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5 year cd vs. laddered cd's
Old 02-12-2010, 04:53 AM   #1
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5 year cd vs. laddered cd's

I have some of my stash going to cd's. I have heard it might be better to just go long (5 years) and break the cd with the resultant penalty instead of laddering. I have been looking at this approach. My problem is I think it would be tempting to get out as soon as I see a substantial rate increase. Say 75 bp. With a 3% 5 year cd, the penalty would put me at a 1 year break even point. I suppose that is an incentive to just stay with it.

New cd 5% (wishful thinking).
Break 3.3 cd costs 1.65% in interest (6months)
Break even is roughly 6 months.

Is there a rule of thumb people here have used ? Is it better to just ladder at 1 year maturities?

best rates from
1y 1.7
2y 2.05 (upgrade once if rates go up per ally)
3y 2.60
4y 3.03
5y 3.55

The other problem is fdic insurance. What is the chance of the 250k BECOMING PERMANENT. It's not that big a problem to spread it among multiple banks.

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Old 02-12-2010, 06:35 AM   #2
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Originally Posted by floatingdoc View Post
Is there a rule of thumb people here have used ? Is it better to just ladder at 1 year maturities?
It depends, because rates change and terms on the various CDs are different.

Right now, with the yield curve as steep as it is, it does seem like a much better deal to go with a 5-yr CD and pay the break fee than to ladder maturities. Be sure to read the fine print though. I've seen some CDs that have an early withdrawal fee equal to the "economic replacement value" of the CD, which is basically a market price that the bank determines at its sole discretion . . . I wouldn't own one of those unless I was sure the money was going to stay put for the duration.

In other cases the different fee structures might change how you look at the stated yield. For example, the 3.55% 5-yr CD from carries a 6 month early withdrawal fee. That's a 1.78% hit which cuts the 1-yr yield in half if you take your money out early. Ally Bank, meanwhile, offers a 3.15% 5-yr CD with a 60 day break fee. So you're better off with Ally for money that you plan to pull out early and with iGO for money that is likely to sit around for several years.

So there is no rule of thumb as each product is different.

With respect to the FDIC insurance, I'm assuming it goes back down to $100K in 2013(?). It will probably get extended but I'm not putting myself in a position where I'll have to break CDs and move money around if it doesn't.

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Old 02-12-2010, 06:40 AM   #3
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thank you
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Old 02-12-2010, 10:11 AM   #4
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I've ask several bank & credit union personal and all seem to think the 250k limit will stay in place. The old 100k limit never moved with inflation and should have been changed many years ago. Also, I think the banks will work with anyone caught in the middle of any change that adversely affected a customer (just a personal opinion though).
If you are looking at anything 5 to 7 years be sure to look at penfed. They normally have the better rates. Not sure about penalties?
PS. There was an in depth thread at bogleheads (I think it was) about going long term CD's that you should check out. You may have seen it going by your questions.
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Old 02-12-2010, 11:10 AM   #5
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A ladder is all 5-years terms staggered so that one matures every year. Shorter terms are used only to build the ladder from a standing start.
For the fun of it...Keith
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