CD Break and Reinvest Options Perspectives

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bpg1234
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CD Break and Reinvest Options Perspectives

Post by bpg1234 » Sat Sep 08, 2018 1:58 pm

Bogleheads,

I have an existing 5 year CD with 36 months remaining yielding 2.28% APY which I'm considering breaking.

Following are the options I presently have on the table:
1.) Existing bank which holds the 5 year CD will reduce my early withdrawal penalty from 6 to 3 months if I keep the funds with them and reinvest the funds in a new 3 year CD @ 3.04% APY.

2.) I can pay the full 6 month penalty and put remaining proceeds in a new 15-month CD @ 3.25% APY and then upon maturity reinvest the proceeds into say a new 2 year CD at the prevailing rates at that time. A new two year CD now is presently yielding around 2.80%.

In scenario 1, I'm guaranteed to increase my final value at the end of 36 months over my existing 5 year CD so a no brainer to at least proceed with this option.

In scenario 2, at the 15 month mark I would need a new 2 year CD yielding roughly 3.17% APY to equal the savings that option 1 provides. A 2 year CD yielding higher than 3.17% APY 15 months from now and then Option 2 wins but there is some interest rate risk.

So a bird in the hand versus... In light of the Fed's plan to continue to raise rates, I'm leaning towards taking the risk with option 2 with hopes of a higher 2 year CD yield of at least 3.17% or greater in 15 months.

Perspectives? Thanks in advance.

bpg1234
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Re: CD Break and Reinvest Options Perspectives

Post by bpg1234 » Sun Sep 09, 2018 9:32 am

bump. I know CDs are boring but thought I would get at least a few perspectives. :o LOL

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Sandtrap
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Re: CD Break and Reinvest Options Perspectives

Post by Sandtrap » Sun Sep 09, 2018 9:35 am

#1 for simplicity . . .
or #2 . . .
The difference is very small but both are good moves from the existing.
j

mix
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Re: CD Break and Reinvest Options Perspectives

Post by mix » Sun Sep 09, 2018 9:49 am

I would not assume that interest rates will continue to rise in the future. What does this calculator tell you?

When to Break a CD Calculator
https://www.depositaccounts.com/tools/b ... lator.aspx

bpg1234
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Re: CD Break and Reinvest Options Perspectives

Post by bpg1234 » Sun Sep 09, 2018 10:01 am

Sandtrap wrote:
Sun Sep 09, 2018 9:35 am
#1 for simplicity . . .
or #2 . . .
The difference is very small but both are good moves from the existing.
j
Thanks Sandtrap for your thoughts. Yes I do like option #1 for simplicity but rates on 2 year CDs may very well go up a decent amount after the proposed additional Fed rate hikes and then I may very well be regretting locked in for the full 3 year period of option 2.

bpg1234
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Re: CD Break and Reinvest Options Perspectives

Post by bpg1234 » Sun Sep 09, 2018 10:04 am

mix wrote:
Sun Sep 09, 2018 9:49 am
I would not assume that interest rates will continue to rise in the future. What does this calculator tell you?

When to Break a CD Calculator
https://www.depositaccounts.com/tools/b ... lator.aspx
Thanks mix! That's the calculator I use which clearly tells me to break now. Your point about not assuming interest rates will rise in the future is the rub in the ointment. I take option 1 and I'm guaranteed to be a good amount ahead. With option 2 I'm dependent on where rates on 2 year or so CDs at the 15 month mark are compared to being better or worse than option 1. Hence the bird in the hand...

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Re: CD Break and Reinvest Options Perspectives

Post by MikeG62 » Sun Sep 09, 2018 10:49 am

bpg1234 wrote:
Sat Sep 08, 2018 1:58 pm
Bogleheads,

I have an existing 5 year CD with 36 months remaining yielding 2.28% APY which I'm considering breaking.

Following are the options I presently have on the table:
1.) Existing bank which holds the 5 year CD will reduce my early withdrawal penalty from 6 to 3 months if I keep the funds with them and reinvest the funds in a new 3 year CD @ 3.04% APY.
Out of curiosity, what bank are you dealing with and is the 3.04% 3-year CD their published rate for a 3-year CD or a deal to keep you from moving the funds elsewhere?

I am in a similar position with regard to a CD I have and so far have chosen to leave it as is.
Real Knowledge Comes Only From Experience

bpg1234
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Re: CD Break and Reinvest Options Perspectives

Post by bpg1234 » Sun Sep 09, 2018 12:58 pm

MikeG62 wrote:
Sun Sep 09, 2018 10:49 am
bpg1234 wrote:
Sat Sep 08, 2018 1:58 pm
Bogleheads,

I have an existing 5 year CD with 36 months remaining yielding 2.28% APY which I'm considering breaking.

