CD Ladder

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SteveNet
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CD Ladder

Post by SteveNet » Sun Dec 08, 2013 10:56 am

My question is one of today's low interest rates and how that would affect a cd ladder over a 10 yr time horizon.
Due to low interest rates (and the potential of them rising during the 10 yr period rather than lowering)...
Would it be better to create the ladder with a 3 yr max horizon instead of a 5 yr?

Money would be needed each of the 10 years, so from what I have read a 'ladder' should
be created for 1,2,3,4,5 years and each time a cd comes to maturity the money left over be rolled into a 5yr cd to complete the 10 yr period.
At the end of the 10 yr cycle the monies are depleted.

But given the better possibility of cd rates rising I was wondering if instead of being locked into a 5y time frame if it would be
more advisable to ladder on a 3 yr basis?
This way the cd's are rolled over more during the 10 yr period.

Thoughts?

Thanks
SteveNet
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John3754
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Re: CD Ladder

Post by John3754 » Sun Dec 08, 2013 11:19 am

In order to answer this question we'd need to be able to see the future. Nobody can tell you with certainty when (or even if) rates will rise, and if they do rise nobody can tell you how much they'll rise or how fast.

dbr
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Re: CD Ladder

Post by dbr » Sun Dec 08, 2013 11:24 am

The standard option anticipated by CD enthusiasts is to withdraw the CD early with a penalty and buy a new CD.

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SteveNet
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Re: CD Ladder

Post by SteveNet » Sun Dec 08, 2013 11:31 am

John3754 wrote:In order to answer this question we'd need to be able to see the future. Nobody can tell you with certainty when (or even if) rates will rise, and if they do rise nobody can tell you how much they'll rise or how fast.
While the crystal ball is foggy, the suggested 5yr cycle is based on a crystal ball theory.
If it weren't then why not ladder for all 10 yrs independently?
It was designed so as not to get locked in for 10 yrs. In case rates rise.
So My question was one of given current possible fed tightening combined with already low cd rate returns if it were to be more prudent to reduce the 5 yr cycle?
Given today's conditions.
It would seems so to me, however I may be overlooking something that others are aware of as to why a 5yr cycle should still be maintained.
Being frugal is hard to learn, but once learned is hard to stop.

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SteveNet
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Re: CD Ladder

Post by SteveNet » Sun Dec 08, 2013 11:38 am

dbr wrote:The standard option anticipated by CD enthusiasts is to withdraw the CD early with a penalty and buy a new CD.
Ah... ok I had not thought of that.
If the rates rise enough to make the early withdrawal penalty worthwhile then lock in the 4 and 5 yr rates now in case they don't rise.


Thanks!
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Sriracha
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Re: CD Ladder

Post by Sriracha » Sun Dec 08, 2013 12:08 pm

Check the wiki pages on laddering http://www.bogleheads.org/wiki/Ladderin ... CD_ladders and comparing CDs http://www.bogleheads.org/wiki/Comparing_CDs for some good nuts and bolts of the process as well as a handy dandy spreadsheet to help you figure out whether breaking an existing CD is worthwhile in light on higher rates on new CDs.
Don't reach for yield.

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SteveNet
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Re: CD Ladder

Post by SteveNet » Sun Dec 08, 2013 12:31 pm

Sriracha wrote:Check the wiki pages on laddering http://www.bogleheads.org/wiki/Ladderin ... CD_ladders and comparing CDs http://www.bogleheads.org/wiki/Comparing_CDs for some good nuts and bolts of the process as well as a handy dandy spreadsheet to help you figure out whether breaking an existing CD is worthwhile in light on higher rates on new CDs.
Oh Great!
This is very helpful, and addresses my concerns about potential rate increases after being locked in!

Thanks :sharebeer
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sport
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Re: CD Ladder

Post by sport » Sun Dec 08, 2013 12:33 pm

The answer also depends on the difference in interest rates for the 3 and 5 year CDs. If the interest rate difference in small, it would be better to stay shorter. However, if the difference is large enough, then going longer makes more sense. The real question is how much difference justifies the longer term? That is a judgment call. Of course, all this presumes that rates will rise rather than fall within the next 5 years.
Jeff

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SteveNet
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Re: CD Ladder

Post by SteveNet » Sun Dec 08, 2013 6:13 pm

jsl11 wrote:The answer also depends on the difference in interest rates for the 3 and 5 year CDs. If the interest rate difference in small, it would be better to stay shorter. However, if the difference is large enough, then going longer makes more sense. The real question is how much difference justifies the longer term? That is a judgment call. Of course, all this presumes that rates will rise rather than fall within the next 5 years.
Jeff
Good point!
No sense in locking in a rate for a longer time for just a very small difference in rate.


