Preservation with CD’s

[Carol1862]

We are now retired for quite some time and doing fine financially. CD rates are at about 5% and I moved a considerable portion of our portfolio into CD’s. I use various online banks (Synchrony, Ally, Discover to name a few).

Since Firecalc has us at 100% with this form of investing we’re taking advantage for the next year or so of this.

Some are offering a 4.5 or so for longer term. My question is what should be the longest I lock my money into CDs and at what rate should be my minimum?

Also, we have a TIRA brokered CD maturing at Vanguard in December. They’ll put the money in their MM for now, but am at a loss as to what to do long term for this amount ($100,000). We’re looking for preservation more than huge gains.

Thank you

 

[COcheesehead]

Guessing on interest rates is impossible, but one technique to help guard against getting caught too short or too long is to ladder your fixed income investments. Some say five years, I went ten, but I used a variety of bonds, non callables to assure we had the funds along the entire duration. We get paid interest almost every two weeks and have bonds mature almost every few months so we can take advantage of the rates at that time. If rates drop, the bonds will rise in value, if rates rise, we have fresh funds to reinvest at the higher rate.

 

[pb4uski]

We are now retired for quite some time and doing fine financially. CD rates are at about 5% and I moved a considerable portion of our portfolio into CD’s. I use various online banks (Synchrony, Ally, Discover to name a few). ...

I think it is wearysome to move funds around between various banks to get the best CD rates and deals. Much easier to just centralize it all with one of the big brokerage firms like Vanguard, Schwab or Fidelity and buy brokered CDs.

Over the last year or so I've crafted a 7 year ladder of brokered CD, agency bonds, high quality corporate bonds and a dash of high quality floating rate preferred stocks that has a YTM of 5.54%.

Below is a CD ladder from Schwab. I bought a 5 year brokered CD ladder (10 rungs about 6 months apart) for a friend last month before the pullback in rates that had a weighted average YTM of 5.4%.

 

[Rianne]

We have a combination of CDs and treasuries. For treasuries, I always look for and buy the highest coupon and purchase price of less than 100. That interest drops into the settlement account and we can either repurchase or use it for income.

The CDs provide simple interest into the settlement account but make sure you're not buying more than $250K from one bank. That interest can be used to reinvest or for income.

It occurred to me that when (8 years) we reach RMD age, I'll have to pay attention to which treasuries or CDs are maturing to make sure we can pay the RMD from the tIRA and not have to sell a bond. For the most part, we are laddered out 5 years.

 

[frayne]

Personally and not based on anything, I don't like locking my money up on CDs much more than about five years out and currently I don't have anything more than three years out.

 

[LakeRat1]

For the past 24 months, I have been buying short term CDs, 6mo, 9mo, and 1 year .... As they mature, I make a decision as where to invest next for the short term.... I am playing with 500k right now, with 300k of that becoming available again in January ..... This is all in my tax deffered IRA, so I am not taking any of the $$$ out, just re-investing ...... I figured I will keep doing this as long as the current adminitration is in office

 

[Car-Guy]

Personally and not based on anything, I don't like locking my money up on CDs much more than about five years out and currently I don't have anything more than three years out.

Me too.

See post #2134

https://www.early-retirement.org/fo...post-updates-here-116449-107.html#post3018904

 

[pb4uski]

Personally and not based on anything, I don't like locking my money up on CDs much more than about five years out and currently I don't have anything more than three years out.

Me too.

See post #2134

https://www.early-retirement.org/fo...post-updates-here-116449-107.html#post3018904

So does that mean that your weighted average term is about 18 months? Or are maturities skewed towards one end or the other?

Do you plan to extend portfolio duration at any point or just stick with 3 years or less? If the former, what will your trigger be?

 

[Al18]

Most of my CD’s I’ve bought in the last year are in the 12 month to 24 month range. I have bought a few 36, 48 and 60 month, but not many. Aside from brokered CD’s, I have accounts at 6 banks/credit unions and pick the best rate/term in the group. I done opening new accounts to chase down every last basis point - I’m retired.

 

[Alex The Great]

I looked at brokered CDs with Fidelity today: the longest term I noticed was 5 years. There were also 10 years CDs but they are not call protected which I would never consider to purchase. In addition to that all those 10 years CDs were from no-name banks which I also try to avoid.

 

[mcbraemer]

Guessing on interest rates is impossible, but one technique to help guard against getting caught too short or too long is to ladder your fixed income investments. Some say five years, I went ten, but I used a variety of bonds, non callables to assure we had the funds along the entire duration. We get paid interest almost every two weeks and have bonds mature almost every few months so we can take advantage of the rates at that time. If rates drop, the bonds will rise in value, if rates rise, we have fresh funds to reinvest at the higher rate.

We are set up almost identically as Cocheesehead above. Laddered corporates evenly out about 13 yrs, with dividends every 2 weeks (somewhat even across each of the 12 months), and chunks worth 7k-15k coming due approximately every quarter. We scrape income and withdraw it (all in std IRA's) but have reinvested principal to the long end of the ladder. So far we are making this scheme work for us.

