Chasing yield again: PenFed CDs

[Nords]

Most of our kid's college fund has been in CDs that mature in two weeks. She starts this August (just 160 days!) and we think she's going to do NROTC for at least the first year. We're going to cover the remaining freshman-year expenses from education bonds laundered through a 529.

The NROTC four-year program has recently changed to be "free" for the first year with service obligations starting the second year. She's probably a sucker for the NROTC lifestyle but we'll hedge our bets until she's seen the "real" fleet. So just in case she bails on the military after summer cruise in 2011, we'll hold the sophomore year's expenses in a one-year CD.

I'd put the rest of it into a longer-term CD but the sweet spot seems to be about three years, and I expect that CD rates are going to start creeping up at the end of this year or early 2011. I've had an account with NFCU for over 30 years, and recently they e-mailed me:

If you need further assistance, please let us know. Navy Federal appreciates your long standing membership and looks forward to providing you service for many more years.

So I e-mailed them back:

NFCU,
Here's an opportunity. We've received your share certificate maturity notices and we're considering renewing for a three-year CD. The interest rates on a three-year CD appear to be about 2.35-2.50% while similar CDs at Pentagon Federal Credit Union are paying 3.00%. Over the last couple years, PenFed has consistently matched or exceeded NFCU's rates.
We'd appreciate knowing what NFCU can do about the PenFed competition. Thanks,

NFCU's response:

The rates on investment products may only be set by our Board of Directors. Our Board of Directors monitors our interest rates very carefully on a monthly basis. While our key competitor’s rates are one of the factors used in rate determination, we do not price our products based on any single competitor. A variety of factors, including market conditions, are weighed before we determine rates as well as national averages. Our philosophy is to remain in the top portion of rate offerings nationwide, not to be at the top at all times on all products. We do not compete with all offerings as it would not be in the best interest of fiscal responsibility for our members.

So I guess I'm goin' with PenFed for 3%.

If you see a better rate in the next couple weeks, please post it to this thread...

 

[calmloki]

Most of our kid's college fund has been in CDs that mature in two weeks. She starts this August (just 160 days!) and we think she's going to do NROTC for at least the first year. We're going to cover the remaining freshman-year expenses from education bonds laundered through a 529.

The NROTC four-year program has recently changed to be "free" for the first year with service obligations starting the second year. She's probably a sucker for the NROTC lifestyle but we'll hedge our bets until she's seen the "real" fleet. So just in case she bails on the military after summer cruise in 2011, we'll hold the sophomore year's expenses in a one-year CD.

I'd put the rest of it into a longer-term CD but the sweet spot seems to be about three years, and I expect that CD rates are going to start creeping up at the end of this year or early 2011. I've had an account with NFCU for over 30 years, and recently they e-mailed me:



So I e-mailed them back:



NFCU's response:


So I guess I'm goin' with PenFed for 3%.

If you see a better rate in the next couple weeks, please post it to this thread...

As a math problem - consider the 6 month interest penalty on a 5 year PenFed CD just to see if breaking it at the expected time gives you a better rate than the 3 year. For me the rate was better buying a 5 even if i broke at 2, but that was when we had the 4% on 5 year offer back in Dec,

 

[JohnDoe]

Perhaps you can find a credit union paying over 2% on a savings account. Then you wouldn't have to worry about term and perhaps the rate would increase when the fed moves.

 

[CCdaCE]

You're probably already aware of the fatwallet forum CD thread. Penfed tops the 3 yr. list with 3%, but other banks have them beat for longer terms. Like calmloki says, the devil is in the details w/ the 6 mo. penalty, etc.

