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Old 05-03-2018, 07:05 AM   #41
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Was thinking the same thing too, but what about this scenario?
Forget the exact math.

If product A costs 100 and the CD rate is 2% and inflation is 2%.
Inflation and CD rate go up to 4%. Product A goes up to 102.

Now Inflation and CD rate go back down to 2%, but you know the product is still at 102.
So now one is earning the same lower interest whether the product is at 102 or 104. Thus is CD is not keeping up with the cost of goods?
Am I missing something?
Is my example too simple?
I think this is why you would ladder the CDs, right?
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Old 05-03-2018, 08:16 AM   #42
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No, that is a good example, as well as the fact that rates don't track inflation exactly anyway, its a broad stroke. So if you buy a 5 year CD, then inflation tanks, you are beating it, and vice versa. On a large scale, WHILE the rate was high you profited. Rates will never track fast steep changes in inflation , its just a rolling average that is compounded. The idea is that when the rates increased, your principal increased and is now earning more, which levels the playing field on the increased price. It is the rate of change that matters, not the absolute price.
So in the end, do you feel that with a mainly CD type only portfolio which is covering expenses to be safe enough?

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So in your examp!e, what are the CD balances and cost of product A at the end of years 1, 2 and 3?
I don't have specific balances; was just angling on the CD portfolio concept in higher/lower inflation rate scenarios.
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Old 05-03-2018, 08:17 AM   #43
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I think this is why you would ladder the CDs, right?
True, true
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Old 05-03-2018, 08:27 AM   #44
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OK, so I think the consensus is that a CD Ladder works best. I am a little confused how to create one that give off Maximum interest over a 5 year period without buying all 5 year CDS. What I mean is, unless you buy 5 year CDs with all your cash, you are going to forfeit some interest in the lower denominations to create the ladder.

In this example: $1m invested in CDS to maximize the $250k FDIC safety net. The Rates are hypothetical.

1 x $250k 5 year CD at 3%
1 x $250k 4 year CD at 2.75%
1 x $250k 2 year CD at 2.35%
1 x $250k 1 year CD at 2%

This is a lot less than buying 4 x 5year CDS but your full cash is tied up for the total period.
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Old 05-03-2018, 08:48 AM   #45
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OK, so I think the consensus is that a CD Ladder works best. I am a little confused how to create one that give off Maximum interest over a 5 year period without buying all 5 year CDS. What I mean is, unless you buy 5 year CDs with all your cash, you are going to forfeit some interest in the lower denominations to create the ladder.

In this example: $1m invested in CDS to maximize the $250k FDIC safety net. The Rates are hypothetical.

1 x $250k 5 year CD at 3%
1 x $250k 4 year CD at 2.75%
1 x $250k 2 year CD at 2.35%
1 x $250k 1 year CD at 2%

This is a lot less than buying 4 x 5year CDS but your full cash is tied up for the total period.
In a rising interest rate environment, your income will go up as you renew. When interest rates are falling, you lock in longer terms, as all those PenFed 3 percent five year CD holders did. The ladder approach appears to be the way to go today.
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Old 05-03-2018, 09:02 AM   #46
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1 x $250k 5 year CD at 3%
1 x $250k 4 year CD at 2.75%
1 x $250k 2 year CD at 2.35%
1 x $250k 1 year CD at 2%

