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Old 03-02-2014, 12:29 PM   #21
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Bingo - that's the difference between someone who invests in CD's and someone who has setup a CD ladder to generate a steady source of interest that is spent during retirement. I've spent years setting up multiple CD ladders that come up for renewal every 3 months. I can choose to let the CD rollover, move it to a another bank or spend the interest.
I'm just not following why you keep bringing this up. We are in agreement that CDs can be good investments. We are in agreement that building a CD ladder to generate income in retirement makes perfect sense to me. But what I'm trying to point out has absolutely nothing to do with any of this.

Consider what happens if part of your CD ladder has brokered CDs maturing in 10 years at 3%, and my ladder has bank direct CDs also earning 3%. Tomorrow interest rates on 10 year CDs rise to 5%. I cash out my bank direct 10 year CD, pay a small 3% interest penalty, and reinvest into a 10 year CD paying 5%. I'm now earning 60% more income on my investment than you are. You can't cash in your brokered CD, because the rise in interest rates just caused your CD to drop in value by 20% if you had to sell it on the open market. So you continue to suffer through 10 years of 3% interest while I live much more lavishly on my 5% returns.
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Old 03-02-2014, 12:51 PM   #22
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Many banks and credit unions have changed their disclosures and some will no longer let you close them early. Some will not even let you take out a small portion of your CD if needed in an emergency. All plans work until they no long do. They can clawback on the rules with new disclosures. Read your disclosures but also ladder CD's. You still have the best of both worlds by laddering CD's.
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Old 03-02-2014, 01:05 PM   #23
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I think it would be a serious mistake to buy a brokered CD. I really don't like them. In my mind, they carry all of the interest rate risk of bond funds without any of the premium yield over traditional bank CDs.
I too prefer traditional CD's, but I don't think you have your analysis quite right.

Brokered CD's "carry all of the interest rate risk of bonds (NOT bond funds) without the premium yield over traditional bank CD's."
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Old 03-02-2014, 01:15 PM   #24
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Brokered CD's "carry all of the interest rate risk of bonds (NOT bond funds) without the premium yield over traditional bank CD's."
Yes, my mistake. Good catch, thanks!
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Old 03-02-2014, 04:31 PM   #25
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I see nothing wrong with investing in brokered CD's, as long as you stick to FDIC insured, non-callable. Obviously you want to stay under the $250K FDIC limit per bank.

Most of my CD's are thru banks, but I've recently invested in a long-term brokered CD with a good rate.

As for the warnings from the other folks on this thread, I don't think they fully understand how CD ladders work. If you have to cash in your CD before maturity, then your CD ladder is not setup correctly IMHO.
I think my ladder is set up correctly. It goes out to 2022 with between 250k and 400k coming due each year. Problem I have (guess not really a problem ) is that we have maxed out FDIC coverage at Penfed , Navy FCU, Apple FCU Etc and the rates are dropping again. I have always gone out as long as possible without every breaking a CD. Unless the rates go below 2% we should always be able to live on the interest when we call it quits.
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Old 03-02-2014, 10:23 PM   #26
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I have both brokered Cd's and Bank Cd's. Agree, I prefer bank Cd's.
However, with Cd's interest rates so low, I have no problem purchasing
Broker CDs.

Key, is PLAN ON HOLDING TO MATURITY. original post said they could
hold to maturity. So Broker CD is fine for OP.

Also, agree, if interest rates rise to 5%, a Broker CD will drop in value.
Only problem is, if we all knew rates would rise to 5%, we would not buy
a 3% broker CD. (no one really knows when rates will rise).

While one waits for rates to rise, one is losing interest income. Again,
no one has been able to predict when rates will rise, and if and when they
do, will it be in small increments?

Never thought, I'd be happy getting 3% on my CD's, but I've joined the
CD laddering crowd.
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Old 03-02-2014, 10:48 PM   #27
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Key, is PLAN ON HOLDING TO MATURITY. original post said they could
hold to maturity. So Broker CD is fine for OP.

Also, agree, if interest rates rise to 5%, a Broker CD will drop in value.
Only problem is, if we all knew rates would rise to 5%, we would not buy
a 3% broker CD. (no one really knows when rates will rise).
As you say, no one knows what interest rates are going to do, certainly not 5-10 years out. At today's prices, the direct-from-bank CDs offer a very valuable option: to get your money back at any time with a small forfeiture of interest (usually 1 year). If interest rates go up (can they do otherwise from here?) the holder of a brokered CD is just screwed. Why not get the (virtually) free insurance?

