minimum. Not a problem really, but it is one more line item to keep track of. Personally, I would get the 7-year in that scenario. I did for my mother just for that very reason.
User avatar
dratkinson
Posts: 6116
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: New PenFed CD rates!

Post by dratkinson »

marcwd wrote:
dratkinson wrote:My data point.

Had the last of my 4% CDs mature this month and rolled them over into TE bonds. Not too worried about NAV fluctuation.

Double checked Vanguard today:

VWIUX (IT TE), 2.40% SEC yield, 3.20% TEY (25% bracket), give back 5% to state = 3.04% after tax.

VWLUX (LT TE), 3.48% Sec yield, 4.64% TEY (25% bracket), give back 5% to state = 4.41% after tax.
This doesn't seem right.

The state tax rate will be assessed on what you actually receive - that is, the SEC yield, not the Tax-Equivalent Yield.

The true "after tax" yields are:

VWIUX 2.4% - 5% (state tax) = 2.28%
VWLUX 3.48% - 5% (state tax) = 3.31%
Believe you are correct. I misspoke the "units". I was working toward "after (state) tax TEY", but said "after tax"... which gives the wrong impression.

In double-checking my work, I see I've induced a second error. What? I should have combined fed and state tax rates in one step to compute effective tax bracket for TEY. By attempting to do TEY in two steps, I was working on two principle amounts (a different one in each step), when I should have worked on only one. The error overstates the TEY.

Corrected here and above.

VWIUX (IT TE), 2.40% SEC yield, 3.00% TEY (25% fed avoided, 5% state paid, 20% combined avoided).

VWLUX (LT TE), 3.48% Sec yield, 4.35% TEY (20% bracket).

So comparing above to 7-yr PenFed CD, and assuming all are taxable, the choices are worst to best: VWIUX (3.00%), CD (3.04%), VWLUX (4.35%).
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
john94549
Posts: 4638
Joined: Tue Jul 26, 2011 8:50 pm

Re: New PenFed CD rates!

Post by john94549 »

Get that pen and note pad folks. The EWP on IRA CDs, if you are over the age of 59.5, you can ignore. This is "partial" and applies only to IRA CDs. That said, many financial institutions allow partials if one is over 70 and eligible for RMDs. That's a different issue.
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: New PenFed CD rates!

Post by steve_14 »

dratkinson wrote:So comparing above to 7-yr PenFed CD, and assuming all are taxable, the choices are worst to best: VWIUX (3.00%), CD (3.04%), VWLUX (4.35%).
Not adjusting for risk, that is. But not adjusting for risk, stocks are even better.
User avatar
Kevin M
Posts: 15789
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: New PenFed CD rates!

Post by Kevin M »

john94549 wrote:Get that pen and note pad folks. The EWP on IRA CDs, if you are over the age of 59.5, you can ignore. This is "partial" and applies only to IRA CDs.
This only applies if you take the money out of PenFed. You cannot, for instance, do a penalty-free, partial early withdrawal and have PenFed put it directly into a new CD; at least that's what a rep told me when I asked. So, unless you actually want to remove money from your IRA before you have to (I do not), this would only be useful to do a once per year IRA rollover; i.e., take the money out, and roll it over to another IRA account within 60 days. I assume you could roll it back into a PenFed IRA CD, since who are they to say where the money came from.

So, I would not say you can just ignore the EWP for an IRA CD if you are 59.5 or older.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
Kevin M
Posts: 15789
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: New PenFed CD rates!

Post by Kevin M »

steve_14 wrote:
dratkinson wrote:So comparing above to 7-yr PenFed CD, and assuming all are taxable, the choices are worst to best: VWIUX (3.00%), CD (3.04%), VWLUX (4.35%).
Not adjusting for risk, that is. But not adjusting for risk, stocks are even better.
Exactly! Comparing apples to oranges. With a direct CD the downside is limited to the EWP, in this case 3%. With the funds (which I own too), the potential downside is much greater, and of course there's some upside potential if rates decline.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
rj49
Posts: 630
Joined: Tue Feb 22, 2011 11:22 pm

Re: New PenFed CD rates!

Post by rj49 »

Bustoff wrote:What do you guys think is better, reinvesting or taking the monthly dividends ? (I didn't major in math)
Over 3 -5 years will it matter that much at these rates ?
I have two Penfed CDs from the 6.25% glory days. One is reinvested, one I take monthly dividends to use to pay my penfed visa card with instant transfers. So I'd say diversify with both, especially since the compounding effect isn't going to be huge. That way you'll get current satisfaction from the income and future satisfaction of a payoff in 5-7 years.
awarelife
Posts: 43
Joined: Mon Mar 22, 2010 8:37 pm

Re: New PenFed CD rates!