Thanks for all the replies, it's something I never have done and I wanted to avoid inexperienced mistakes... :sharebeer
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john94549
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Re: CD Ladder

Post by john94549 » Mon Dec 09, 2013 11:01 pm

By and large, 5-year CD ladders work the best. You can find wonderful deals on the margins (a super 7-yr deal here, a wowser 10-year deal there), but 5-yr CDs tend to roll the easiest and the best. I tend to keep the ladder intact, adding a tad here and there unless I can find a really good outlier. For example, my best outlier (outside my ladder), is my 10-year KeyDirect at 5.75%. My Mom's best outlier was USAA's 7-yr at 3.8%. She just died, but I was co-owner under the trust. The CD is good until 2017, so that's not too shabby.

Odd as it may seem, the PenFed 3% 5-yr is, these days, an outlier.

Call_Me_Op
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Re: CD Ladder

Post by Call_Me_Op » Tue Dec 10, 2013 7:49 am

SteveNet wrote: But given the better possibility of cd rates rising.
Purely speculative statement.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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SteveNet
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Re: CD Ladder

Post by SteveNet » Sat Dec 14, 2013 9:28 am

Call_Me_Op wrote:
SteveNet wrote: But given the better possibility of cd rates rising.
Purely speculative statement.
Thanks for the contribution.
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OAG
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Re: CD Ladder

Post by OAG » Sat Dec 14, 2013 10:09 am

IMO it really depends on your yearly needs for the ladder to produce. Excel (or other SS) and FV formulas can help alleviate the guessing on rates. Personally I always go and buy long term - currently a 7 Year Ladder but have been 10 recently. Cash in early has never been in the plan (yet).
OAG=Old Army Guy. Retired CW4 USA (US Army) in 1979.

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SteveNet
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Re: CD Ladder

Post by SteveNet » Sat Dec 14, 2013 2:54 pm

OAG wrote:IMO it really depends on your yearly needs for the ladder to produce. Excel (or other SS) and FV formulas can help alleviate the guessing on rates. Personally I always go and buy long term - currently a 7 Year Ladder but have been 10 recently. Cash in early has never been in the plan (yet).
Basically I'm looking at a 10 year period in which the cd ladder would be used up starting now aprox.
So I'm thinking the 5 yr ladder would work well and be less complicated. The last 5 yrs would all be 5yr cd's expiring each year.
I'm not a fanatic about a few basis points in rate one way or the other, so cashing in early I don't foresee unless rates really jump up suddenly.
Being frugal is hard to learn, but once learned is hard to stop.

john94549
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Re: CD Ladder

Post by john94549 » Sat Dec 14, 2013 3:08 pm

Not sure I'd assume the CD bucket would be "used up".

When I started my CD ladder, back in the Paleolithic era, I always assumed I'd cash in those CDs in retirement. Fast forward to retirement. Suddenly it dawns on me: why not just roll the ladder? Which is what I do.

We have an IPS. It calls for "X%" in bonds, "Y%" in equities. We count our CD ladder as "bonds".

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SteveNet
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Re: CD Ladder

Post by SteveNet » Sat Dec 14, 2013 6:14 pm

john94549 wrote:Not sure I'd assume the CD bucket would be "used up".

When I started my CD ladder, back in the Paleolithic era, I always assumed I'd cash in those CDs in retirement. Fast forward to retirement. Suddenly it dawns on me: why not just roll the ladder? Which is what I do.

We have an IPS. It calls for "X%" in bonds, "Y%" in equities. We count our CD ladder as "bonds".
This is the monies I have specifically dedicated to delay my SS till age 70. (60 now)
I have other accounts which are invested, but this I am placing into CD's just for this specific reason.
If at the end there is some leftover so to speak then so much the better, but I am planning (assuming) it will be used up by age 70.
Being frugal is hard to learn, but once learned is hard to stop.

john94549
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Re: CD Ladder

Post by john94549 » Sat Dec 14, 2013 7:10 pm

SteveNet, I also planned on using my CD ladder to fund the first segment of retirement (in my case, 15 years). It suddenly dawned on me that such a program would leave my AA seriously out-of-whack. Hard to have "age-in-bonds" when selling your fixed-income stuff and not selling equities.

That said, it felt very warm and fuzzy when I was 60 to know I had the "cash in the bank" for age 60 - 75.* Now 66, and it's still warm and fuzzy. The timeline just keeps moving each year (now 66 - 81).

*Remember six years ago? The bull market was on a roll. House values just kept going up, up, up. CDs were at 6%. CDs these days are a bit lower, but we've seen this movie before.

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