CD Ladder?

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diyinvestor
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CD Ladder?

Post by diyinvestor »

Is now a good time to establish a CD ladder? I've got $100,000 that I won't need for at least 10 years, but I want to keep it as risk-free as possible. However, I've never done anything like this before, and I'm not quite sure how to structure it. The highest 5-year rate I can find is 2.30%. Would it be wise to put $20,000 each in one-year staggers, up to 5 years, in FDIC-insured banks? Is there any downside to this strategy? It seems like rates are going up. Thanks.
aristotelian
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Re: CD Ladder?

Post by aristotelian »

10 years is such a long time horizon. I would recommend an intermediate bond fund rather than a series of 5 year CD's. I would be shocked if there is any 10 year period in history where Total Bond Market did not return more than 2.30%. Muni bonds would also be a possibility if you are in a high tax bracket. I would even consider a portion in stocks.

Also keep in mind that you have one big portfolio. It is possible that other parts of your portfolio may have doubled in 10 years. In that case, you may want to cash in stock gains rather than tap into your bond allocation. So I would just add to your portfolio but make your allocation a bit more conservative knowing that you may want to cash in your $100K in 10 years.
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goingup
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Re: CD Ladder?

Post by goingup »

Yes, a 5 year ladder is a good solution if you want risk-free. It sounds as though you know how to structure it. You'd buy 1 each of a 5, 4, 3, 2,1 year CD. At the end of each year you roll the maturing CD into a 5 year CD. In this way you get exposure to the changing rates.

I started a small ladder in 2008 and have maintained it since then. I prefer the liquidity of an intermediate muni bond fund where I can add and withdraw money as needed. If you're unsure about which way to go you might try $50K in CD ladder, and $50K in bond fund. Of course the bond fund will fluctuate.
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in_reality
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Re: CD Ladder?

Post by in_reality »

diyinvestor wrote:Is now a good time to establish a CD ladder? I've got $100,000 that I won't need for at least 10 years, but I want to keep it as risk-free as possible. However, I've never done anything like this before, and I'm not quite sure how to structure it. The highest 5-year rate I can find is 2.30%. Would it be wise to put $20,000 each in one-year staggers, up to 5 years, in FDIC-insured banks? Is there any downside to this strategy? It seems like rates are going up. Thanks.
I don't understand the point of a ladder for you.

I would find a 5 year CD with a decent early withdrawal penalty (in case rates jump) and put it all in.

I don't see how the lower rates of a one, two, three and four year CD are going to help you keep above inflation. You said you don't need the liquidity, so why not earn the term premium?

Then again, if it's not for a lump sum purchase forget that and ladder. What's it earmarked for?
Last edited by in_reality on Tue Jun 20, 2017 9:25 am, edited 1 time in total.
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dm200
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Re: CD Ladder?

Post by dm200 »

diyinvestor wrote:Is now a good time to establish a CD ladder? I've got $100,000 that I won't need for at least 10 years, but I want to keep it as risk-free as possible. However, I've never done anything like this before, and I'm not quite sure how to structure it. The highest 5-year rate I can find is 2.30%. Would it be wise to put $20,000 each in one-year staggers, up to 5 years, in FDIC-insured banks? Is there any downside to this strategy? It seems like rates are going up. Thanks.
Yes - a 5 year CD ladder can make a lot of sense. You do not know the future and longer term rates can do down even when short term go up.
Yes, a 5 year ladder is a good solution if you want risk-free. It sounds as though you know how to structure it. You'd buy 1 each of a 5, 4, 3, 2,1 year CD. At the end of each year you roll the maturing CD into a 5 year CD. In this way you get exposure to the changing rates.
This is a good approach. When the one year matures, purchase a 5 year. Do NOT limit this to FDIC insured banks, but include NCUA Insured credit unions as well.
txranger
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Re: CD Ladder?

Post by txranger »

I m new to cds but don't see a point to lock anything longer than a year in this rate env. Can get 1.5% w no ewp at ally. If u have more than 5 yr horizon are u supposed to be in the market?
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Leif
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Re: CD Ladder?

Post by Leif »

I have a CD ladder, but a few of the rungs (years) are missing. I will be using the funds for the period starting with retirement (coming up soon) until 70 (SS kicks in).

As my CDs become due I will replenish my cash and use any remaining funds for a new 5 yr CD.

I don't mind that a few rungs are missing since I purchased multiple CDs with an easy early withdrawal penalty. If I need the money I can break a CD. Even with the early withdrawal penalty I will probably be ahead of splitting the CD into 1 year, 2 year, etc. The key is to create multiple 5+ year CDs since normally you are not allowed to make a partial withdrawal from a CD.
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dm200
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Re: CD Ladder?

Post by dm200 »

txranger wrote:I m new to cds but don't see a point to lock anything longer than a year in this rate env. Can get 1.5% w no ewp at ally. If u have more than 5 yr horizon are u supposed to be in the market?
You are predicting rates for terms over one year. A five year ladder reduces risk.
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Kevin M
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Re: CD Ladder?

