7 year cd ladder

[gsw333]

I have an idea that I would really appreciate some feedback on.I am 63 and planning on retiring in 7 years.I am very conservative investment wise.My idea is buy a new $10,000 7 year cd every 3 months in my Vanguard brokerage acct.for 7 years.This would cover my expenses in the first 7 years of retirement with no need to sell any stock or bond funds.I already have a 200,000 10 yr cd at 3.4 which will mature in 9 years or in March when I am 72.I picked the 7 year because it offers a better yield than a 5 and it ties in with my retirement date.My thought is by buying every three months if rates rise I will get a better return than an intermediate bond fund.I will invest the interest payments into either a balanced fund like Wellesley or a life strategy fund that I will be keeping forever.Between the 7 yr ladder and the 10 yr cd I would have roughly 30 pct of my investments in CD's the day I retire.For whatever reason this gives me peace of mind.I can determine what is best to do with the $200,000 10 year when it matures.Thanks for any thoughts.

 

[OAG]

You say you want a better idea of what to do with the $200K CD that matures in 9 years. If that is the only question a LOT can happen in the next 9 years. I personally would just sit tight and wait and see. Just too bad that 3.4% rate cannot be allowed to be reinvested back to the CD (why I only buy non-brokered CD's). Reading the FMOC information from the news conference yesterday it does not seem like interest rates will be allowed to rise anytime soon (now that the FED has taken relative control of the timing).

 

[gsw333]

No I am looking for responses about the the 7 yr cd plan....does it make sense?

 

[jfn111]

For a conservative investor this sounds like a good plan. $40,000+ income from C/D's plus SS and pension?
You will still have 70% of your portfolio growing in other investments.

 

[RenoJay]

One thing to look at is the fee charged for cashing in a CD early. Do the math. Sometimes it makes more sense to go for longer term (like 10 year) CDs if the penalty is reasonably small. You can calculate a break-even time and also calculate where rates would need to go in order for it to make sense to cash in the cd early.


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[2B]

I'm assuming that this is new money from your employment. On that basis you have a great plan except for the part about working until age 70.

 

[gsw333]

These are brokered cds so I need to reinvest the interest every 6 months from every cd.I will invest it in a vanguard fund either intermediate bond or a balanced fund such as Wellesley or a life strategy fund.


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[pb4uski]

I guess it depends on what the gap is between what you need to live and your income from SS and whether you will need $40k a year from ages 70 to 77. If you have that amount of need and are conservative and want to cash flow match then its not a bad play. If you don't have that much of a gap and the CDs would be reinvested as they mature then I don't see the sense of it and I would think that total return investing would be preferable.

 

[gsw333]

I like the idea of not selling any shares of my stock and bond funds for 14 years and I have grown weary of how bond funds may perform going forward if rates rise.Depending on what I do with the 10 yr cd when it matures,i could extend the plan into my early eighties if I make it that far��

 

[pb4uski]

If you want to constrain yourself from selling equities or bonds that you currently own for 14 years, then you probably don't have much choice is you need this CD money to live on, but with all due respect, constraining yourself that way is probably not a great idea.

No disrespect and I'll concede that you are a new poster and I am being provocative with you with this next question, but did you save the money to support you in your retirement or for it to sit there so you can look at it? My point is that money is fungible and it is fine to move it around as necessary to meet your needs.... after all you saved it and it is yours.

 

[gsw333]

I appreciate your input.I was not clear before when I said I like the idea of not selling any shares for 14 years.....I was referring to the period of 7 yrs building the ladder and 7 years when the cds mature.I estimate our expenses at about 3000 per month outside of SS when retired accounting for normal inflation and it just seems to work.It would be much simpler to just keep it in a fund and I am probably overthinking this.

 

[samclem]

These are brokered cds so I need to reinvest the interest every 6 months from every cd.I will invest it in a vanguard fund either intermediate bond or a balanced fund such as Wellesley or a life strategy fund.

