Current 5 year CD rates

[watchman3135]

My 4 yr. 250k 3.25% BMO bank CD came due a few days ago and I renewed it with their current 59 mo. 4.50% apy (4.402%) knowing I have the allotted 10 day grace period if I decide to do something else. This is part of my "fixed" asset allocation and like before it will pay monthly but about $240 dollars more at around $915 which like before I'll add to my monthly spending. I have traditional Vanguard IRA's as well as non-tax sheltered brokerage with SCHD, VYM as well as JEPI and a few other monthly payers. Since I have no pension and retired at 53 now 57 I use all these for monthly income and so far I'm getting around $2,700 combined per month which works well since outside of utility bills and groceries we have no other debt outside of a 3 yr. remaining mortgage, and my wife is not retiring for a few more years. None of this included my wife's savings. I pull $250 from that $2,700 per month for year-end taxes so that's around $2,450 net per month so far. Not balling by any means. I'll also be 59.5 in 2025 and the dividends alone from my Wellington, Wellesley and Total Stock market IRA's will pay around 20k additional per year. I also plan to wait to full social security age of 67.

My question is I see many current CD offers 5% and over but for less than two year durations so I'm guessing the banks believe interest rates will start coming down by then. Since I use that 250k CD to generate monthly income and lean like the banks that the interest rates will drop in a few years I don't see an advantage to a 2 year 5% or higher CD since I'm using this money as income. I'd rather not be in the situation where in 2 years I am forced to renew at a substantially lower rate. Fidelity offers higher brokered CD's however many show payment at maturity which won't work for me as I need the supplemental monthly income. I am not an annuity fan with this money.

The funny thing is if someone had offered me a 4.5% CD two years ago I would a jumped quickly for it and if you believe in Vanguard's 10 year earnings projections, 4.5% for a worry-free FDIC return sounds pretty sweet. Any suggestions if I am doing it correctly would be appreciated. Thanks.

 

[ShokWaveRider]

Watchman. It is a little bit of a dilemma for you. I unlike you am looking for CDs that pay at maturity to offset this year's taxes. Unfortunately, Schwab only has some that are paying Semi Annually and not at Maturity, which is what I would prefer right now. I do not want to shift brokerages just for a CD.

 

[pb4uski]

I think this is what I would do.

Take a year's worth of income from this $250k ($915*12 or $10,980?... let's say $11,000) and put it in a money market account that will yield about 4.0%-4.5% currently. Then set up an automatic redemption and transfer to your checking account of $915/month on the xth day of each month.

Then take the remainder, split it 3 ways and buy 1, 2, 3 year CDs or UST, whichever is highest yielding. Those will yield about 5% +/-.

After a year, the 1 year CD will mature, you can move $11,000 of the maturity proceeds to the MM fund and reinvest the remainder in a new 3 year CD. The end result is like a rolling 3 year CD ladder but with a side fund for a year of interest to fund the monthly payments that you desire since many of these brokered CDs only pay interest annually and you desire monthly cash flow.

Note that I said cash flow... you don't necessarily need monthly income, but you do desire monthly cash flow and since money is fungible, a side money market fund to provide that liquidity fits the bill.

 

[watchman3135]

I think this is what I would do.

Take a year's worth of income from this $250k ($915*12 or $10,980?... let's say $11,000) and put it in a money market account that will yield about 4.0%-4.5% currently. Then set up an automatic redemption and transfer to your checking account of $915/month on the xth day of each month.

Then take the remainder, split it 3 ways and buy 1, 2, 3 year CDs or UST, whichever is highest yielding. Those will yield about 5% +/-.

After a year, the 1 year CD will mature, you can move $11,000 of the maturity proceeds to the MM fund and reinvest the remainder in a new 3 year CD. The end result is like a rolling 3 year CD ladder but with a side fund for a year of interest to fund the monthly payments that you desire since many of these brokered CDs only pay interest annually and you desire monthly cash flow.

Note that I said cash flow... you don't necessarily need monthly income, but you do desire monthly cash flow and since money is fungible, a side money market fund to provide that liquidity fits the bill.

So keep the CD and take the first year 11k plus accrued MM interest in reinvest in a ladder CD? Kind of like this idea.

 

[pb4uski]

Why would you keep the 4.5% CD when 5%+ is available?

Heck, you could dump the 5 year 4.50% CD that you are in, put $55k in a MM fund to provide your monthly payments and then invest $195k in a 5.25% 5-year brokered CD and still be way ahead... you'll be getting 75bp more on most of your money and almost the same 4.5% on the $55k.

 

[DallasGuy]

Why would you keep the 4.5% CD when 5%+ is available?