 

[jazz4cash]

Response to post #10
Yeah I understand some reluctance to go with a no-name bank but I can think of a dozen or more local banks that I trust 100% but anyone from another region would’ve never heard of. With brokered CDs from unfamiliar issuers I am counting on FDIC coverage and I trust Fidelity to a lesser extent. There are orher ways to evaluate including ratings sites and depositaccounts.com. Pgm got u Rates are inverted and volatile so issuers are being stingy with call protection. I see 5yr CDs pay~ 45-60 basis points less with call protection. IMO 10 year CDs have always been a bit of an anomoly but I did buy one in 2011 that paid 4% from a credit union.

 

[Carol1862]

Thank you for all of your replies. We are going to sit down, review and come up with a laddered plan.

Truly appreciate your input.

 

[pb4uski]

I looked at brokered CDs with Fidelity today: the longest term I noticed was 5 years. There were also 10 years CDs but they are not call protected which I would never consider to purchase. In addition to that all those 10 years CDs were from no-name banks which I also try to avoid.

I don't mind callables but I can understand why some people perfer to avoid them... it all depends on what I'm being paid for the call feature. Right now, 5-year callable CDs at Schwab yields 5.577% and the best 5-year noncallable is 4.572%... so IMO a 1% premium isn't that bad.

On the last part, as long as you stay within the FDIC limits any no name bank is fine. Even if the FDIC ends up having to take it over it is usually over a weekend and has no impact on CD depositors.

 

[jazz4cash]

I don't mind callables but I can understand why some people perfer to avoid them... it all depends on what I'm being paid for the call feature. Right now, 5-year callable CDs at Schwab yields 5.577% and the best 5-year noncallable is 4.572%... so IMO a 1% premium isn't that bad.

On the last part, as long as you stay within the FDIC limits any no name bank is fine. Even if the FDIC ends up having to take it over it is usually over a weekend and has no impact on CD depositors.

It’s good to evaluate call premiums and penalties on CDs. Several friends, family and acquaintances say they wont buy non callables or CDs with early withdrawal penalties. When I ask what is the penalty or how much less noncallables pay they dont have a clue. On a 5 yr I’m choosing not to pay the 45-60 bps premium I mentioned upthread so 1% is definitely too much for me. I’m buying bonds instead.

 

[pb4uski]

Interesting. I think of it as I would be getting 1% more because it is callable. It sounds like you think that you are giving up 1% because it is non-callable.

It doesn't make sense that one would refuse to buy bank CDs without early withdrawal penalties since they don't exist to my knowledge... it is an option that the investor owns and if they are a HTM investor then they can effectively ignore it though it is a nice if the SHTF feature.

 

[Al18]

The only nationally available bank that offers no early withdrawal penalty is Ally bank AFAIK.

For brokered CD’s, it just takes a few seconds to check the bank/credit union rating at www.depositaccounts.com. I will usually check to see if the bank has been in existence for at least 10 years and has an overall bank rating (updated quarterly) of at least a B.

 

[Car-Guy]

So does that mean that your weighted average term is about 18 months? Or are maturities skewed towards one end or the other?

Do you plan to extend portfolio duration at any point or just stick with 3 years or less? If the former, what will your trigger be?

For me, I'm still pondering both of those questions. I'll probably decide after hearing what Powell says in his next meeting in mid December. I've accumulated a good pile of cash in SWVXX this year (so I'm getting a good return while waiting) and the rest of my CD's will be maturing all throughout next year.

 

[jazz4cash]

Interesting. . It sounds like you think that you are giving up 1% because it is non-callable.
.

Not really. I just think of it as the cost for the feature so I just need to decide if there is value for me. Right now CDs are not attractive to me but it seems I am continuously rotating through most of the fixed income options except preferreds. Just haven’t put in the research on those.

 

[audreyh1]

The only nationally available bank that offers no early withdrawal penalty is Ally bank AFAIK.

For brokered CD’s, it just takes a few seconds to check the bank/credit union rating at www.depositaccounts.com. I will usually check to see if the bank has been in existence for at least 10 years and has an overall bank rating (updated quarterly) of at least a B.

At Ally Bank it’s only th 11 month CDs that have no early withdrawal penalty.

And Synchrony Bank offers the same term 11 month no penalty CD.

 

[Al18]

At Fidelity, there are NO call protected CD's beyond 36 months.


I hope there's a better selection at the beginning of 2024.

 

[jazz4cash]

At Fidelity, there are NO call protected CD's beyond 36 months.


I hope there's a better selection at the beginning of 2024.

I think you’ll find they come and go. I am confident you will see some fresh supply before 2024. I presume you are looking at the New Issues tab. If you search on the secondary market there are over 20 CDs that mature in 5 yrs or more right now at Fidelity. I don’t know if there is a downside to buying secondary market CDs. I guess you have to pony up accrued interest to the seller. I think we all prefer non callable but many here have no desire to buy callable issues.

 

[Al18]

I’m referring to new CD only

 

[jazz4cash]

I’m referring to new CD only

Would you consider buying on the secondary market if new issues have dried up?

 

[Al18]

Nope. Most of my purchases are 12-36 month CD’s right now.