Post by awarelife »

How can PenFed pay rates that are so much higher than everyone else? Does this give anyone concern as to the risk associated with using them (i'd rather not go through the process of getting $ back if a bank went under...)
TheGreyingDuke
Posts: 2219
Joined: Fri Sep 02, 2011 10:34 am

Re: New PenFed CD rates!

Post by TheGreyingDuke »

In my experience, there is no "process" to go through when the insured bank goes belly up. Had it happen x2, the bank closed on Friday, on Monday it opened up again in another name and the check was in the mail. You do risk needing to reinvest at a lower rate if rates have dropped since your purchase.

EDIT: BUT if you buy a brokered CD at a premium and the bank goes bust, you are out the premium, that is not insured.
"Every time I see an adult on a bicycle, I no longer despair for the future of the human race." H.G. Wells
jdilla1107
Posts: 849
Joined: Sun Jun 24, 2012 8:31 pm

Re: New PenFed CD rates!

Post by jdilla1107 »

awarelife wrote:How can PenFed pay rates that are so much higher than everyone else? Does this give anyone concern as to the risk associated with using them (i'd rather not go through the process of getting $ back if a bank went under...)
They are also higher than what they themselves are lending at. A 5 year car loan is 1.99%. This seems nonsensical to me.
User avatar
JamesSFO
Posts: 3404
Joined: Thu Apr 26, 2012 10:16 pm

Re: New PenFed CD rates!

Post by JamesSFO »

jdilla1107 wrote:
awarelife wrote:How can PenFed pay rates that are so much higher than everyone else? Does this give anyone concern as to the risk associated with using them (i'd rather not go through the process of getting $ back if a bank went under...)
They are also higher than what they themselves are lending at. A 5 year car loan is 1.99%. This seems nonsensical to me.
Don't assume everyone is getting the 1.99% rate for the car loan, that's for the highest credit member applicants.
learning_head
Posts: 844
Joined: Sat Apr 10, 2010 6:02 pm

Re: New PenFed CD rates!

Post by learning_head »

Kevin M wrote: <snip>

As to your decision (and my decision on my 2.4% CDs), it depends on the tradeoffs between interest-rate risk, the value to you of cheaper liquidity, and the expected return (yield).

The interest-rate risk manifests as the higher EWP on the new CD along with the longer term to maturity. Seems to me that this is similar to the tradeoff folks make in deciding on the maturity/duration of their bond funds, except of course the downside risk is limited and fixed and there is no upside "risk" if interest rates fall. So your existing CDs have a yield of 1.85%, a term of two years, and a downside risk of 0.92%. The PenFed CD has a yield of 3%, less the EWP on the current CD, so say roughly 2.8%, a term of five years, and a downside risk of 3%. So you're getting roughly 100 basis points more in yield, which is more than 30 basis points per year for the additional three years maturity. I think this is well above guidelines from folks like Larry Swedroe for extending maturity, and it seems to me that you're increasing risk quite a bit less than extending maturity by three years for a bond fund. I think that would support going for the PenFed 3% CD.

Kevin
Thanks Kevin - very interesting line of thinking. I am not sure how you got 30 basis points there (should not it just be 100 basis points per year since 100 basis points was already calculated as yearly yield difference?).

BTW, I was wondering what would the rates need to be in 2 years to make it break even. If my math is right, rates in 2 years would need to be around 3.52% to reach the break even point between the two approaches, i.e.:

(1+1.85%)^2*(1+3.52%)^3 =~ (1-0.925%)*(1+3%)^5

Noone knows of course if 3.52% rate is likely to be there in 2 years, esp. on 3-year CD; so maybe it's not that useful, not sure.
User avatar
G-Money
Posts: 2867
Joined: Sun Dec 09, 2007 6:12 am

Re: New PenFed CD rates!

Post by G-Money »

learning_head wrote:
Kevin M wrote: <snip>

As to your decision (and my decision on my 2.4% CDs), it depends on the tradeoffs between interest-rate risk, the value to you of cheaper liquidity, and the expected return (yield).

