Brokered CD Advice / Making a mistake

[pletal]

Morning, I have been CD laddering for over 30 years. This month I have over 300K coming due and need some direction on who to invest with for a Brokered CD. I will not cash it in early and don't mind going long term, no matter what rates may do in the future. I am happy with a 2.8 - 3 percent return. I had a financial adviser come to my house the other night, he was over 60 years old, telling me I am making a huge mistake keeping my money in CD's. Any thoughts on that?

Have 36 months to ER at 52 . God willing

 

[LOL!]

Nothing wrong with CDs if they fit your ability, need, and willingness to take risk. Of course, your returns on this investment will be rather low, so that you will need to have a lot more money saved up in order to generate money for future expenses. But maybe that's the way you roll.

Another poster here, obgyn65, does not like anything risky, too.

Other possiblilies for you are I-bonds purchased directly from Treasury Direct, but there is a rather low annual limit.

You also did not write that CDs were your only investment, so maybe you have a stash of equities in the form of passively-managed low-expense-ratio index funds, too.

 

[obgyn65]

Hello - I also like brokered CDs. I don't think you are making a mistake by sticking to them.

 

[frayne]

And I'll bet the FA wanted you to buy a SPIA.

 

[obgyn65]

Which, in some cases only, make sense.

And I'll bet the FA wanted you to buy a SPIA.

 

[Lakewood90712]

I have used "Brokered CD's" ( On E-Trade, you find them in the "Bonds" section) . The only way I have found acceptable rates going out 3 or more years.

Remember a FA needs to make money in commisions to survive. And he can't ,unless he sells you something. A financial product / insurrance sales person does not wish you bad things , it's just that he put's himself as a priority , not you, and this can cost you big time.

If CD's are where your comfort zone is , your gut feeling is likely correct.

 

[OAG]

Vanguard has a lot of them. IMO I personally would stick to FDIC and non-callable ones and be reasonably sure I could hold to maturity - redeeming early on the open market in a rate rising environment could be ugly. BTW if you can get in Navy FCU is currently paying 3.1% APY on standard 7 year NCUA insured CD's of $100K+. I just bought there and at Pentagon FCU (Pentagon no longer has any 3% ones currently). We have been retired for a LONG time and CD's is all we have (besides Army Retirement and SS) seems to work just fine for us and IMO was not a mistake.

 

[Ready]

I think it would be a serious mistake to buy a brokered CD. I really don't like them. In my mind, they carry all of the interest rate risk of bond funds without any of the premium yield over traditional bank CDs.

I do have a significant amount of my fixed income in CDs, but all directly with banks, where my penalty for early withdrawal is capped at no more than one year of lost interest.

If interest rates go up 2% over the next few years, you are not going to want to be in a low yield brokered CD, but you are going to see a significant hit in value if you want to sell and reinvest at higher rates. I think it's a complete scam for brokered CDs to be selling at the same rates as bank CDs given the interest rate sensitivity they carry. IMHO, don't do it, don't even think about it. Go for the best rate you can get with a bank CD knowing you can get out and reinvest if rates go up.

 

[LOL!]

@Ready, so you trade CDs just like you do bonds? I find that unusual. Folks who buy CDs are supposed to hold them to maturity no matter what. If you do, then brokered CDs are the same as non-brokered CDs.

I suppose if one has to cash in a CD early, even non-brokered CDs have early redemption penalties. It is true that some penalties are rather light.

Maybe we should have a poll to see how many folks have cashed in a CD before the term was up?

Full disclosure: I have used brokered CDs in the past and held them to maturity without any issues whatsoever.

 

[Ready]

Look at the brokered cd that Obgyn65 bought - 10 years at 3.3%. Compare that to the PenFed CDs we all recently bought at 3% for 5 years.

Now look at the impact of these two investments if rates rise to 5% in two years. For the PenFed CD, I cash out after two years, pay 3% and reinvest in a new 5 year CD at 5%.

The brokered CD immediately takes a drop in value of 20%, so clearly you are not going to sell. Instead, you continue holding a CD for 8 more years at 3% when I'm making 5% on my CDs.

This is interest rate risk. Any time I take on risk, I want to earn more yield than a risk free investment. If a bank CD is risk free, a brokered CD has to pay more to make it worth the risk of interest rates rising.

Look at the yields on brokered CDs right now. They are awful. They are lower than the 3% PenFed or NavyFCU rates. Yes, I know the PenFed deal is over, but those deals tend to come around at least once or twice a year. Put your money into a high yield Ally savings account and wait for a deal to come back.

 

[pb4uski]

LOL! to me the issue with brokered CDs is if interest rates rise and you want access to your CD you will get hammered and likely experience a loss. However with a bank CD you would pay a modest early withdrawal penalty and be able to access your funds (or reinvest at the higher rates).

