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CD ladder question
Old 11-23-2008, 09:00 AM   #1
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CD ladder question

I have been thinking of setting up a CD ladder, but don't really know how to do it. I was just going to look up various banks and start calling.

I've read about brokered CDs at places like Schwab and Fidelity. Is there a fee on these brokered CDs? Is that how everyone does it?

Also, how do you plan it out? For instance, if I need 3K per month to live on, surely I don't buy tons of 1 month CDs. Is there a system out there that has been tested by some of yall that works?

My plan is to put all my cash in CDs so I can live on that over the next 6-7 years while I wait on my equities to recover, then start spending that. I hope 6-7 years is enough time...........

Thanks! Thoughts? Thanks!
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Old 11-23-2008, 10:59 AM   #2
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Certainly more than one way to do it, here's mine:

Three year ladder, buy once a quarter for the same amount each time. Results in twelve CDs, each three year term (which seemed the most economical term available when compared with risk of getting stuck in a rising interest rate scenario). When you start out, each quarter you buy a one year, two year, and three year term CD. Once it's going it's a simple matter to renew at a three year term for the original investment and harvest the interest earned.

Couple planning considerations. We use a credit union that provides the best interest rates (or close to it) we could find and NCUA insurance. You also need to structure your ownership (joint, trustee, sole) to remain within insured limits, though with increased 250k limits that's less of an issue now (well depending on how much you got.)

Confounding your nice structured ladder is the occasional special or one time good deals that you want to take advantage of, like current one year/5 pct deals, or a 3 year variable/4.4 pct deal that you can add to or up the interest rate once in the 3 years. These have put my nice pretty structured ladder into complete disarray.

Figure this though, your 3k a month means taking out 9k a quarter. You're going to need about three 250k ladders at 5 pct to meet those needs.
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Old 11-23-2008, 11:30 AM   #3
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I decided to just buy a bond fund, and let the fund handle the buying/selling. Unless you have some unusual control needs, it works out the same with much less work.
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Old 11-23-2008, 11:57 AM   #4
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I decided to just buy a bond fund, and let the fund handle the buying/selling. Unless you have some unusual control needs, it works out the same with much less work.
I don't see a bond fund as equivalent to a CD ladder. Cardude's CD ladder can't/won't lose principal either short term or over the 6-7 years. A bond fund (especially one of longer duration bonds) could dip a lot.
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Old 11-23-2008, 12:43 PM   #5
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I decided to just buy a bond fund, and let the fund handle the buying/selling. Unless you have some unusual control needs, it works out the same with much less work.
Have to agree with samclem. Our bond fund is down now, though it's only a paper loss. Our CD ladder hasn't lost anything.

This isn't a control issue, it's a different investment strategy.
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Old 11-23-2008, 01:09 PM   #6
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Pertaining to bond funds vs CD ladders, we have decided to revive our ladder, remembering how much we appreciated it in 2000 when I first retired. The stability, safety and predictability are just too attractive. There are pluses for a managed bond fund as well. Fyi, we are trying to balance our portfolio with investing in both; half in funds and half in CDs. The half in funds is in balanced funds (Wellington/Wellesley) which also provides some automatic rebalancing between stock and bond which we like.... bill
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Old 11-23-2008, 01:30 PM   #7
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Greetings All,

Thanks deepc for a CD Ladder road map. On Sept 15th we moved all our money into Vanguard funds but quickly (that week) found out we were still vulnerable to this wild ride.

We are totally new at this CD buying however we LOVE Vanguard and have been moving our investments under their umbrella. After looking at the logistics of rolling IRA's and accounts to banks we have decided to stay with Vanguard, finish doing roll overs and buy through their brokerage service even though we may be making in some cases a bit less in interest then appeared on bankrate.com.

While we need every penny (no pensions or SSI for about 10 plus years) we also need it to be manageable and safe. We ended up with 3mo and 9mo CD's giving us time to learn more about CD laddering. We have to get our return higher so we can get back the 4% rule... (and / or some ahhhh ugh ahhh part time work)

Hang on to your boot straps! And thanks again for the info and discussion. Marie
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Old 11-23-2008, 02:13 PM   #8
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The Schwab Brokered CD's do cost you a little off the yield. You don't see the charge, as you receive the interest rate quoted. Over the years, I have seen the Brokered CD's offered at a higher rate of interest that an institution is offering directly, and I have seen the opposite. It is very convenient to have your CD's at a brokerage. You don't have to communicate with the issuer about automatic renewal. Brokered CD's don't renew. Your interest is credited to your account on the due date either monthly or as per what was stated when you bought. Sometimes, there is little in the way of CD's offered.....
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Old 11-23-2008, 02:49 PM   #9
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Originally Posted by cardude View Post
I have been thinking of setting up a CD ladder, but don't really know how to do it. I was just going to look up various banks and start calling.