The interest-rate risk manifests as the higher EWP on the new CD along with the longer term to maturity. Seems to me that this is similar to the tradeoff folks make in deciding on the maturity/duration of their bond funds, except of course the downside risk is limited and fixed and there is no upside "risk" if interest rates fall. So your existing CDs have a yield of 1.85%, a term of two years, and a downside risk of 0.92%. The PenFed CD has a yield of 3%, less the EWP on the current CD, so say roughly 2.8%, a term of five years, and a downside risk of 3%. So you're getting roughly 100 basis points more in yield, which is more than 30 basis points per year for the additional three years maturity. I think this is well above guidelines from folks like Larry Swedroe for extending maturity, and it seems to me that you're increasing risk quite a bit less than extending maturity by three years for a bond fund. I think that would support going for the PenFed 3% CD.

Kevin
Thanks Kevin - very interesting line of thinking. I am not sure how you got 30 basis points there (should not it just be 100 basis points per year since 100 basis points was already calculated as yearly yield difference?).
Not Kevin, but Larry Swedroe's rule of thumb (which I believe Kevin was referencing) is that for fixed income, investors should demand an extra 15-20 basis points for each year of added maturity. The reason is that you are adding maturity risk, and rational investors should insist on being compensated for it.

So if you have a 2 year bond/CD yielding 1.85%, the recommendation might be that you require getting a yield of at least 2.05% to extend maturity to 3 years, 2.25% to extend to 4 years, and 2.45% to extend to 5 years. As Kevin showed, redeeming your existing 1.85% 2-year CD early and buying a 5 year would give you almost an extra 100 basis points in yield to tack on 3 years. 100 basis points / 3 years = 33.3 basis points for each added year of maturity.

Now, because CDs can often be redeemed (though not always, and perhaps not precisely when you want to do it), you could argue that the maturity risk of CDs is less than that for bonds. In that case, one might not require a full 15-20 basis points in additional yield to extend maturities for CDs. But, since CDs are less liquid and thus longer maturities can potentially tie up your money longer than short ones (assuming you are NOT able to redeem whenever you want), it likely makes sense to insist on earning SOME higher yield to extend maturities on CDs.

TL;DR: Extending to 5 years is probably a good deal for you, assuming you didn't have plans on using that money in the interim.
Don't assume I know what I'm talking about.
User avatar
G-Money
Posts: 2867
Joined: Sun Dec 09, 2007 6:12 am

Re: New PenFed CD rates!

Post by G-Money »

learning_head wrote:BTW, I was wondering what would the rates need to be in 2 years to make it break even. If my math is right, rates in 2 years would need to be around 3.52% to reach the break even point between the two approaches, i.e.:

(1+1.85%)^2*(1+3.52%)^3 =~ (1-0.925%)*(1+3%)^5

Noone knows of course if 3.52% rate is likely to be there in 2 years, esp. on 3-year CD; so maybe it's not that useful, not sure.
Yes, I think you need about 3.5% on a 3-year CD to break even if you stick with your existing CD. It's useful to calculate that in the sense that the best 3 year rates are around 2% right now, so that would represent a 150 basis point jump over the next 2 years. You would need to decide for yourself how likely you think that kind of a jump would be.

I take (what I think is) a neutral view when it comes to interest rates. I always assume the odds of rate increases are the same as odds of rate decreases. In other words, I subscribe to the idea that the best predictor of future interest rates is current interest rates. So my assumption (and everyone knows what happens when you assume), is that in two years, the best 3 year CD will be yielding 2%.
Don't assume I know what I'm talking about.
mall0c
Posts: 1145
Joined: Fri May 16, 2008 11:04 pm

Re: New PenFed CD rates!

Post by mall0c »

Just to confirm - there is no reason to buy several smaller 5 year CDs instead of just one bigger one? You can do early withdrawal on just part of a CD at PenFed? Does anyone have actual experience with successfully doing this?
FIRE'd. Mid-40s.
Topic Author
Happy2BeFree

Re: New PenFed CD rates!

Post by Happy2BeFree »

mike_slc wrote:Just to confirm - there is no reason to buy several smaller 5 year CDs instead of just one bigger one? You can do early withdrawal on just part of a CD at PenFed? Does anyone have actual experience with successfully doing this?
When I spoke with a CSR at PenFed, she said they don't allow partial withdrawals, that I'd have to break the entire CD. Now, that was one rep I talked to, so if I were serious about it, I'd call again and then get it in writing. But I broke my CDs into smaller chunks anyway, to be safe.
mall0c
Posts: 1145
Joined: Fri May 16, 2008 11:04 pm

Re: New PenFed CD rates!