CD Thread, Post The Best Rates You Can Find Here!--Best Nationally Available Rates--

4 Year (48 Month)
U 06/05/09 $$ Intervest Bank 3.55%
D 06/05/09 $$ Melrose Credit Union 3.49%
U 06/05/09 $$ Tennessee Commerce 3.45%
U 01/01/10 $ Pentagon Federal Credit Union 3.25%

5 Year (60 Month)
D 2/21/10 $$ Melrose Credit Union 3.65%
U 2/21/10 $ iGObanking.com 3.55%
U 2/21/10 $ Pentagon Federal Credit Union 3.50%

-CC

 

[Nords]

As a math problem - consider the 6 month interest penalty on a 5 year PenFed CD just to see if breaking it at the expected time gives you a better rate than the 3 year. For me the rate was better buying a 5 even if i broke at 2, but that was when we had the 4% on 5 year offer back in Dec,

Good point. This calculation used to be a lot more fun when the three-year certificates were paying 6.25% APY.

From PenFed's application:

2) Certificates Having a Term Greater Than Six Months and up to and including 5 years.
a) If redeemed within 180 days of the issue date or any renewal date, all dividends will be forfeited.
b) If redeemed thereafter, but prior to the maturity date, dividends for the most recent 180 days will be forfeited.

So either way an early redemption would lose up to six months' interest. That means the five-year CD would probably be the better deal as long as it was broken no more than once, and doing it twice would probably involve breaking it every two years.

I don't remember a formula or a thumbrule to make this decision, but maybe an iterative approach would work. Let's say that I was willing to wait a year at the higher rate to recover from the loss of six months' interest. At the five-year rate of 3.5% APY the new rates would have to rise to 5.25% any time during the next four years. At the three-year rate of 3% the new rates would have to rise to 4.5% anytime during the next two years.

If I was willing to wait two years to recover from the loss of six months' interest then five-year rates would have to rise to 4.375% anytime during the next three years, or three-year rates would have to rise to 3.75% within a year.

So I have to decide whether it's more likely that:
- three-year rates could rise to 3.75% within the next year or to 4.5% during the next two years, requiring the Fed to raise rates nearly a quarter-point per quarter year, or
- five-year rates could rise to 4.375% within the next three years or to 5.25% within the next four years, requiring roughly a quarter-point every three quarters or as much as a quarter-point every other quarter.

I think it's much more likely that interest rates will go up slowly over the next two years, and perhaps even the next three years. And again that would tend to make the five-year CD the better deal. The five-year CD gains an edge if accumulated interest payments are left in the account to compound in addition to the principal.

The only other complication is that we'll need a small portion of the funds available in 2014 (graduation year) to begin to share the savings of her NROTC scholarship with her. I'm sure that will be a great consolation to her as she's wearing shiny ensign's bars (with all the respect that's worth) and working her way through a huge stack of qualification cards.

So to do everything we're considering in this financial scheme, we're going to have to make sure that we don't redeem too many education bonds each year (that tax break phases out with AGI), that we have one years' expenses in a one-year CD, and that we have a smaller amount available in 2014. Guess I'd better chart this out a year at a time over the next five years.

*Sigh.* This is why we call these shenanigans "chasing yield"...

Perhaps you can find a credit union paying over 2% on a savings account. Then you wouldn't have to worry about term and perhaps the rate would increase when the fed moves.

Perhaps I could (any suggestions?) but a five-year 3.5% APY CD would be a total return of nearly 19%. To equal that, the savings account's rate would have to step up an average of 0.8% per year to equal that. I'm not sure we'd want to "win" that race to an economy where savings accounts are earning 5.2% in 2014...

Unless another credit union loses their mind in the next couple weeks, I think we're still going to ride the PenFed pony on this one.

 

[ziggy29]

I'm seeing some CDs with increasingly punitive early withdrawal penalties. Apparently they see the yield is so pathetic on the short end that they see a lot of folks willing to eat a 30-day to 90-day interest penalty on longer maturities, and some have introduced interest penalties of as much as half of the term's interest. That means there's a 2.5 year interest penalty on a 5 year CD in some places...