For the OP, I think the target maturity bond funds from Guggenheim and iShares are a sensible alternative to CDs, particularly if you have the ability and intent to hold to maturity. You get better yields, albeit with some credit risk. While those instruments have interest rate risk, if you have the ability and intent to hold to maturity it is moot. I own both.

 

[Ready]

Looking at CDs available through Vanguard, the highest yield for a 5 year CD is 2.067%. So exactly the rate of PenFed's 5 year CD now that the promotion is over, or a full point less than NavyFCU if you are eligible to join.

To get the rate up to 3%, I have to go up to 8.5 years. Why would anyone want to lock up their money for 8.5 years at 3%, knowing that if rates rise they will take a significant hit if they want to sell early?

To account for interest rate risk, a brokered CD MUST pay at least a full percentage point above a bank CD to justify the extra risk. Until they do, they are just plain bad investments.

When I hear brokered CD, I have the same reaction as when a new member tells us they are thinking about going to Ameriprise for their investments. Sorry, but it's just plain bad. Don't do it.

 

[jayc]

Morning, I have been CD laddering for over 30 years. This month I have over 300K coming due and need some direction on who to invest with for a Brokered CD. I will not cash it in early and don't mind going long term:

Schwab has 7 yr for 2.7%, 10yr/3.3. You could get two, one for annual expense (I.e 60k) and 240k for the 2nd. Or get one for whatever amount gets you to the next maturity rung.

Did you ask the FA what he did with HIS last 300k that needed a home?

 

[Al18]

I see nothing wrong with investing in brokered CD's, as long as you stick to FDIC insured, non-callable. Obviously you want to stay under the $250K FDIC limit per bank.

Most of my CD's are thru banks, but I've recently invested in a long-term brokered CD with a good rate.

As for the warnings from the other folks on this thread, I don't think they fully understand how CD ladders work. If you have to cash in your CD before maturity, then your CD ladder is not setup correctly IMHO.

 

[obgyn65]

Just a couple of comments. Sorry for any typo as I am traveling.

I found that buying 10-year CDs is what works best for me. I like the predictability, stability, and zero risk over the long term. I already have $70k in CDs maturing every year on average, including in 5 years time - therefore why on earth would I need to buy more CDs expiring in 5 years then if I spend less than the CD maturing value + interest that year ?

I have never had a CD going down 20 percent. Right now all my CDs up to 5 years are 101-105% of their initial values. The CDs up to 10 years are between 97-99%.

I am not trying to sell the concept of 5 year vs 10 year CDs. What works for me will not work for everyone.

Look at the brokered cd that Obgyn65 bought - 10 years at 3.3%. Compare that to the PenFed CDs we all recently bought at 3% for 5 years.

Now look at the impact of these two investments if rates rise to 5% in two years. For the PenFed CD, I cash out after two years, pay 3% and reinvest in a new 5 year CD at 5%.

The brokered CD immediately takes a drop in value of 20%, so clearly you are not going to sell. Instead, you continue holding a CD for 8 more years at 3% when I'm making 5% on my CDs.

This is interest rate risk. Any time I take on risk, I want to earn more yield than a risk free investment. If a bank CD is risk free, a brokered CD has to pay more to make it worth the risk of interest rates rising.

Look at the yields on brokered CDs right now. They are awful. They are lower than the 3% PenFed or NavyFCU rates. Yes, I know the PenFed deal is over, but those deals tend to come around at least once or twice a year. Put your money into a high yield Ally savings account and wait for a deal to come back.

 

[Ready]

Risks come in many forms. We often focus on the risk of investing in stocks and having them go down in value, thus we "lose money".

CDs, whether direct or brokered, will not "lose money" assuming they are FDIC insured. However, that does not mean they don't have risk.

If rates rise tomorrow from 3% to 5%, your stuck earning 3% for the next 10 years with a brokered CD. I will be cashing in all of my bank CDs, paying a small penalty, and reinvesting all of them at 5%.

I'm not sure how to state it any simpler than that. It's an opportunity loss risk, not a loss of principal value risk. And it has nothing to do with understanding how laddered CDs work.

The funny thing is, when investing my money in fixed income, I consider myself to be more conservative than Obgyn65. That is why I'm not wiling to take on the risk of buying brokered CDs. I'm afraid that Obgyn65's conservative desire to invest has actually placed him in the position of taking on more risk that necessary, simply because he does not understand the importance of factoring in interest rate risk into investment planning.

 

[Mulligan]

Risks come in many forms. We often focus on the risk of investing in stocks and having them go down in value, thus we "lose money".



CDs, whether direct or brokered, will not "lose money" assuming they are FDIC insured. However, that does not mean they don't have risk.



If rates rise tomorrow from 3% to 5%, your stuck earning 3% for the next 10 years with a brokered CD. I will be cashing in all of my bank CDs, paying a small penalty, and reinvesting all of them at 5%.



