Would you do 2.3% 5 year CD with early withdrawal or 3.2% 10 year CD without?

[Earl E Retyre]

Hi all,
I have some extra cash earning .1% in the bank today that I do not need to touch for a while. At this point, I do not want to add to my stock and bond investments. I want an FDIC insured investment where I am guaranteed principal/interest.
I looked into CDs and found 2 options. Option 1 is a 2.3% CD at Synchrony Bank with a yield of 2.3% and a 6 month penalty for early withdrawal.
Option 2 is a 3.2% CD through Vanguard which purchases a 10 year CD (coincidentally also through Synchrony Bank). My understanding of the Vanguard CD is that I could not withdraw early since it is treated like a bond – but that it is FDIC insured and am guaranteed principal and interest at the end of 10 years.
Of the 2 options, which do you think is a better option?
My initial reason to look into the 2.3% CD is because, if rates go up, I can always withdraw, simply lose 6 months interest and re-invest. For example, if PenFed offers a 3% or higher CD again then I could always move the funds to PenFed. But if rates do not go up within 6 months, then I am better off with the 2.3% CD rather than keeping it earning .1% in the bank today.
Then I saw the Vanguard option of 3.2% FDIC insured (but no early withdrawal). And am trying to decide whether to go for it instead. I already have investments in Wellesley, US and international stock market index funds, bond index funds, municipal bond funds, etc. So, I know I have the option to invest more in those vehicles. But assuming I want a CD, which would you do – option 1 or 2?

 

[Meadbh]

Chances are high that interest rates 10 years from now will be significantly higher than they are now. There is no way I would tie up my money for that duration for 3.2%.

 

[TimSF]

Between those two, option one for sure. And agree with Meadbh's comment.

 

[braumeister]

It's a tough decision at times. I agree with Meadbh that ten years is far too long a time to tie up your money at that rate.

Personally, I compromise with a regular savings account at Discover Bank paying 0.9%. When good CD offers come along, I have money immediately available to take advantage of them.

 

[clifp]

Unless things have changed at Vanguard, you can sell your CD on the open market. But it will be subject to interest rate risk (it basically acts like a bond.)

Also in most case when you die you can also redeem the CD penalty free, although that feature maybe of rather limited use in this life.

 

[Quantum Sufficit]

No doubt I would choose option #1. Not even close. 10 years is a LOOONNNGGG time

 

[brewer12345]

The 5 year CD is a no-brainer compared to your alternatives. A third option would be to buy an I bond, but the dollar amount is limited.

 

[retirementguy1]

I agree the with above posters, ten years is too long in a low interest rate environment.

 

[kaneohe]

........and even better, if it is in an IRA.........and you're old enough (59.5?).
Then you can effectively "withdraw" with no penalty and get new higher rate
once per yr (or perhaps 12 mos.) on 1 CD. (best to check an confirm tho)

 

[Al18]

I would pick both #1 and #2. My advice would be to divide your money by 4 and invest in 3 year, 5 year, 7 year and 10 year CD's. This is called a CD ladder, and the advantage is you'll have access to some of your money on a regular basis without paying an early withdrawal penalty. As each CD matures, you'll have the ability to spend it, reinvest it or buy some stocks/bonds.

The 10 year Vanguard CD is a brokered CD. Note the interest on a brokered CD does NOT compound, unlike the 5 year CD. The interest simply appears in your Vanguard account according to the terms of the CD (probably every 6 months).

 

[jebmke]

Jan 2025 TIP is yielding .321. For long duration I prefer to have the insurance against unexpected inflation. Most of my fixed income is in short nominals (average duration < 3). Ten years is a lot of risk with no inflation protection.

 

[veremchuka]

OP maybe you should check this out Where to stash your cash to make more - CBS News

 

[Chuckanut]

Here's a 25 month CD paying 2.25% as of today.

https://www.depositaccounts.com/blog/2015/09/usalliance-financial-revives-25month-cd-special.html

 

[Earl E Retyre]

Here's a 25 month CD paying 2.25% as of today.

https://www.depositaccounts.com/blog/2015/09/usalliance-financial-revives-25month-cd-special.html

Thanks for the heads up ... in looking at the link it says the CD is callable. Doesn't that seem odd?

Callability Policy
The Credit Union has the right to call or redeem Certificate Accounts early. To call or redeem your Certificate Account early, the Credit Union will provide 60 days written notice to you. Should the Credit Union exercise this option, your Certificate Account will be redeemed without penalty on the day specified in the notice.

 

[Koogie]

I wouldn't buy a 10 year CD either but just to play devils advocate: in 2005 the average 5 year CD rate was just about at 4%

Things haven't changed a lot in 10 years have they... (

 

[Lakewood90712]

Go for the 5 year, I did a bunch in the last 2 months

 

[pb4uski]

I'll be watching to see if PenFed does any CD specials this year.

 

[mickeyd]

I'm holding out for another NFCU-like 5% 12 month deal since my last one recently matured.

 

[wolf]

Tough decision. Next year I will be in the same situation.

History. Interest rates have remained low since 2008, 8 years.
If this scenario continues, option 2 best bet.


Rates may rise, but very slowly, according to Yellen. So option 2, still
might be the best option.

Since, no one can predict the future, the poster who mention a ladder might be correct.

In my case, I might put 1/2 in 10 yr broker CD, and the other 1/2 in
5 yr CD, with 6 month EWP.

 

[ziggy29]

I wouldn't tie up my money that long for a low rate, but that said, five years ago many of us probably wouldn't have thought "QEx" (aka the War on Savers) would still be going on heading into 2016... so you never know. In hindsight a 5-year CD would have been fine in 2010.

Every time they talk about raising rates, the economic data suggest a slowdown or the markets start to fall, and it gets put on hold, or so it seems.

 

[Tadpole]

You ever had stuff pile up in the corner of your garage or a shed while you kept telling yourself you were going build or buy an organizer to house the stuff? So you let it sit until you find that perfect shelving unit or cabinet. That is currently the way my cash is beginning to look. Like a ever growing unproductive pile in the corner just waiting for something to come along with worthwhile bins for long term storage.

 

[Totoro]

+1 on that.

 

[DEC-1982]

This is very timely. I took a look at the CBS link posted by Veremchuka. It seems like the 5 year CD (only checked Synchrony) and cancellation after 2 years (1.72%) delivers a better return than the 2 year CD (1.45% at Synchrony).

 

[Bikerdude]

so you never know. In hindsight a 5-year CD would have been fine in 2010.

And the 10 yr has been a good bet since 1984. I have a ten year CD ladder and sleep well at night.

 

[Al18]

If you started building your yearly CD ladder as I mentioned in August, 2014 - you shouldn't be concerned with early withdrawal penalties as a portion of your money would have been available in August, 2015.