 

[smjsl]

Nords, I am also looking for CDs in the next week or so. I looked at Melrose but their early-withdrawal policy scared me off. I am now looking at Apple FCU now for 5-year @ 3.6% or PenFed 5 year @ 3.5%. Both seem to have same early-withdrawal penalty of 180 days after some initial period, so I am leaning towards Apple. (Opening accounts seems to be easy in both of these for outsiders willing to pay ~$20 for joining an organization.)

5-year Igobanking rate is 3.25 now, not 3.55 as far as I can see on their site...

 

[calmloki]

Just ran across this site with yields for checking and CDs. Best CD Rates (Certificate of Deposit) Rates - Top 10 Highest CD Rates Claims daily updates.

 

[Nords]

Just ran across this site with yields for checking and CDs. Best CD Rates (Certificate of Deposit) Rates - Top 10 Highest CD Rates Claims daily updates.

Thanks, I'm perched on it for the next 10 days.

I spent a couple hours this morning flowcharting out all the different options and the timelines. We're ready to go.

 

[JPatrick]

I've got a feeling I Bonds may have their day in the sun again, perhaps as early as the May reset. Anyone believe inflation is heading down?

 

[smjsl]

Thanks for the site, calmloki!

Looks nice, but word of caution: it does not seem to distinguish or reflect jumbo CD rates.

 

[ziggy29]

I've got a feeling I Bonds may have their day in the sun again, perhaps as early as the May reset. Anyone believe inflation is heading down?

Over the next 1-2 years or over the next 10-20?

 

[JPatrick]

Over the next 1-2 years or over the next 10-20?

I think our risk of deflation expires in one year max.
I Bonds have a 5 year (no penalty) holding period. I'm pretty certain the bond you buy today with a 3.66 yield will be higher (yield) in 5 years.
Still, I'd wait until the May reset to see if we can bump the fixed rate portion up a bit.
I Bonds when compared to other 100% safe investments have done quite well over the past 10-15 years. I still hold a nice chunk of them circa 1998 that yield north of 8%.
One nasty rumor to note, Obama and company are apparently exploring the feasibility of dropping the tax deferral part of the deal.
Yet another ---But, it's not a tax increase..

 

[Nords]

Nords, I am also looking for CDs in the next week or so. I looked at Melrose but their early-withdrawal policy scared me off.

Melrose and PenFed have been the five-year front runners this week, but I've noticed that it's very difficult to read about Melrose's early-withdrawal penalties. Do you happen to have a link or any other info?

PenFed not only makes it ridiculously easy to join and to apply for CDs (compared to Melrose and most other CUs), but they also give their customers the impression that they're sharing the automation savings...

 

[smjsl]

Melrose and PenFed have been the five-year front runners this week

Apple FCU is posting better rates than either one of them (for CDs over 50k). Did you have a bad experience with them or some other reasons you don't want to use them?

but I've noticed that it's very difficult to read about Melrose's early-withdrawal penalties. Do you happen to have a link or any other info?

I did not find an official link (I don't recall if I called them to confirm following info or not - I do have a note in my records to not even bother with them due to severe penalties), but here is a "rumor-kind" link:

Melrose CU update – CD Penalty | CD Max Return

 

[Nords]

Apple FCU is posting better rates than either one of them (for CDs over 50k). Did you have a bad experience with them or some other reasons you don't want to use them?

No, never used Apple either, but the RateBrain list for five-year CDs has Melrose & PenFed as the top two. I see Apple is up there too, especially for the shorter terms.

"Over $50K" is another issue. I'm splitting the college fund into much smaller chunks so that if NROTC plans change and I do have to break into a CD for a year's tuition then I don't mess with the other CDs. PenFed has always been good about offering higher rates for smaller amounts. I'll have to do the math and see how much I'm giving up for flexibility.

I did not find an official link (I don't recall if I called them to confirm following info or not - I do have a note in my records to not even bother with them due to severe penalties), but here is a "rumor-kind" link:
Melrose CU update – CD Penalty | CD Max Return

The interesting thing is that in both cases the interest rate on the CD then drops to 1.5% for the remainder of the term. Pretty tough penalty.

Yikes! Guess I'll chase that down.