I'm not sure how to state it any simpler than that. It's an opportunity loss risk, not a loss of principal value risk. And it has nothing to do with understanding how laddered CDs work.



The funny thing is, when investing my money in fixed income, I consider myself to be more conservative than Obgyn65. That is why I'm not wiling to take on the risk of buying brokered CDs. I'm afraid that Obgyn65's conservative desire to invest has actually placed him in the position of taking on more risk that necessary, simply because he does not understand the importance of factoring in interest rate risk into investment planning.

I understand what you are saying Ready, but I cannot get the 3%, 5 year CD. I have to confess, I was looking at transferring a chunk of my Roth in vanguard the other day to a 10 year 3.4% brokered CD. The only thing that stopped me was I discovered I would have to open another brokerage account in the Roth and couldn't just buy by selling my funds. I will probably just wait out the year and see if they do rise, and if that happens my fingers will be more interested in setting up another account.


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[Ally6770]

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[Al18]

Ready states: If rates rise tomorrow from 3% to 5%, your stuck earning 3% for the next 10 years with a brokered CD. I will be cashing in all of my bank CDs, paying a small penalty, and reinvesting all of them at 5%.

Bingo - that's the difference between someone who invests in CD's and someone who has setup a CD ladder to generate a steady source of interest that is spent during retirement. I've spent years setting up multiple CD ladders that come up for renewal every 3 months. I can choose to let the CD rollover, move it to a another bank or spend the interest.

 

[thefinancebuff]

I had a financial adviser come to my house the other night, he was over 60 years old, telling me I am making a huge mistake keeping my money in CD's. Any thoughts on that?

The huge mistake was letting a financial adviser come to your house, no matter how old he or she is. Actually the older the worse. Why is he or she still working at that age?

Unless you are getting a much higher rate, direct CD is better. Also check the Treasury yields and make sure you are getting a meaningfully higher rate on the brokered CD versus Treasuries. Treasuries are more liquid and state income tax free.

 

[Ready]

Bingo - that's the difference between someone who invests in CD's and someone who has setup a CD ladder to generate a steady source of interest that is spent during retirement. I've spent years setting up multiple CD ladders that come up for renewal every 3 months. I can choose to let the CD rollover, move it to a another bank or spend the interest.

I'm just not following why you keep bringing this up. We are in agreement that CDs can be good investments. We are in agreement that building a CD ladder to generate income in retirement makes perfect sense to me. But what I'm trying to point out has absolutely nothing to do with any of this.

Consider what happens if part of your CD ladder has brokered CDs maturing in 10 years at 3%, and my ladder has bank direct CDs also earning 3%. Tomorrow interest rates on 10 year CDs rise to 5%. I cash out my bank direct 10 year CD, pay a small 3% interest penalty, and reinvest into a 10 year CD paying 5%. I'm now earning 60% more income on my investment than you are. You can't cash in your brokered CD, because the rise in interest rates just caused your CD to drop in value by 20% if you had to sell it on the open market. So you continue to suffer through 10 years of 3% interest while I live much more lavishly on my 5% returns.

 

[Ally6770]

Many banks and credit unions have changed their disclosures and some will no longer let you close them early. Some will not even let you take out a small portion of your CD if needed in an emergency. All plans work until they no long do. They can clawback on the rules with new disclosures. Read your disclosures but also ladder CD's. You still have the best of both worlds by laddering CD's.

 

[youbet]

I think it would be a serious mistake to buy a brokered CD. I really don't like them. In my mind, they carry all of the interest rate risk of bond funds without any of the premium yield over traditional bank CDs.

I too prefer traditional CD's, but I don't think you have your analysis quite right.

Brokered CD's "carry all of the interest rate risk of bonds (NOT bond funds) without the premium yield over traditional bank CD's."

 

[Ready]

Brokered CD's "carry all of the interest rate risk of bonds (NOT bond funds) without the premium yield over traditional bank CD's."

Yes, my mistake. Good catch, thanks!

 

[pletal]

I see nothing wrong with investing in brokered CD's, as long as you stick to FDIC insured, non-callable. Obviously you want to stay under the $250K FDIC limit per bank.

Most of my CD's are thru banks, but I've recently invested in a long-term brokered CD with a good rate.

As for the warnings from the other folks on this thread, I don't think they fully understand how CD ladders work. If you have to cash in your CD before maturity, then your CD ladder is not setup correctly IMHO.

I think my ladder is set up correctly. It goes out to 2022 with between 250k and 400k coming due each year. Problem I have (guess not really a problem ) is that we have maxed out FDIC coverage at Penfed , Navy FCU, Apple FCU Etc and the rates are dropping again. I have always gone out as long as possible without every breaking a CD. Unless the rates go below 2% we should always be able to live on the interest when we call it quits.