Following are the options I presently have on the table:
1.) Existing bank which holds the 5 year CD will reduce my early withdrawal penalty from 6 to 3 months if I keep the funds with them and reinvest the funds in a new 3 year CD @ 3.04% APY.
Out of curiosity, what bank are you dealing with and is the 3.04% 3-year CD their published rate for a 3-year CD or a deal to keep you from moving the funds elsewhere?

I am in a similar position with regard to a CD I have and so far have chosen to leave it as is.
Actually a better deal is the US Alliance FCU 3 year 3.25% CD than my CU which is only giving 3.04%. The reduction in EWP that they are specifically offering for me is what makes them comparable to US Alliance, otherwise I would go with that one if looking to go with 3 year or the NASA FCU 15 month CD at 3.25% APY as outlined in option 2 above.

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Kevin M
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Re: CD Break and Reinvest Options Perspectives

Post by Kevin M » Mon Sep 10, 2018 12:08 pm

bpg1234 wrote:
Sat Sep 08, 2018 1:58 pm
I have an existing 5 year CD with 36 months remaining yielding 2.28% APY which I'm considering breaking.

Following are the options I presently have on the table:
1.) Existing bank which holds the 5 year CD will reduce my early withdrawal penalty from 6 to 3 months if I keep the funds with them and reinvest the funds in a new 3 year CD @ 3.04% APY.
I probably would go with this one. The rate is competitive with 3-year brokered CDs, it's simple, and knocking the EWP down to 3 months is a plus.
2.) I can pay the full 6 month penalty and put remaining proceeds in a new 15-month CD @ 3.25% APY and then upon maturity reinvest the proceeds into say a new 2 year CD at the prevailing rates at that time. A new two year CD now is presently yielding around 2.80%.
<snip>
In scenario 2, at the 15 month mark I would need a new 2 year CD yielding roughly 3.17% APY to equal the savings that option 1 provides. A 2 year CD yielding higher than 3.17% APY 15 months from now and then Option 2 wins but there is some interest rate risk.
This isn't bad, but I wouldn't bet too much on the 2-year rate 15 months from now. No one is good at predicting interest rates. Also, if rates are higher then, maybe your existing bank will have another good deal and lower your EWP to 3 months of interest again.

Also, there is a risk that the 3.25% rate will drop by the time you get the money into the new CU.
So a bird in the hand versus... In light of the Fed's plan to continue to raise rates, I'm leaning towards taking the risk with option 2 with hopes of a higher 2 year CD yield of at least 3.17% or greater in 15 months.
We don't know for sure that the Fed will continue to increase the federal funds rate (FFR)--it will depend on the economy. Even if the FFR is increased, the 2-year yield may not increase by as much.

Kevin
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welderwannabe
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Re: CD Break and Reinvest Options Perspectives

Post by welderwannabe » Mon Sep 10, 2018 12:19 pm

5 year Treasury Note is 2.82% right now. 3 year is 2.77%. Something to also consider depending on what your state tax rate is. Treasuries are state tax exempt.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

international001
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Re: CD Break and Reinvest Options Perspectives

Post by international001 » Mon Sep 10, 2018 12:27 pm

mix wrote:
Sun Sep 09, 2018 9:49 am
I would not assume that interest rates will continue to rise in the future. What does this calculator tell you?

When to Break a CD Calculator
https://www.depositaccounts.com/tools/b ... lator.aspx

What are the assumptions of the alternative CD?

i.e. if I have a 5 year CD that I had for 3 years remaining, should I compare it to a 2 years CD?

For reference, I had a 5 year CD in Ally, 3 years old (2.05% APY). To break even, the remaining 2 years should be about 2.55%. So still in the break even area. Not worth the hassle

bpg1234
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Re: CD Break and Reinvest Options Perspectives

Post by bpg1234 » Mon Sep 10, 2018 1:11 pm

Kevin M wrote:
Mon Sep 10, 2018 12:08 pm
bpg1234 wrote:
Sat Sep 08, 2018 1:58 pm
I have an existing 5 year CD with 36 months remaining yielding 2.28% APY which I'm considering breaking.

Following are the options I presently have on the table:
1.) Existing bank which holds the 5 year CD will reduce my early withdrawal penalty from 6 to 3 months if I keep the funds with them and reinvest the funds in a new 3 year CD @ 3.04% APY.
I probably would go with this one. The rate is competitive with 3-year brokered CDs, it's simple, and knocking the EWP down to 3 months is a plus.
2.) I can pay the full 6 month penalty and put remaining proceeds in a new 15-month CD @ 3.25% APY and then upon maturity reinvest the proceeds into say a new 2 year CD at the prevailing rates at that time. A new two year CD now is presently yielding around 2.80%.
<snip>
In scenario 2, at the 15 month mark I would need a new 2 year CD yielding roughly 3.17% APY to equal the savings that option 1 provides. A 2 year CD yielding higher than 3.17% APY 15 months from now and then Option 2 wins but there is some interest rate risk.
This isn't bad, but I wouldn't bet too much on the 2-year rate 15 months from now. No one is good at predicting interest rates. Also, if rates are higher then, maybe your existing bank will have another good deal and lower your EWP to 3 months of interest again.

