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CD Ladder Discipline
Old 08-15-2019, 07:18 PM   #1
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CD Ladder Discipline

A portion of our investment portfolio includes a 5 year CD ladder. One of our laddered CDs is maturing in about 2 months. The current falling rate environment has me second guessing my plan to renew maturing CDs to a new 5 year term.

I had hoped we had seen the end of the extremely low CD interest rates from previous years but this recent FED cut and another cut expected in the near future has me questioning locking money up for 5 years. Especially when the yield between a 1 year CD and 5 year CD can be so little.

But who knows... a 5 year CD in October at say 2.5% might be the best available rate for 5 years if the FED continues to cut and we enter a new period of falling rates to stimulate a slowing economy and a possible recession.

If you have a laddered CD plan... How committed have you stayed to your plan and renewed as scheduled and accepted the yield as it averaged over the life of the ladder?
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Old 08-15-2019, 07:33 PM   #2
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We have a 5 year ladder, renewing one each year. At renewal time I just find the best rate available, and go with it. Partly because I'm lazy, and partly because I'm smart enough to know that I'm not smart enough outguess the world.

A famous economist once said there are two kinds of economists- those who don't know the future of interest rates, and those who don't know that they don't know.
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Old 08-15-2019, 07:46 PM   #3
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Originally Posted by Gearhead Jim View Post
We have a 5 year ladder, renewing one each year. At renewal time I just find the best rate available, and go with it. Partly because I'm lazy, and partly because I'm smart enough to know that I'm not smart enough outguess the world.

A famous economist once said there are two kinds of economists- those who don't know the future of interest rates, and those who don't know that they don't know.
Kudo’s to you.
6 months or so ago I had a CD mature that I had scheduled, per my ladder, to roll into a 5 year CD at around (I think) 3.5%. Instead I used my brain (LOL) and bought a shorter term CD because everyone thought rates would continue to rise. Oops. Now the 5 year is barely over 2 and rates are most likely going down. Lesson number 1,527,340 that sticking to to the plan is the way to go.
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Old 08-15-2019, 07:48 PM   #4
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Stay with the process. I am a bond ladder guy, not CDs, but same concept applies. I bought a lot of 5% muni’s when everyone said rates where going to rise. Really, really glad I have them now. Rates still could drop even lower.
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Old 08-15-2019, 08:07 PM   #5
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To answer this, look at the origin of the CD ladder approach.

The purpose of using CDs spread over time is to lock in the highest rate for your cash bucket. When CD ladders were invented, the 5-year term was "always" the highest rate. We now, however, live in interesting times with inverted rates.

I just look for the highest CD rate and lock it in, even if it's less than a 5-year term. Doing different, that is, gambling that rates will drop lots during the next 5 years, is market timing.
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Old 08-15-2019, 08:27 PM   #6
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I'm pretty sure I'm going to plunk some money into CDs this week, my first time in decades.
I'd normally set up a ladder, but am now considering putting the whole allocation into 5 five-year CDs. My thinking:
1) There's good reason to believe rates are going down, maybe for a long time. If so, I'll be happy I went long on all of these.
2) If rates don't decline, the most likely reason is that the Fed doesn't see a need to keep goosing the economy, and so maybe my other investments will be holding their own and these CDs are less important.
3) If rates go up significantly, I'll just accept the 150 day interest penalty and buy new CDs.
Similarly, if I need some funds, I'll just break a CD and pay the penalty. One silver lining of these pathetic rates is that the early withdrawal penalties are small.
So, in your boots I guess I'd renew each CD for the max term. This also leaves your ladder intact.
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Old 08-16-2019, 01:56 AM   #7
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You shouldn't get too stressed over it.

1. A year after you purchase the 5-year CD, new 5-year CDs could be paying below 2%. If that happens you'll be happy that you are locked in at 2.5%, or whatever you get it for.

2. 5 years is not so long that if things reverse course and rates head higher, you are locked in to that rate for a very long time. If these are bank or credit union CDs (non-brokered) and rates head much higher, you could just terminate it and accept the early withdrawal penalty.