It doesn't matter if the purchaser plans to hold the CD to term, or if he "can", or if he doesn't know what rates are going to do. Why deliberately increase risk for zero additional gain?
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Old 03-03-2014, 05:44 AM   #28
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The difference in interest rates on some brokered CD's is not zero. As recently as a few weeks ago, Discover was offering a 3.20% 10 year brokered CD rate, while according to www.discover.com, they are only offering 1.90% APR for a 10 year CD.
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Old 03-03-2014, 09:11 AM   #29
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Compare the best rate you can find on a brokered CD to the best rate you can find on a bank CD, and then make your decision. Comparing the brokered versus direct rate at one bank is not enough to draw a conclusion.

The OP already stated he has funds in Navy FCU, so I will assume that makes him eligible. That means he can invest in a 7 year CD at 3.07% with a one year early termination penalty. If the best rate on a brokered CD is 3.20% for 10 years, that's not even a close call.

A 10 year brokered CD at 3.2% acts exactly the same as a ten year bond paying 3.2%. If you were to poll the forum, I doubt you would find many takers for a 10 year bond paying 3.2%. The yield is much too low to lock up money for that long and take such a big hit if rates go up and you want to get out early to reinvest.

The OP mentioned FDIC limits. There are several ways around this if he already has $250K at NavyFCU. If he has money in both taxable and IRA accounts, he can have one of each and have each be covered by the $250K individually.

Additionally, you can name different Payable On Death (POD) beneficiaries and have each account carry the full $250K of FDIC insurance. For example, the first $250K has his spouse named as the POD. The second $250K has both his spouse and child listed as POD. Because the beneficiary on the second one is different, he gets the full $250K of FDIC insurance on both. Throw in spouse + sister, spouse + brother, spouse + daughter, etc...and you can raise the limits as much as you need to maintain full coverage.
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Old 03-03-2014, 09:13 AM   #30
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The difference in interest rates on some brokered CD's is not zero. As recently as a few weeks ago, Discover was offering a 3.20% 10 year brokered CD rate, while according to www.discover.com, they are only offering 1.90% APR for a 10 year CD.
Sometimes the difference is zero, sometimes it is close. "As recently as a few weeks ago" you could get a 5 or 7 year PenFed CD for 3%. And NFCU is offering 3% right now on 7 year CDs. Stretching to get an extra 0.2% APR by taking the risk of a 10-20% loss of principal, or accepting a several percent reduction in the interest rate for 7-10 years seems imprudent. But, folks are buying them, so there's apparently disagreement on this point.
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Old 03-03-2014, 02:41 PM   #31
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Sometimes the difference is zero, sometimes it is close. "As recently as a few weeks ago" you could get a 5 or 7 year PenFed CD for 3%. And NFCU is offering 3% right now on 7 year CDs. Stretching to get an extra 0.2% APR by taking the risk of a 10-20% loss of principal, or accepting a several percent reduction in the interest rate for 7-10 years seems imprudent. But, folks are buying them, so there's apparently disagreement on this point.
It is possible that the 5 or 7 year CD's mature into a lower interest rate environment. In that case the longer maturity/ higher rate bet would pay off. That is not my prediction, but would explain the logic in going long. As of today, a 10yr brokered CD can be bought with a 3.44% yield in the secondary market.
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Old 03-03-2014, 05:05 PM   #32
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Well, I would never suggest that someone substitute my judgment for their own. But I personally would not want to commit my money into a brokered CD for 10 years to earn 3.44%.

There are multiple posters here, but I see this decision falling in to two categories: those who are eligible to become a member of NavyFCU and those who are not.

If you are eligible, taking 3.07% for 7 years with a very modest one year penalty is a total no brainer compared to a brokered ten year CD at 3.44%. Nobody can predict the future, but betting that rates won't go up at all in the next ten years just doesn't seem logical to me. And we know they can't go down much, so there just isn't much down side here.

If you can't join NavyFCU, I haven't seen direct bank rates much about 2% for five years, so now the spread at least becomes somewhat interesting. But it still doesn't change my mind about not wanting to lock up my money at 3.44% for ten years.
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Old 03-03-2014, 11:06 PM   #33
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Which promotes the CD ladder philosophy. Buy and hold. Your return is an
average.
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