I can see why my customer inertia is so high with PenFed.

 

[brewer12345]

I can see why my customer inertia is so high with PenFed.

That goes double for me. I have never had a bad experience with PF, and they have even bent over backwards to be more than fair. Having said that, you do have to be a squeaky clean customer to get a loan, especially if you are non-military.

Heh, some day I will tell you all my job title and why it either gets a loan app from me labelled "approve immediately" or "treat with extreme suspicion." Unfortunately, you will have to wait til I hang up my spurs.

 

[smjsl]

FWIW, I decided to open the CD at Apple FCU with 3.6% APY. Unfortunately, the process took a whole week, but mostly because I decided to send my application by snail mail instead of overnight-ing it. Once they received it, approval process took 1 day and my CD was opened the same day approval got in (I wired the funds the same day). Joining Apple costs $20 if no other categories apply to you, via joining NVADACA - on AppleFCU online application page, you can click "None of the categories apply to me" and they will do the rest; no separate application is needed, and you send $20 to them along with $5 savings account deposit during opening).

One good thing that came out of this unexpected delay is that I went back and carefully compared AppleFCU deal vs Ally bank and realized that Ally deal is quite good. So, I ended up opening 2 CDs actually - half in Apple and half in Ally. Opening account at Ally took ~15 minutes - they don't require a mailing before opening an account and they take ACH funding information during the same process - they say interest will be credited starting the next day even though funds won't arrive to them til later.

If I did not make a mistake in my arithmetic, as long as the APYs are over 3.3% at the time of early withdrawal in the next 2.5 years, withdrawing from Ally 3.09% APY 5-year CD will be more beneficial than withdrawing from AppleFCU (due to 60 vs 180 day penalty differences).

In fact I almost decided to put most of my CD money into Ally, but then decided to go half-and-half since Ally bank could change its 60-day-early-withdrawal policy and as I confirmed, it would apply to old CDs too :-( Also, as rates go up, it would be financially beneficial to Ally to change their early withdrawal policy to deter folks with low-rate CDs from withdrawing funds.

 

[copyright1997reloaded]

In fact I almost decided to put most of my CD money into Ally, but then decided to go half-and-half since Ally bank could change its 60-day-early-withdrawal policy and as I confirmed, it would apply to old CDs too :-( Also, as rates go up, it would be financially beneficial to Ally to change their early withdrawal policy to deter folks with low-rate CDs from withdrawing funds.

This is puzzling. How can Ally change the terms in conditions of a contract after the contract is signed? Unless of course, they are a) the federal government (e.g. TARP funds) or b) the contract itself says that the early withdrawal penalty is subject to change. If b), I would never do the CD there as they could make the withdrawal penalty ALL the accrued interest.

 

[jazz4cash]

Navy Fed

I think I looked last week and Navy FCU dropped thier 7 yr CD rate to 3.xx. I just checked today and they are at 4.25(IRA) apy for 7 yrs w/20k min. Think Im gonna pull the trigger on this to rollover a chunk from 401k. I would normally split this up into 4 chunks, but the <20k rate drops to 4.1

 

[friar1610]

So I guess I'm goin' with PenFed for 3%.

If you see a better rate in the next couple weeks, please post it to this thread...

Interesting exchange of emails with NFCU. The past year or two, I've pretty much kept my CD deposits to those two institutions. (Been an NFCU member for about 40 years so I have the same loyalty all Navy folks do to NFCU, USAA, etc..) More and more I'm finding that PenFed beats NFCU except when NFCU is running one of their "specials."

I could shop all the banks on the web looking for a little more yield and at one time I used to do that. But life is simpler when there are only two institutions (rather than 5 or 6) to deal with.

 

[smjsl]

This is puzzling. How can Ally change the terms in conditions of a contract after the contract is signed? Unless of course, they are a) the federal government (e.g. TARP funds) or b) the contract itself says that the early withdrawal penalty is subject to change. If b), I would never do the CD there as they could make the withdrawal penalty ALL the accrued interest.