Post by mall0c »

Thanks. Smaller chunks seems safer.
FIRE'd. Mid-40s.
User avatar
VictoriaF
Posts: 20122
Joined: Tue Feb 27, 2007 6:27 am
Location: Black Swan Lake

Re: New PenFed CD rates!

Post by VictoriaF »

mike_slc wrote:Thanks. Smaller chunks seems safer.
You can get the chunks of 1k, 2k, 4k, 8k, 16k, 32k, 64k, and 128k, so no matter what amount you need you could get it.

Victoria
Inventor of the Bogleheads Secret Handshake | Winner of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
User avatar
G-Money
Posts: 2867
Joined: Sun Dec 09, 2007 6:12 am

Re: New PenFed CD rates!

Post by G-Money »

mike_slc wrote:Just to confirm - there is no reason to buy several smaller 5 year CDs instead of just one bigger one? You can do early withdrawal on just part of a CD at PenFed? Does anyone have actual experience with successfully doing this?
From PenFed's IRA Disclosure Statement:
XIII. PENTAGON FEDERAL ACCOUNT DISCLOSURES
. . . .
4. IRA certificates are subject to the following terms and conditions:
. . . .
f. Withdrawals:
. . . .
(2) Partial withdrawals may be made, subject to early withdrawal penalties as described in paragraph (g) below, providing the requested withdrawal amount does not reduce the original issue below a minimum of $1,000 for 1-, 2-, 3-, 4-, 5-, or 7-year IRA Certificates, in which case the funds will be transferred to the IRA Share account.
(3) The credit union reserves the right to require a written notice of up to 60 days of intention to withdraw from your IRA certificate(s).
Direct link to PDF: https://www.penfed.org/Opening-an-IRA-Account/

Granted, this is for IRA certificates, which may have different rules from the taxable, money market certificates. Also, it is unclear (to me, at least) if partial withdrawal includes redeeming just part of a CD to invest in another certificate at PenFed, or if you literally need to withdraw the money from your IRA at PenFed and either take a distribution or roll it over to another IRA.

And, of course, PenFed has the provision that it "reserves the right to make changes in the terms and conditions of its IRA program without prior notice," for whatever that is worth.
Don't assume I know what I'm talking about.
User avatar
G-Money
Posts: 2867
Joined: Sun Dec 09, 2007 6:12 am

Re: New PenFed CD rates!

Post by G-Money »

VictoriaF wrote:
mike_slc wrote:Thanks. Smaller chunks seems safer.
You can get the chunks of 1k, 2k, 4k, 8k, 16k, 32k, 64k, and 128k, so no matter what amount you need you could get it.

Victoria
That puts you $5k over the NCUA limits, even before interest. :P
Don't assume I know what I'm talking about.
learning_head
Posts: 844
Joined: Sat Apr 10, 2010 6:02 pm

Re: New PenFed CD rates!

Post by learning_head »

I just got some info from CSR that 3.04% APY rates will be available at least through the END of January.
Last edited by learning_head on Tue Dec 03, 2013 11:41 am, edited 2 times in total.
fsrph
Posts: 1610
Joined: Sun Jul 26, 2009 7:54 pm
Location: Pa.

Re: New PenFed CD rates!

Post by fsrph »

learning_head wrote:This assumes I could find 3% CDs in 2 years. If CD rates are higher in 2 years, I probably should hold current CD. If not, I should switch... Or maybe I should just switch to get ~0.9% extra for sure?
I was considering all this too. I decided to convert three cd's to the 3% rate for 5 years. Granted rates could be higher in 2 or 3 years but I have a few other CD's coming due then.

Francis
"Success is getting what you want. Happiness is wanting what you get." | Dale Carnegie
fsrph
Posts: 1610
Joined: Sun Jul 26, 2009 7:54 pm
Location: Pa.

Re: New PenFed CD rates!

Post by fsrph »

learning_head wrote:I just got some info from CSR that 3.04% APY rates will be available at least through the END of January.
I just got of the phone with a PenFed rep and they said the same thing. Rates good thru the end of Jan 2014.

Francis
"Success is getting what you want. Happiness is wanting what you get." | Dale Carnegie
User avatar
G-Money
Posts: 2867
Joined: Sun Dec 09, 2007 6:12 am

Re: New PenFed CD rates!

Post by G-Money »

learning_head wrote:I just got some info from CSR that 3.04% APY rates will be available at least through the END of January.
That's comforting. I mailed my application to open an IRA at PenFed yesterday, but was concerned that the transfer of bond money from Vanguard to PenFed CDs might not be completed by 12/31/13.
Don't assume I know what I'm talking about.
Post Reply