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Optimum ladder length?
Old 05-25-2015, 07:30 PM   #1
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Optimum ladder length?

I retired 5 years ago with a 5 year bond and CD ladder yielding a marvelous 5% weighted average. Those were the days!!

As the global economy has sputtered, I have gradually lengthened my ladder to 10 years to eke out a 3% average in CDs and various individual bonds. If rates shoot up fast, I'll be slow to catch up my weighted average, only renewing 10% of my portfolio each year at the increasing rates. Maybe I should go to 20 years and grab another myself another point of average yield. I can live on the 3% as long as inflation doesn't take off. If it does I'll have to revert to the "rice and beans" plan!

Has anybody else made these same moves? Any advice about where to go from here? Miserable uncertainty loves company!


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Old 05-25-2015, 08:07 PM   #2
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Any advice about where to go from here? Miserable uncertainty loves company!
If you want CDs, one tactic is to just be willing to withdraw the money if rates climb. Buy only from the originator (no brokered CDs), and buy those that have reasonable early withdrawal penalties. The yields today are so paltry that, face it, even a 12 month forfeiture of interest is not very much. So, if rates climb a few percent above today's rates, just withdraw the money and buy a new one. If the "penalty" is really low, go ahead and go for a really long term.
The penalty for getting out of a brokered CD can be a lot higher.
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Old 05-25-2015, 08:58 PM   #3
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Though, right now, you can get paid to get out of brokered CDs...


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Old 05-26-2015, 02:27 PM   #4
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I suspect many of those recent CD purchases were in the 2% range. Say rate a JUMP to 5% for 10 years; even a 1 year Early Redemption or Withdrawal Penalty (ER/WP) would cost you $2,000 per $100K (which is tax deductible on page 1 of the 1040) on the current CD's. You can calculate the payback period for the new rate (hint at that rate the payback period would really be pretty sort). However I am personally on record for saying rates may rise (but I have my doubts) and if they did it will be gradual.

Not to start any unfounded rumors but I would watch NFCU and/or PFCU to see where rates go next Monday - should be some indication of a possible upward trend or maybe not.
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Old 05-28-2015, 09:41 AM   #5
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It sounds like you are 100% in CDs.

The last time I looked into it, there did not seem to be any overall advantage in a ladder to income instruments with maturities more than 5 years.

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Old 05-28-2015, 11:07 AM   #6
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Old 05-28-2015, 01:37 PM   #7
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I use the rule of thumb that I need .2% additional for every year. I think I read that in one of Ferri's books. So, the 20 should be yielding 2% more than the 10 to be worthwhile.
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Old 05-28-2015, 02:00 PM   #8
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Quote:
Originally Posted by John467 View Post
I retired 5 years ago with a 5 year bond and CD ladder yielding a marvelous 5% weighted average. Those were the days!!

As the global economy has sputtered, I have gradually lengthened my ladder to 10 years to eke out a 3% average in CDs and various individual bonds. If rates shoot up fast, I'll be slow to catch up my weighted average, only renewing 10% of my portfolio each year at the increasing rates. Maybe I should go to 20 years and grab another myself another point of average yield. I can live on the 3% as long as inflation doesn't take off. If it does I'll have to revert to the "rice and beans" plan!

Has anybody else made these same moves? Any advice about where to go from here? Miserable uncertainty loves company!


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I have made the same CD moves for the last 25 years. Always have gone long (7-10 years) and always made about the same interest every year. Less money - higher interest rate. Now more money .... lower interest rate. We average about 3.2% and can live rather well off the interest. Eventually I will look at a 40 year period and burn through the principle. Kinda OK with that. Still have a couple of 5.75 % cd's from Capital One not due till 2018! Those were the days. If the rates go up many banks will let you pull out the interest and you could use that towards new CD's . Brokered CD's usually deposit interest into a cash account which is a plus.
Sometimes I feel like a fool not being heavily invested in the stock market. OH well!
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