3. For a point of reference, next month I have a 4-year 1.5% CD maturing. 1.5% is where rates were 4 years ago for new 4-year CDs. I'm quite confident that when that CD matures, even though rates will be lower than they have been this past year, I will likely be able to renew at a rate higher than the 1.5%. Worst case, there are now solid dividend paying companies shares that are beginning to become much more affordable and attractive with the market volatility of the past couple weeks.

4. The Fed is in a rate reduction cycle. The odds are that they will not be raising rates over the next 18 months. This means that they will either go lower or remain flat. So, the soonest they would begin raising rates again would likely be mid-2021. That will be 2 years in to your 5-year CD. The chances at that time of 3-year CD rates being higher than the 5-year rate you lock into between now and year end is quite small.

So, again, I wouldn't get too stressed over it. 5-years is a period of time that even if things go against you, even in the worst case, it wouldn't turn out too badly.

Lastly, you will never lose any money in a CD if you hold to maturity. You might not get as much compared to always owning the highest paying CDs, but you will never lose money.
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Old 08-16-2019, 05:16 AM   #8
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Last fall I went against common wisdom and stretched my 5 year ladder out with new purchases in the 7-10 range. Even this move only raised my avg maturity to 3.5 years. If a 5 year ladder is your plan stick to it. Your avg maturity will fluctuate in the low 2 year range as you roll it. That's pretty short term. And remember the basis for a ladder is that nobody knows nothin. I think recent history has proven the point.
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Old 08-16-2019, 05:32 AM   #9
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Quote:
Originally Posted by samclem View Post
I'm pretty sure I'm going to plunk some money into CDs this week, my first time in decades.
I'd normally set up a ladder, but am now considering putting the whole allocation into 5 five-year CDs. My thinking:
1) There's good reason to believe rates are going down, maybe for a long time. If so, I'll be happy I went long on all of these.
2) If rates don't decline, the most likely reason is that the Fed doesn't see a need to keep goosing the economy, and so maybe my other investments will be holding their own and these CDs are less important.
3) If rates go up significantly, I'll just accept the 150 day interest penalty and buy new CDs.
Similarly, if I need some funds, I'll just break a CD and pay the penalty. One silver lining of these pathetic rates is that the early withdrawal penalties are small.
So, in your boots I guess I'd renew each CD for the max term. This also leaves your ladder intact.
+1
We switched a 2 year ladder into this concept and went into a credit union for the first time to max the rates.
It is only 9% of the total portfolio anyways.
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Old 08-16-2019, 05:39 AM   #10
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We have 5 year 3.8% CDs for mine and DW's IRAs (will mature in time for RMDs for me) and 24 the and 22 months for cash at 3%. They average out at $3.52% We have another chunk in VMMXX as I like to keep 5 years expenses in cash (I know but It is habit), I am trying to convince myself to put some in 18month 3% that are still currently available.
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Old 08-16-2019, 05:44 AM   #11
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We have 5 year 3.8% CDs for mine and DW's IRAs (will mature in time for RMDs for me) and 24 the and 22 months for cash at 3%. They average out at $3.52% We have another chunk in VMMXX as I like to keep 5 years expenses in cash (I know but It is habit), I am trying to convince myself to put some in 18month 3% that are still currently available.
Nice.
My bond/cash portion of my portfolio is stripped out from the stock portion, so can calculate a 3.27% overall return currently.
Goal is to get to 3.5% eventually, as below 2% maturities are coming due and get be reinvested at 3% at a minimum.
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Old 08-16-2019, 07:20 AM   #12
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I have one maturing in a few months. Considering just plunking it into a new online savings account at 2.5% as I may need the liquidity for a bit and rates are competitive.
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Old 08-16-2019, 09:23 AM   #13
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Since I'm now retired, I withdraw some of the interest and spend it. I search for the best 5 year CD rates and invest the rest.



https://www.depositaccounts.com/blog/fed-deposit-interest-rate-predictions/

is a good source of advice on CD rate info and predictions.
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Old 08-16-2019, 09:29 AM   #14
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I only buy CDs when I have additional cash to invest, and CD rates are favorable compared to treasuries and bond funds of similar duration.
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Old 08-16-2019, 09:48 AM   #15
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I only buy CDs when I have additional cash to invest, and CD rates