I've read about brokered CDs at places like Schwab and Fidelity. Is there a fee on these brokered CDs? Is that how everyone does it?

Also, how do you plan it out? For instance, if I need 3K per month to live on, surely I don't buy tons of 1 month CDs. Is there a system out there that has been tested by some of yall that works?

My plan is to put all my cash in CDs so I can live on that over the next 6-7 years while I wait on my equities to recover, then start spending that. I hope 6-7 years is enough time...........

Thanks! Thoughts? Thanks!
Here are the best rates I could find in Bank CD's, FDIC Insured. Setting up a ladder here is not too difficult. Note however each CD must be for a minimum of $5K Additionally, I got a letter from them yesterday and an enclosure states that these rates end tomorrow. I do not know which way they are going to go tomorrow. Capital One Direct Banking: Certificates of Deposit - Rates
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Old 11-23-2008, 02:53 PM   #10
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OAG

Those are good rates. Especially the 18 month and the 5 year one.

Thanks for posting that...also I read some of your other posts and I thought they were very good!

Jim
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Old 11-23-2008, 03:46 PM   #11
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. You also need to structure your ownership (joint, trustee, sole) to remain within insured limits, though with increased 250k limits that's less of an issue now (well depending on how much you got.)

.
The increased insurance limits last only thru the end of next yr so it doesn't really help with CDs of more than 1 yr maturity and could be a problem laddering even those after a few months.
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Old 11-23-2008, 04:21 PM   #12
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I do not mean to keep beating the drum for Capital One but they do have a little chart about staying below the limit(s). You may want to look at this chart and just divide the amounts in half - if you think the current limit (which, as Kaneohe sated, is scheduled to "sunset" on 12/31/2009) and will not be extended. Direct Banking FDIC Information
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Old 11-23-2008, 08:14 PM   #13
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Actually, I think you'll find Nationwide bank's rates to be slightly higher.

Online Certificate of Deposit | Get CD Interest Rates From Nationwide Bank | Nationwide.com


. . . and then there is Moneyaisle.com for bidding from banks interested in issuing CDs.

-- Rita
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Old 11-24-2008, 10:50 AM   #14
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Thanks for the replies everyone.

Does it matter what bank I pick since the CDs are insured? If they fail is it a pain to get your money back? Couldn't we see some bank failures if we get into a depression?

Deepc-- where did you see one year rates at 5%?
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Old 11-24-2008, 10:57 AM   #15
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USAA is competitive with the longer term rates but they're nowhere near as good on those 1 year.
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Old 11-24-2008, 10:59 AM   #16
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Not as hard as getting your money back from the Stock Market when it falls. Some institutions take longer and it matters if they are taken over by the Government or another banking institution or just allowed to close. In the 22 banks that have closed this year we have seen lots of methods but I have not heard of anyone losing principal yet, and most continued to earn interest at the contracted (when the CD was purchased) rate. BTW Capital one did change their rates this morning but the long term CD went to 5.7% while some of the lesser periods went down a tad. If one is building a long term Ladder I would start with the longest term rungs first and work my way down, but that may just be me.
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Old 11-24-2008, 11:08 AM   #17
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I do not mean to keep beating the drum for Capital One but they do have a little chart about staying below the limit(s). You may want to look at this chart and just divide the amounts in half - if you think the current limit (which, as Kaneohe sated, is scheduled to "sunset" on 12/31/2009) and will not be extended. Direct Banking FDIC Information
Glad someone's paying attention. I had no idea that higher limit was termporary. Not that I have that much cash anyway but it's nice to know.
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Old 11-24-2008, 05:08 PM   #18
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This thread is helpful to me....I am working on a CD ladder, but I never considered buying quarterly. PenFed credit union has a 5% APY promotion that ends 11/30, which I guess is actually 11/28. It is for 3-7 yr term with $1k min.
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Old 11-24-2008, 07:29 PM   #19
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Not sure if this is true for all banks, but many will take the early withdrawal penalty out of your principal if you have yet earned enough interest. For example, a bank has a 6 month interest penalty and you have to break the CD after 3 months. The difference comes out of your principal. So... It's technically possible to lose a bit of principal with CDs. Still, it's a very safe place to stash your money.
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Old 11-25-2008, 05:54 AM   #20
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Not sure if this is true for all banks, but many will take the early withdrawal penalty out of your principal if you have yet earned enough interest. For example, a bank has a 6 month interest penalty and you have to break the CD after 3 months. The difference comes out of your principal. So... It's technically possible to lose a bit of principal with CDs. Still, it's a very safe place to stash your money.
Never head of this factor. I never break any early, but the fine print on my 3 CU and one Bank all say something like - 3, 6, 12 months penalty OR up to then current accrued interest. Guess I am lucky as none of mine say principal would be in jeopardy.
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