CD laddering in rising rate environment

[GrayHare]

Like many I've been using a 5-year CD ladder, but with interest rates forecast to be rising, what variations may be useful? I'm seeing rates on 2 to 3 year CDs creeping up while 5-year rates barely budge. Assuming the CD can be broken with reasonable penalty, say, a few months of interest, in this environment does it makes sense to stick with a 5-year CD when it pays only 0.25% to 0.5% more than a 2-year?

 

[brewer12345]

Don't underestimate the value of the option to surrender early. If you get .5% more than a 2 year and the surrender penalty is 1%, you are almost certainly better off with a 5 year CD even if you get 2 years in and it is worth surrendering and chasing a higher rate.

 

[jazz4cash]

I've actually been extending out to 84 months in many cases. I have considered splitting the deposit into multiple certificates or multiple terms. It depends on the early withdrawal policy (e.g. are partial withdrawals permitted?) In the case of a reasonable Early Withdrawal Penalty, I just take the longest possible term and the rate can be much higher even after the penalty. This early withdrawal penalty calculator is a handy tool to evaluate the effect of taking early withdrawals.
https://www.depositaccounts.com/tools/ewp-calculator.aspx

 

[Totoro]

+1 on that.

That said, I'm not in CDs right now since the yield curve is absurd in Euro and I want to be able to move tax jurisdiction easily.

 

[FIREd]

As long as the early withdrawal penalty is reasonable (6-months or less), I am going for longer maturities (60-84 months) right now.

 

[FiveDriver]

I've been laddering with 12-month CD's at my local Navy FCU. The difference in Interest Rates for longer terms like 4 or 5 years was not great enough to tie up money for that long. The framework for the ladder is every 2 months I have something up for renewal. I don't think I'll extend the term on the next renewal just yet, but I'll continue to monitor the yield curve.

 

[Dash man]

PenFed just increased their certificates to 2.28% APY for a five year CD and 2.38% for a seven year certificate.

 

[brewer12345]

PenFed just increased their certificates to 2.28% APY for a five year CD and 2.38% for a seven year certificate.

Nice rates, but the early withdrawal penalty language makes them a no-go for me:

2) Certificates Having a Term Greater Than Six​

Months.​

a) If redeemed within the first year, all dividends​

will be forfeited.​

b) If redeemed thereafter, but prior to the maturity​

date, the early withdrawal penalty will equal 30%​

of what would have been earned if the certificate​

had been held to maturity, not to exceed total​

dividends earned

 

[Dash man]

We don't buy CDs with money we might need during the term of the CD. If we withdrew them early it'd only be because the rates had risen so much we'd want to roll them over.

 

[RetiredGypsy]

Navy Fed has a special 1 year 3% CD with a cap of $3k that you can renew every year; if you have a spouse and kids, you can stick $3k in each of their own accounts too if you wanted. Other than that, the best I've found was a recent 2% 17 month CD at Navy Fed as well.

I've only opened CDs with a penalty of 6 months interest, thinking that it may be worth pulling out early for better rates/emergency whatever. Every time the math has worked out best to get the highest interest and longest period possible.

 

[FiveDriver]

Navy's 3% CD is for IRA's only.

There's not enough difference between their 1 year and their 3 year IMO. It's only about 0.4% -- on $10K what is that 40 bucks ??

 

[Dash man]

Navy Fed has a special 1 year 3% CD with a cap of $3k that you can renew every year; if you have a spouse and kids, you can stick $3k in each of their own accounts too if you wanted. Other than that, the best I've found was a recent 2% 17 month CD at Navy Fed as well.

I've only opened CDs with a penalty of 6 months interest, thinking that it may be worth pulling out early for better rates/emergency whatever. Every time the math has worked out best to get the highest interest and longest period possible.

We can't join Navy FCU since I'm separated from the Air Force over 20 years. The $3,000 limit is not what we're looking for either. But thanks for the info. We'll most likely open a new PenFed CD next week when the money from some exercised options hits our account.