Also, there is a risk that the 3.25% rate will drop by the time you get the money into the new CU.
So a bird in the hand versus... In light of the Fed's plan to continue to raise rates, I'm leaning towards taking the risk with option 2 with hopes of a higher 2 year CD yield of at least 3.17% or greater in 15 months.
We don't know for sure that the Fed will continue to increase the federal funds rate (FFR)--it will depend on the economy. Even if the FFR is increased, the 2-year yield may not increase by as much.

Kevin
Thanks Kevin, I always and I mean ALWAYS appreciate your perspective. You are one heck of a BH forum asset. I ended up going with option 1 based on your and others perspectives.

If rates do go up I have the chance to revisit this analysis again over the 3 year period but for now at least I'm assured of a reasonably good additional return over my prior CD that had 37 months left with only a 9 month break even point after they reduced my EWP from 6 months to 3 months.

The remainder of the new 3 year period after the 9 month point results in increased earnings of roughly .75% over my existing CD so a win for sure.

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Kevin M
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Re: CD Break and Reinvest Options Perspectives

Post by Kevin M » Mon Sep 10, 2018 6:32 pm

international001 wrote:
Mon Sep 10, 2018 12:27 pm
mix wrote:
Sun Sep 09, 2018 9:49 am
I would not assume that interest rates will continue to rise in the future. What does this calculator tell you?

When to Break a CD Calculator
https://www.depositaccounts.com/tools/b ... lator.aspx
What are the assumptions of the alternative CD?

i.e. if I have a 5 year CD that I had for 3 years remaining, should I compare it to a 2 years CD?

For reference, I had a 5 year CD in Ally, 3 years old (2.05% APY). To break even, the remaining 2 years should be about 2.55%. So still in the break even area. Not worth the hassle
If two years remaining, I'd compare to a 2-year Treasury or CD. In a taxable account, a 2-year Treasury is preferable to a 2-year brokered CD at my marginal tax rates of 27% and 8%. Two-year Treasury yield is about 2.7%, which is 3.03% TEY for me. This is quite nice, considering I don't have to open any new accounts to get this rate.

Ally EWP is five months of interest.

If I plug all of these numbers into the DA "should I break" calculator for $100,000, I'm told that I'll earn an extra $1,103.07 over the remaining 2-year period. I would break the Ally CD to buy a 2-year Treasury.

I actually have a friend in this situation, and was recommending that he do this, but he has an old-platform mutual-fund-only trust account at Vanguard, and I'm afraid that upgrading it to a brokerage account might be too complicated for him (can't do it online--must fill out a 15-page paper form). Also, simplicity is important for this friend, so I suggested he consider the Vanguard Short-Term Treasury Index fund (admiral shares) as an alternative. This fund holds mostly 1-3 year Treasuries, so not a bad compromise.

Of course we don't know that the fund will beat the Ally CD after two years, as we do with the 2-year Treasury, but at an SEC yield of 2.57%, which for him is a TEY of 2.86% (marginal rates are 22% and 8%), I'm thinking it's not a bad bet.

Of course you probably can find an even better rate with a direct CD if you don't mind opening another credit union or bank account.

Kevin
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international001
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Re: CD Break and Reinvest Options Perspectives

Post by international001 » Wed Sep 12, 2018 6:51 am

I want to compare apples to apples. I know I can get a better deal with treasuries
Still, my point is that for a break-even rate of 2.55% it's not worth opening a new one unless I had a lot of money on it. So I'll hold it unless rates increase a lot

goblue100
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Re: CD Break and Reinvest Options Perspectives

Post by goblue100 » Wed Sep 12, 2018 7:24 am

Kevin M wrote:
Mon Sep 10, 2018 6:32 pm

If two years remaining, I'd compare to a 2-year Treasury or CD. In a taxable account, a 2-year Treasury is preferable to a 2-year brokered CD at my marginal tax rates of 27% and 8%. Two-year Treasury yield is about 2.7%, which is 3.03% TEY for me. This is quite nice, considering I don't have to open any new accounts to get this rate.

Ally EWP is five months of interest.

If I plug all of these numbers into the DA "should I break" calculator for $100,000, I'm told that I'll earn an extra $1,103.07 over the remaining 2-year period. I would break the Ally CD to buy a 2-year Treasury.