Post by Kevin M »

Direct CDs (purchased directly from banks and credit unions) are excellent deals for retail investors who can take advantage of the federal deposit insurance (FDIC for banks, NCUA for credit unions). You can do better than 2.30%: 5 Year CD Rates - Compare rates on 5 year certificates of deposit.. I see one at 2.50%, and several with rates higher than 2.30%.

Compare these rates to the 5-year Treasury yield of 1.80%. You get a yield premium of 50-70 basis points (0.5-0.7 percentage points) with the CD, and your interest-rate risk actually is lower due to the early withdrawal option.

Ideally you want a CD with a low early withdrawal penalty (EWP), but without sacrificing too much yield. A competitive EWP on a 5-year CD is six months of interest, but one year of interest is more common these days. A low EWP pretty much eliminates the need to do a CD ladder, but you should check out the after-penalty effective yield at various terms to see for yourself. Either way, the early withdrawal option limits your downside risk due to rising rates, whereas you don't get this with bonds (or brokered CDs). This is a big benefit of direct CDs with good early withdrawal terms.

At the short end, consider the 11-month no Penalty CD from Ally Bank, for which the rate was just raised from 1.35% to 1.50% for $25K or more; it's 1.25% for $5K-$25K. The 1.5% rate is competitive with to-tier 1-year CDs, but without the EWP. I just did a penalty-free early withdrawal from one I opened 11 days ago to reinvest at the higher rate. If the rate increases within 10 days of opening and funding the CD, you'll get the higher rate automatically. The CDs are easy to open and close online.

Brokered CDs are attractive due to the yield premium over Treasuries, but they don't have the early withdrawal option that direct CDs have, so they aren't as good a deal. Also, if you redeem a brokered CD before maturity, you'll take a haircut due to the high bid/ask spread relative to Treasuries. However, some prefer brokered CDs due to ease of management or other issues that restrict them from buying direct CDs.

Kevin
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Tyler Aspect
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Re: CD Ladder?

Post by Tyler Aspect »

I gave CD ladder construction some thought this year. I believe it is not a good idea to finish a CD ladder all in a single year, because you will get poor coupon rate on the year 1, and year 2 CD. If you are constructing the usual 5 year CD ladder, I would recommend to only purchase the year 5 and year 3 CD in the first year, with the rest stashed in a short term corporate index fund. Then in year 2 you can purchase again year 5 and year 3 CD using proceeds from short term corporate index fund. Finally in year 3 you liquidate the short term corporate index fund to purchase a year 5 CD, which completes the CD ladder.

Usually I do not locate the CD in my taxable account, but reserve space in my traditional IRA account for them.
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J295
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Re: CD Ladder?

Post by J295 »

At Fido you can just click 5 year CD ladder and it pulls up the ladder for you and you buy it ..... in your case $20k per CD. Simple and safe.
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patrick013
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Re: CD Ladder?

Post by patrick013 »

If you buy a 5 year CD every year as part of your AA and you
retire, in the case of a market downturn in stocks, you will
have $20,000 tax free every year ( the $100,000 / 5 ) to
weather your portfolio thru the downturn. May not provide
for all expenses but treasury heavy bond funds (ticker BIV)
are also supposed to be part of a retirement AA for that as
high quality bonds especially treasuries hold value when
stocks do not for withdrawal purposes.

$100,000 is a pretty decent emergency or reserve fund.
age in bonds, buy-and-hold, 10 year business cycle
Rus In Urbe
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Re: CD Ladder?

Post by Rus In Urbe »

Tyler Aspect wrote: Tue Jun 20, 2017 1:39 pm I gave CD ladder construction some thought this year. I believe it is not a good idea to finish a CD ladder all in a single year, because you will get poor coupon rate on the year 1, and year 2 CD. If you are constructing the usual 5 year CD ladder, I would recommend to only purchase the year 5 and year 3 CD in the first year, with the rest stashed in a short term corporate index fund. Then in year 2 you can purchase again year 5 and year 3 CD using proceeds from short term corporate index fund. Finally in year 3 you liquidate the short term corporate index fund to purchase a year 5 CD, which completes the CD ladder.

Usually I do not locate the CD in my taxable account, but reserve space in my traditional IRA account for them.
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J295
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Re: CD Ladder?

Post by J295 »

One percent difference on a $20,000 principal CD is $200. I’m not one to sneeze at $200 (or $1000 in the case of $100,000 principal) but I put in a five-year CD ladder earlier this year. To me, it was more important to get the CDs in place rather than wring my hands over interest rates. The CDs and other non-equity portions of our portfolio are more of a safety net than portfolio fuel, so that impacts my perspective and decision. Our non-equity portion includes total bond fund, CDs, I bonds, floating rate fund, tips, amx savings. Now each year we will just roll the maturing CD into a new five-year CD
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