I started a 5-year CD ladder at Ally after I paid off my house in 2009. Bought a new CD every month. The rates started at around 3.25... then went down through the 3's... the 2's... at 1.8 (after 30 months of buying), I couldn't take it any more. I went to my "dividend growth" approach. I now have a taxable brokerage account in the low 7-figures with an overall dividend yield of nearly 4%, and most of the stocks increase their dividends every year by 3% or 5% or 10% or more. Yes, I have a lot of market exposure but the emphasis is on the dividend streams.

Meanwhile, Ally 5-year CD's are only back to 2.65% today.

Sorry if this is off topic.
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Old 08-16-2019, 10:47 AM   #16
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So how do most people set up CD Ladders? Are they 5 - 5 year CDs? How do you get started? I have 5 years worth of Cash, CDs, and Bonds, but I am at OMY. Do I create a new CD every year, withdrawing money from the market regardless of performance (potential recession?) to get the ladder established? And when there is a significant market drop and you don't replenish your CDs for a year or two, do you then double dip to fill them back up in subsequent years?
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Old 08-16-2019, 10:59 AM   #17
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So how do most people set up CD Ladders? Are they 5 - 5 year CDs? How do you get started? I have 5 years worth of Cash, CDs, and Bonds, but I am at OMY. Do I create a new CD every year, withdrawing money from the market regardless of performance (potential recession?) to get the ladder established? And when there is a significant market drop and you don't replenish your CDs for a year or two, do you then double dip to fill them back up in subsequent years?
I started with a 5 year ladder with 6 month rungs in Sept of 2018.
First I bought a 1, 1.5, 2, 3, 4, 5 year set of CDs.
6 months later I bought 1,2,3,4, and 5 year CDs in March of 2019.
Now a CD matures every 6 months. The original plan was to roll each maturing CD into a 5 year CD as they time out.

I'm not blindly buying/selling anything. I saw rates dropping back in May, so I "jumped the gun" on the next maturing CD... squeezed cash kitty a little and bought the next 5 year CD in May at 3% vs. waiting until Sept. Now when the Sept CD matures I'll either backfill the cash kitty or figure out what I'm going to do with it.
Some call that market timing. I call it reading the news.
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Old 08-16-2019, 11:23 AM   #18
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Originally Posted by 34rlsa View Post
A portion of our investment portfolio includes a 5 year CD ladder. One of our laddered CDs is maturing in about 2 months. The current falling rate environment has me second guessing my plan to renew maturing CDs to a new 5 year term.

I had hoped we had seen the end of the extremely low CD interest rates from previous years but this recent FED cut and another cut expected in the near future has me questioning locking money up for 5 years. Especially when the yield between a 1 year CD and 5 year CD can be so little.

But who knows... a 5 year CD in October at say 2.5% might be the best available rate for 5 years if the FED continues to cut and we enter a new period of falling rates to stimulate a slowing economy and a possible recession.

If you have a laddered CD plan... How committed have you stayed to your plan and renewed as scheduled and accepted the yield as it averaged over the life of the ladder?
One thing you could do is set up a 5 year add on CD now for $500 at GTE CU, for 3 percent, or 3.25 if you have over $100,000 and then add the maturing money in two months. All of GTE's CD's are add on.
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Old 08-16-2019, 11:26 AM   #19
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So essentially, you are rolling your 5 year CDs at maturity, and living off income from the stock market until a time when the market tanks, at which point you start living off of the CDs as they mature?
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Old 08-16-2019, 11:38 AM   #20
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So essentially, you are rolling your 5 year CDs at maturity, and living off income from the stock market until a time when the market tanks, at which point you start living off of the CDs as they mature?
My CD interest is paid out monthly/semi-annually... so the interest income is slowing my cash burn rate. I have very little exposed to the stock market at this time. If cash gets too low I have an opportunity to siphon cash from a maturing CD every 6 months.
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