Since you asked for opinions:
1) We continue to be at near historic lows for interest rates, so it is a time when many people would choose to avoid long-term CDs. 7 years is long. But if I were buying long-term CDs, I would definitely not buy brokered CDs. For almost zero additional cost one can buy an original issue CD, and these can be "broken" at any time just by paying the penalty. The penalties are almost inconsequential at today's low interest rates. If CD rates (and inflation) go up over the course of the next 7 years, I definitely would want the options to "pay" a 12 month interest penalty in order to get possibly much higher interest rates.

2) You have an intermediate time horizon--you don;t need any of this money for 7 years. The CD investments you are contemplating are not low-risk: They are very likely to return less than inflation, and so you are at high risk--of losing some of the buying power of this money. On the other hand and just for perspective, Since 1979 (when Wellington adopted it's current investment strategy) the fund has 33 five-year investment periods and in none of them did it lose money (in nominal dollars). The average annual return for the last 15 years (including some fairly "bad" ones) was 8.67%. On the 85 year history of the fund, the worst 3 year total return was -1.08%
And Wellesley (which has been around for 44 years) hasn't lost (nominal) money over any 5 year period since it started. The average annual return over the last 15 years was 8.27%.

Obviously, the next 7 years (or 14 years) might be nothing like the last 44. But if they are in any way similar, an investment solely in CDs at today's rates will leave an investor far behind where he would have been in many very conservative balanced funds. If your portfolio size is such that you will have enough for your minimal needs even if your nest egg loses up to a few percent every year in real value (to inflation), then long-term CD's might be a good strategy. On the other hand--you've said you plan to put the CD interest (which will not be much) into a balanced fund sometime down the road. If you put some (or all) of the principal in those funds today instead and let it grow over the intervening 7 years, you may find yourself well ahead--and are unlikely to find yourself behind (if history is a guide).

Sorry, none of that was what you asked. . .

 

[NoiseBoy]

Have you considered I-bonds? They are not paying much at all these days, but they do offer some protection against the inflation risk of holding a lot of cash, and their interest isn't taxable at the State level. I believe you mentioned "we" in one of your posts so I think you can buy $10,000 per SSN per year. Also, you can defer taking the interest on the I-Bonds until after you retire when most people typically fall into a lower Federal income tax bracket. With your CD ladder, you're going to pay tax on the interest at your marginal rate for the next 7 years. You could put $20k into I-Bonds and $20k into 7 year CDs each year, buying one instrument per quarter per your original plan.

I have 20% of my current portfolio in cash and it has been a drag on my performance the past few years. I hold Wellesley in my ROTH, but I've been considering switching that over to Wellington to allow me to put more of my cash into Wellesley (get around ROTH contribution limits.) I haven't locked in on a new asset allocation just yet, but I think I can meet my FIRE goals with no more than 10% of my portfolio in cash.

 

[ReadySkiDaddy]

Have you entered your numbers in Vanguard's calculator to see if your super low risk allocation is sustainable? Be sure to enter other hypothetical allocations until you find the sweet spot. http://www.vanguard.com/nesteggcalculator

 

[Al18]

I'm a few years younger than you, but had a similar idea about 5 1/2 years ago. My multiple CD ladder is complete - and I'm getting enough interest to keep up with inflation. With the CD ladder complete, it's made me confident enough to not invest any more money in CD's, and invest it all in stock, stock funds or blended mutual funds. If I were to do it again, I would only invest 75% of that money in CD's, and the rest in a blended mutual fund like those already mentioned form Vanguard or Fidelity's Balanced fund (Morningstar 4/5 star rated). I don't see CD's paying better than the inflation rate for awhile, while Fidelity's Balanced fun is routinely increasing 8-10% per year.

 

[Independent]

I have an idea that I would really appreciate some feedback on.I am 63 and planning on retiring in 7 years.I am very conservative investment wise.

I've said that I'm married to the most risk averse person I know. So I've used something like this.

When I retired, we had a 3 year CD ladder. Then we had I-bonds that would cover expenses for another few years.

I'm concerned about inflation. So, I'd think about using I-bonds and TIPS instead of CDs for a 7 year investment horizon.

(I also retired well before 70, but that's a different thread.)

 

[bad_LNIP]

Why not just buy a zero coupon bond 7 years out?

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