CD Rates, a plan?

[Telly]

As old, high interest rate CD's expire, the new rates are abysmal. I have started to go with 4.xx % rates on 60 mos. Never went out that long before, but the short term rates are just so so low.

6 month interest penalty for early withdrawal, of course. But I am betting that Interest rates are not about to make a big move upwards. And when they do finally move up, that the available CD rates will lag to boost financial institutions profits.

So I'm thinking that I'd rather get 4.xx % a year, then take a 6 month interest hit some time in the future (maybe), rather than definitely subject it to a 1.xx or 2.xx % short-term rate for sure.

Wise plan, or lunacy? Comments, and how are others handling this low-rate CD issue?

[sgeeeee]

I-bonds with a current 4.xx% rate plus inflation protection look pretty good in comparison with a 60 month 4.xx% CD. Of course which works out better for you depends on the future economic twists and turns, but it's something to consider.

[Bob_Smith]

I don't use CDs, but my father does. When ever one expires he calls me. I check the internet for the highest advertised rate I can find. He takes that information in to his small town local commercial bank and usually (maybe 8 times out of 10) they not only match that rate, they also throw in a perk such as letting him cash out without penalty if the need arises. I was amazed the first time he did this, but he has done it repeatedly now. I don't know if this would fly in the cities or the larger banks, but it does in small town Iowa. For those utilizing CDs, it doesn't cost anything to try.

[MRGALT2U]

Don't be afraid to ask. I've gotten to the point in my life
where I negotiate on practically everything. Amazing
what people will agree to if you have the guts to push
a little.

[MRGALT2U]

I was once almost 100% in CDs. Currently I have none.
In order to keep my rate of return up, I have assumed a
lot more risk and gone way out on term (up to 20
years in one case). Most of my invested cash is in bonds, bond funds, or bond like securities. All pay
interest monthly. So far so good, although I confess
some angst over the lack of a guarantee of principle.
On the other hand, I do have quite a bit of my base
in real estate and money market accounts. Bottom line
is even if the bonds go to hell in a handbasket, I still
could muddle through. Worst case scenario -
always consider it. Works for me.

[renferme]

My Dad has always bought CDs ; has been retired for 25 years. He has lived exclusively on CD income and social security. Consequently he has effectively lost 1/2 of his buying power because of inflation. That's what you get (or lose) with CDs. Are you really sure you want to buy more CDs at about 4% ? Have you thought about bonds. I don't mean bond mutual funds. I mean real bonds - high grade bonds. You can get more than 4%. Sure they're not insured, but, the small risk taken is better than a 4% CD. Maybe buy a number of bonds with different maturities with several difference companies. Also, I like REITs, but most seem to be trading at high prices right now. Or, how about this: 50% in CDs and 50% in bonds paying > 4% ? More safety there.

bennevis,

You're right on that one! - CD's are guaranteed! Guaranteed that you will lose purchasing power (i.e. Money) over the long haul.

Life is not without risks. Asset Allocation softens the landings!

[Telly]

I have been thinking more about I-Bonds. Of course there is the 30k/yr limit with them. At this point, I guess I'll just see what happens on Nov. 1. Maybe I'll regret not getting a portion of the present six months rate. I wonder if the base rate will go up? I wouldn't be too surprised if the 6 mos. inflation portion goes down a bit.

[JWR1945]

Telly

Quote:

Of course there is the 30k/yr limit with them.

That is $30K per social security account number. If you have a wife and/or kids, the amount can be higher.

In the back of my mind I think that there is a way to increase the amount to $60K per social security account number. I have forgotten all of the details. It may have been using two types of savings bonds (I and EE?) or it may have had something to do with electronic accounts and physical possession of bonds as paper. I will try to find out more about this.

Have fun.

John R.

[MRGALT2U]

Hello JWR1945! I like your style but ended up chasing yield, which the experts tell you not to do. With hindsight I like your approach better.

[JWR1945]

It is $60K per social security account number both for I bonds and EE bonds. That is a total of $120K

Here is the link:
http://www.publicdebt.treas.gov/sav/sbregfaq.htm

Here is what they say:

Quote:

Purchase Limitations 1. What are the maximum amounts I can invest in EE and I bonds each year? In general, as of May 2003, you can invest up to $30,000 (issue price) in paper EE bonds per calendar year, and up to another $30,000 (issue price) in electronic EE bonds through TreasuryDirect. (The previous annual limitation was $15,000 (issue price) for paper EE bonds.) You can also continue to invest up to $30,000 (issue price) in paper I bonds and up to another $30,000 (issue price) in electronic I bonds in TreasuryDirect. Bonds purchased as gifts or in a fiduciary capacity are not included in the computation for the purchaser. For additional electronic purchase limit information, see our TreasuryDirect web site.

This is from their FAQs at their website.

Have fun.

John R.

[Telly]

Well, maybe I don't feel so bad about dragging my feet in getting I-Bonds this time.

The old composite rate was 4.66%, of which 1.1% was the actual fixed rate (the rest being the inflation adjustment for that 6 month period).

The new rate effective November 3 from the gov website:

I BOND EARNINGS RATE 2.19%

The earnings rate for I Bonds is a combination of a fixed rate, which will apply for the life of the bond, and the inflation rate. The 2.19 percent earnings rate for I Bonds bought from November 2003 through April 2004 will apply for the first six months after their issue. The earnings rate combines the 1.10 percent fixed rate of return with the 1.08 percent annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 184.2 to 185.2 from March 2003 to September 2003, a six-month increase of 0.54 percent.


So the fixed rate stayed at 1.1%, but the inflation adjustment really fell. So, if I would have bought I-Bonds on Oct. 30, I would have locked in the old 4.66% rate for 6 mos. Then, if nothing changed at the next release, my 4.66% would have dropped down to only 2.19%.

Unless inflation is really going to take off, or unless the fixed rate is really going to jump in the next year or so, I figure I'm better off with 5 yr. CDs at 4.15%. Even factoring in possibly losing 6 mos. CD interest to get out if the situation changes greatly.

So maybe procrastination won this time.