Aside from CD rates themselves, there is nothing that says terms and conditions cannot change. In fact, banks periodically do change terms and conditions. There is nothing that says they cannot do so for CDs. In fact, just recently Ally changed their early penalties from 90 days to 60 days and this change also applies to old and new CDs.

life is simpler when there are only two institutions (rather than 5 or 6) to deal with.

...as long as you stay under FDIC limits, yes.

 

[Nords]

The past year or two, I've pretty much kept my CD deposits to those two institutions. (Been an NFCU member for about 40 years so I have the same loyalty all Navy folks do to NFCU, USAA, etc..) More and more I'm finding that PenFed beats NFCU except when NFCU is running one of their "specials."
I could shop all the banks on the web looking for a little more yield and at one time I used to do that. But life is simpler when there are only two institutions (rather than 5 or 6) to deal with.

Same here-- I watched PenFed beat NFCU for nearly three years before I got around to signing up.

In addition to RateBrain I've been watching USAA and a couple local CUs, but it's really down to PenFed and NFCU. In that order.

I'll be pulling triggers next week, depending on how fast the EFT network will let me move the money around.

 

[Nords]

Just to wrap up this thread, I moved the money to PenFed and bought their CDs.

In a stunning exception to Murphy's Law, PenFed hadn't lowered their rates just before I bought and NFCU hasn't raised their rates in the 24 hours since I bought.

After consulting NFCU on their EFT limits I ended up doing a $14 wire transfer:

If the receiving institution is a checking account and the desired transfer amount is $2,500.00 or less, then the funds can be sent as an ACH transfer via Navy Federal Online Account Access (NFOAA).
To wire funds from your Navy Federal account to your account at another financial institution for any dollar amount ... you may call us at 1-888-842-NFCU (6328).

An EFT request from PenFed might have gone just fine but I didn't want to get stuck in a technicality and mess with two bureaucracies. The wire transfer started with a five-minute phone call which was handled by NFCU with no fuss or drama. The money arrived at PenFed a couple hours later. It took me about 15 minutes on PenFed's website to ladder up the CDs, which will wrap up with some snail-mail signature paperwork in another week. PenFed generally beat NFCU by 0.25-0.5% in all rates.

Spouse and I joined NFCU in 1978 & 1979 and have had our paychecks & pension direct-deposited there ever since direct deposit became available. At the start of 2009 NFCU had us for two mortgages, a HELOC, and a pile of CDs. One transaction at a time they've stubbornly lost all of them to other banks or to PenFed, and today they're just a direct-deposit stash before we move our money elsewhere. Their Pearl Harbor branch manager was also a jerk about redeeming paper EE bonds.

NFCU hasn't been "bad", they just haven't been very competitive.

 

[friar1610]

Spouse and I joined NFCU in 1978 & 1979 and have had our paychecks & pension direct-deposited there ever since direct deposit became available. At the start of 2009 NFCU had us for two mortgages, a HELOC, and a pile of CDs. One transaction at a time they've stubbornly lost all of them to other banks or to PenFed, and today they're just a direct-deposit stash before we move our money elsewhere. Their Pearl Harbor branch manager was also a jerk about redeeming paper EE bonds.

NFCU hasn't been "bad", they just haven't been very competitive.

Do you have any theories on why this is? Do you think they've gotten too big and "corporate?" I'm mortgage free at the moment but I had my last several mortgages with them. I have some CD's (but increasingly switching to PenFed per the basic topic of this thread). Like you, get pensions (and SS) direct deposited to them and have both credit and debit cards with them. Use it them for my primary checking account. No reason to switch the checking (and therefore want to keep the debit.) Never pay interest on credit cards, so it really doesn't matter where I have it (but it's easy to do transfers from checking to pay off the occasional cc bill.) So, in my case, no reason to make any big moves, but I don't get the warm and fuzzy sense with NFCU that I once did. That said, I'm sure it's a lot warmer and fuzzier than a mega-bank.