Heck, you could dump the 5 year 4.50% CD that you are in, put $55k in a MM fund to provide your monthly payments and then invest $195k in a 5.25% 5-year brokered CD and still be way ahead... you'll be getting 75bp more on most of your money and almost the same 4.5% on the $55k.

Because some people may not like moving things around all the time. In the scheme of things getting an extra 1/2 to 3/4 of a percent isn't going to make or break most of the people here.

 

[pb4uski]

But the second option that I described was a one and done thing just like the OPs 4.5% 5-year CD. In both cases, once you purchase you're all set for 5 years. Seems like a slam dunk, easy peasy way to pick up 75 bps to me.... that's $1,463 more annually on the $195k of the OP's $250k... $7,313 over 5 years... for an hour of "work"... easy money.

Besides, if the OP was happy with the 4.5% 5-year CD then why would they've created this thread even to begin with? The OP was intrigued by those 5-year 5%+ brokered CDs but put off by the lack of liquidity to meet his cash flow desires.

ETA to refine the numbers:

• FV of $250k deposit today at 4.5% with monthly withdrawals of $915 in 5 years is $251,511.

• FV of $55k deposited today at 4.5% with monthly withdrawals of $915 in 5 years is $7,411.
• FV of $195k depsosited today at 5.25% with no withdrawals in 5 years is $251,852.

• Total terminal value in 5 years is $7,752 better.

 

[watchman3135]

Why would you keep the 4.5% CD when 5%+ is available?

Heck, you could dump the 5 year 4.50% CD that you are in, put $55k in a MM fund to provide your monthly payments and then invest $195k in a 5.25% 5-year brokered CD and still be way ahead... you'll be getting 75bp more on most of your money and almost the same 4.5% on the $55k.

Well, if you're referring to Fidelity brokered CD's all that are higher are shorter term and many pay at maturity not monthly. I also see a lot of them are callable meaning as rates begin to drop and banks determine its no longer a good deal for them, they can cancel the CD at any time. I'm not even sure if or how the monthly ones will pay out to my checking account like the BMO CD does each month which makes it easy access. A few banks offer 5% for 14 months but if I was a betting man I'm guessing rates may be lower in a few years however admittingly my guess which is as good as any. By locking in 5 years I may lose out a bit in the first few years as the Fed continues with smaller incremental rate hikes however may be ahead if the Fed starts cutting rates. Also Agree with DallasGuy's comment.

 

[watchman3135]

But the second option that I described was a one and done thing just like the OPs 4.5% 5-year CD. In both cases, once you purchase you're all set for 5 years. Seems like a slam dunk, easy peasy way to pick up 75 bps to me.... that's $1,463 more annually on the $195k of the OP's $250k... $7,313 over 5 years... for an hour of "work"... easy money.

Besides, if the OP was happy with the 4.5% 5-year CD then why would they've created this thread even to begin with? The OP was intrigued by those 5-year 5%+ brokered CDs but put off by the lack of liquidity to meet his cash flow desires.

Good point and to your last part I am checking to see if I'm missing something in my thinking. You'll never hear me proclaim to be the sharpest tool in the shed

 

[Chuckanut]

The funny thing is if someone had offered me a 4.5% CD two years ago I would a jumped quickly for it and if you believe in Vanguard's 10 year earnings projections, 4.5% for a worry-free FDIC return sounds pretty sweet. Any suggestions if I am doing it correctly would be appreciated. Thanks.

FWIW, years ago I swallowed hard and bought a 3% 5 hear CD from Penfed. I thought I might end up being a chump. But inflation nose dived and I looked like a champ. I would love to claim bragging rights, but in reality, I took a chance and got lucky. IMO, in today's environment a ladder gives me the best shot at earning the most dollars consistent with limiting risk.

Even funnier was the inflation rate was well below 2% for 2020. 1.4%, IIRC. You actually could have had a very positive real return if you could have found that 4.5% CD and inflation stayed about 2%. But, who was issuing 4.5% CDs back then? And who knew inflation would jump up big time in 2021?

Today, even at 5% our real return may not be positive. After taxes it easily could be negative. Still, we do the best we can.

 

[watchman3135]

Even funnier was the inflation rate was well below 2% for 2020. 1.4%, IIRC. You actually could have had a postive real return if you could have found that CD and inflation stayed about 2%.

Today, even at 5% our real return may not be positive. After taxes it easily could be negative. Still, we do the best we can.

Agreed. There are some people that look at never beating inflation and say why bother and leave money in a checking or savings earning .20%. My math still shows 4.30% more is better.

If Vanguards projected 10 year 4.7%-6.7% returns are correct a fixed FDIC 4.5% return starts to look not so bad.