This is a lot less than buying 4 x 5year CDS but your full cash is tied up for the total period.
But at the end of year 1, you have the option of keeping the money or buying a another 5 year CD at the going rate. You will continue to having a CD coming due each year. After five years, renewing each year for a five year CD, you have a CD coming due each year but all were purchased at the then going five year rate.
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Old 05-03-2018, 09:22 AM   #47
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In a rising interest rate environment, your income will go up as you renew. When interest rates are falling, you lock in longer terms, as all those PenFed 3 percent five year CD holders did. The ladder approach appears to be the way to go today.
I am one of those holders.
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Old 05-03-2018, 10:28 AM   #48
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Exactly the first 4 years are not maximized. Nature of the beast. I am not advocating this as a great strategy, but for someone that is unwilling to invest in the market or bonds and doesn’t care if they chew in to principle because at this point in their life, they feel they would rather not lose any more than chance making more, then it minimizes the inflation risk to non lethal proportions. The net draw from principle stays fairly constant, with the rates maintaining the same relative distance from inflation. This is anecdotal and I certainly see the appeal. I know that my spouse would rather stash our nest egg that way raher than invest it. She knows we don’t need it to live, so in her mind, there is no need to maximize gain with risk. Let’s keep it for out of ordinary expenses and ALWAYS know its there “growing”. In my mind, we don’t need it to live on, so it CAN carry some risk, as we will never need a large percentage of it for anything in the near future. I feel confident that say a 60/40 has a higher average upside return over the next 15 year time frame, like most here do. I mean, that’s HOW it got this size. I don’t have any references that track average 5 year CDs vs inflation bit I’m sure the data is out there. I wouldn’t advocate all of it invested 60/40 as old age really approaches, but at 62 to 75 at least, makes sense to me.
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Old 05-04-2018, 07:08 AM   #49
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40% is in 401k & 427b with taxes due upon withdrawal. Our ages are 65 & 60 respectively.

I have calculated if we did this it would last us for ~40 years with a 1.5% annual increase.
Did you include the impact of RMDs on your before tax $s in that 40 year estimate?
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Used cd's
Old 05-04-2018, 09:40 AM   #50
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Used cd's

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I

The key, IMO is that you never want to buy a "used" CD
Why not buy secondary market cd's as long as you don't buy at a premium? They are still FDIC insured? Am I missing something?
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Old 05-04-2018, 09:49 AM   #51
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Why not buy secondary market cd's as long as you don't buy at a premium? They are still FDIC insured? Am I missing something?
Thin markets tend to be inefficient, so I avoid them as a knee-jerk habit. I don't know how I would know whether I was paying too much. I guess with some work I could figure all that out, but it's so easy to buy a new issue that I don't bother.

But it might be worth the effort. Someone is making money investing in used CDs. Maybe you?
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Old 05-04-2018, 10:25 AM   #52
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Why not buy secondary market cd's as long as you don't buy at a premium? They are still FDIC insured? Am I missing something?
Because at almost the same risk level you can buy bonds instead, ones that pay more interest than a brokered CD.
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Old 05-04-2018, 10:37 AM   #53
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Because at almost the same risk level you can buy bonds instead, ones that pay more interest than a brokered CD.
I had an interesting conversation this morning with Chris, my regional bond guy at Schwab.

My main question to him was verify my thinking that, for money that might be needed early, the liquidity that t-bills provide would make them a better choice than CDs. "Absolutely," he said.

He also rambled a little bit about govvies, CDs, and corporates and commented that in today's market the CDs are yielding about the same as the govvies and that investment-grade corporates yield so little more that it's not worth the risk compared to govvies. That's today, Friday the 4th, not a general comment on markets.

Just FYI.
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Old 05-04-2018, 10:48 AM   #54
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On municipal bonds rated A to AAA, for example, I'm seeing rates today from 2.5% to 3.7%, and unlike a CD that's a tax exempt yield.
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Old 05-04-2018, 10:50 AM   #55
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Bonds are not FDIC insured though.... are they?
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Old 05-04-2018, 10:52 AM   #56
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A year ago, most of my short term funds were in something like Vanguard Short-Term Investment Grade Corporate Fund ( or online hi-yield savings).
But know that we are in a rising interest rate environment, any bond funds will struggle to much more than break even. Currently buying 6 month T-bills at 2% yield at auction and holding to maturity. I see no point in going into 1 year CDs when can get the same rate in half year T-bills. Buy some every other week or so and if rates go up, as I expect they will, I'll roll them over at a new higher rate.
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Old 05-04-2018, 11:17 AM   #57
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... Currently buying 6 month T-bills at 2% yield at auction and holding to maturity. ...
I think people don't realize how easy this is.
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Old 05-04-2018, 11:42 AM   #58
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I think people don't realize how easy this is.
Remembering my father going to San Francisco to the actual auction in the 1960's and 70's, I did not realize how easy it was to buy online. Treasury Direct is cumbersome and I wanted to buy some in an inherited IRA, which they can't handle. Buying through Fidelity is very simple. And yeah, the six month is the sweet spot.
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