I actually have a friend in this situation, and was recommending that he do this, but he has an old-platform mutual-fund-only trust account at Vanguard, and I'm afraid that upgrading it to a brokerage account might be too complicated for him (can't do it online--must fill out a 15-page paper form). Also, simplicity is important for this friend, so I suggested he consider the Vanguard Short-Term Treasury Index fund (admiral shares) as an alternative. This fund holds mostly 1-3 year Treasuries, so not a bad compromise.

Of course we don't know that the fund will beat the Ally CD after two years, as we do with the 2-year Treasury, but at an SEC yield of 2.57%, which for him is a TEY of 2.86% (marginal rates are 22% and 8%), I'm thinking it's not a bad bet.

Of course you probably can find an even better rate with a direct CD if you don't mind opening another credit union or bank account.

Kevin
If there are only two years left on the CD at Ally the EWP is not 5 months of interest, it is two months:

"The penalty depends on your term.
24 month or less 60 days of interest
25 month – 36 month 90 days of interest
37 month – 48 month 120 days of interest
49 month or longer 150 days of interest"
Can't take it with you when you're gone | But I want enough to get there on - Rollin with the flow - Jerry Hayes

international001
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Re: CD Break and Reinvest Options Perspectives

Post by international001 » Wed Sep 12, 2018 12:06 pm

It's not about the months left.. but about the months of the original CD

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Kevin M
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Re: CD Break and Reinvest Options Perspectives

Post by Kevin M » Wed Sep 12, 2018 1:14 pm

goblue100 wrote:
Wed Sep 12, 2018 7:24 am
Kevin M wrote:
Mon Sep 10, 2018 6:32 pm
Ally EWP is five months of interest.
If there are only two years left on the CD at Ally the EWP is not 5 months of interest, it is two months:

"The penalty depends on your term.
24 month or less 60 days of interest
25 month – 36 month 90 days of interest
37 month – 48 month 120 days of interest
49 month or longer 150 days of interest"
international001 wrote:
Wed Sep 12, 2018 12:06 pm
It's not about the months left.. but about the months of the original CD
Good to keep in mind that the penalty is different depending on the term, but it is the original term that determines the EWP. The discussion was about a CD with an original term of five years, so the 5-month (150 day) penalty applies.

Kevin
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Kevin M
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Re: CD Break and Reinvest Options Perspectives

Post by Kevin M » Wed Sep 12, 2018 1:37 pm

international001 wrote:
Wed Sep 12, 2018 6:51 am
I want to compare apples to apples. I know I can get a better deal with treasuries
Still, my point is that for a break-even rate of 2.55% it's not worth opening a new one unless I had a lot of money on it. So I'll hold it unless rates increase a lot
Not sure why you're focused on just the break-even rate rather than the differential between the break-even rate and the new rate--or just how much more you'd earn in the new CD or Treasury over the remaining term. To me it's more a matter of how much more I'll earn compared to the work involved, while also considering the value of the low EWP at Ally.

I hear you about the small amount of money though.

I have a relatively small Ally IRA CD (current value about $13,817) earning 2.05% with about 23 months left to maturity. I could break and transfer proceeds to Fidelity or Vanguard and buy a 2-year new-issue CD at 2.85% (first time I've noticed that the best 2-year rate has increased from 2.80%). DA "should I break" calculator tells me I'll earn $93.77 more over 23 months by doing so.

If this were in a taxable account, I'd do it in a heartbeat (except I'd buy a 2-year Treasury). But doing an IRA transfer is more work and takes more time. I'd have to fill out the transfer form, mail it or drop it off at the local Fidelity office, wait for the proceeds to arrive, then enter the order for the new CDs and wait for the order to settle (could be a week or two for new-issue, depending on the timing). Due to the delays, I would not actually earn as much as the DA calculator tells me. On the other hand, I might be able to get a bit more than 2.85% on the secondary market, in which case settlement would be quick at T+2.

I think about doing this periodically, but so far have been too lazy to start the process by filling out the form. I still might though.

Another advantage for me is that this is my last CD at Ally (I used to have a bunch when they were more competitive), so getting rid of it would be a very slight simplification of my portfolio. Unless Ally becomes more competitive, I'll end up doing the transfer anyway when the CD matures. I think I'm talking myself into doing it when I run out of more interesting stuff to do.

Kevin
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goblue100
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Re: CD Break and Reinvest Options Perspectives

Post by goblue100 » Wed Sep 12, 2018 3:32 pm

Kevin M wrote:
Wed Sep 12, 2018 1:14 pm

Good to keep in mind that the penalty is different depending on the term, but it is the original term that determines the EWP. The discussion was about a CD with an original term of five years, so the 5-month (150 day) penalty applies.

Kevin
:oops: Thanks for pointing that out. My brain was reading that as the penalty was dependent on the term that was left, not the original term.
Can't take it with you when you're gone | But I want enough to get there on - Rollin with the flow - Jerry Hayes

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