Can You Get Rich With CDs?

[Marcretire]

Although I have most of my IRA in VG Wellington, I'm trying to get a taxable account going and am considering putting all of it in CDs because the volatility of the stock market has really taken a toll on me emotionally and financially. I don't want to take a chance with the market crashing again in 10 years and losing all gains, like the past 10 years. My question is: I like the security of CDs despite the modest returns and I'm wondering if anyone has accumulated a sizeable portfolio ($1 million+) by just investing with CDs over the course of their lives? Thanks.

 

[OAG]

CD's are fine BUT you will have to consider a "long term" ladder (like 7-10 years) and hunt up Credit Unions that pay better than most banks (assuming you want FDIC protection). A current example is the Navy Federal Credit Union (biggest CU in terms of deposits), if you can qualify to get in - currently paying 5.1% APY on 7 and 10 year CD's. I have been using them for over 30 years and would have hit $1MM in them if I did not pay cash for homes and new cars over that same period; however the current interest/dividends on the ones I do have are paying about 35% of our gross income. Also PENFED (which you see mentioned here frequently) have good rates (but not great right now) and you can get into PENFED for an investment of $20 (+$5 for a share account) if not otherwise qualified.

Standby as I am sure your will hear from many that this is NOT a good idea.

 

[Alan]

Although I have most of my IRA in VG Wellington, I'm trying to get a taxable account going and am considering putting all of it in CDs because the volatility of the stock market has really taken a toll on me emotionally and financially. I don't want to take a chance with the market crashing again in 10 years and losing all gains, like the past 10 years. My question is: I like the security of CDs despite the modest returns and I'm wondering if anyone has accumulated a sizeable portfolio ($1 million+) by just investing with CDs over the course of their lives? Thanks.

In the last 10 years I have accumulated ~$1m with a mix of stocks/bonds/cash. Overall return has been 3.5%/year - less of a return I think than if I had been fully in CDs. However, the key to getting that million was not what I was invested in, but having a high income and practicing LBYM, since the deposits in that 10 year period were $710K.

 

[heyyou]

If you can save enough, for long enough, you will have enough later. Only you can define what lifestyle is "rich" and what one is "enough." The usual problem is divorce and children are expensive and/or the saver waited until age 40 to start on a nestegg.

Equities are risky and volitile so their sometimes rewards are greater than from some other investments. That bigger return is their attraction. You already know about their problems.

If you start young on saving, there is no need for a large equity exposure.

Other options are accepting less pay for 30 years in order to acquire a pension. That is an indirect type of saving. There are always risks. Military, fire, and law enforcement workers have 20 year pension plans.

 

[deepc]

Get rich? How much is rich? We realized that our equities over time (due to our propensity to sell low and buy high) didn't make much more than our CDs. Just don't have the risk tolerance to make the equities investment work.

We're very heavy in CDs and retired at 48. COLAed pension allowed us to be conservative in our investments and some lucky timing in real estate helped. Did this on only one adult in the family working too.

Our formula was to save until the anticipated CD returns combined with the pension reached our expected spending, then it was very difficult to remain on the job.

You can do this ER thing on a very conservative asset allocation, and at times like this it makes it easier to sleep. The key is to not get greedy when the equities are flying and it looks like easy money.

 

[DblDoc]

One could accumulate a sizeable fortune just putting it under a mattress. The crucial question is will it survive a lengthy retirement with inflation gnawing away at it.

DD

 

[OAG]

One could accumulate a sizeable fortune just putting it under a mattress. The crucial question is will it survive a lengthy retirement with inflation gnawing away at it.DD

One could say the same thing about the stock market - "accumulate a "sizable fortune" and put it in the market on 10/15/2007." Inflation has been an AVERAGE of 3.1% over the past 30 years while most stocks are down about 30+ over the last 15 months (I know this is far from an apples to apples comparison). It seems (at least to me) to be all about timing (includes the "time you have left") and luck. The older one gets the less the impact of inflation BUT the impact of a market downturn will hurt more, specifically because you do not have time to recover, maybe permanently. It also can be impacted by a COLA'd pension or other retired pay, cost of health care, and the amount of one's SS benefit. So "it depends" and "to each his own".

 

[FIREd]

CD's are fine BUT you will have to consider a "long term" ladder (like 7-10 years) and hunt up Credit Unions that pay better than most banks (assuming you want FDIC protection). A current example is the Navy Federal Credit Union (biggest CU in terms of deposits), if you can qualify to get in - currently paying 5.1% APY on 7 and 10 year CD's. I have been using them for over 30 years and would have hit $1MM in them if I did not pay cash for homes and new cars over that same period; however the current interest/dividends on the ones I do have are paying about 35% of our gross income. Also PENFED (which you see mentioned here frequently) have good rates (but not great right now) and you can get into PENFED for an investment of $20 (+$5 for a share account) if not otherwise qualified.

Standby as I am sure your will hear from many that this is NOT a good idea.

Actually, I would love to learn more about your CD ladder building strategy. How do you find the good deals, how do you move your money from institution to institution, how do you pick the average maturation for your ladder, how does that change based on the current interest rate environment, etc... You seem to have been very successful with your approach and I am always willing to learn from the experts. Perhaps you could dedicate a brand new thread to the subject (and perhaps some time to time use that thread to let us in on the good deals out there).

 

[noworkethic]

Actually, I would love to learn more about your CD ladder building strategy. How do you find the good deals, how do you move your money from institution to institution, how do you pick the average maturation for your ladder, how does that change based on the current interest rate environment, etc... You seem to have been very successful with your approach and I am always willing to learn from the experts. Perhaps you could dedicate a brand new thread to the subject (and perhaps some time to time use that thread to let us in on the good deals out there).

Ditto...please

 

[OAG]

Nothing very interesting and I am no expert. Just got the ladders (we have 4 of them right now (2-ROTH IRA, 2-Traditional IRA and 1-Joint Regular CD's) built while I was younger. Once I had the ladder built, I put maturing and any "new money" into the farthest "rung". I.e., CD's maturing in 2009 and "new money available" will go into a rung maturing in 2016-2019 (unless I have another use for the money). The ROTH and Traditional IRA ones just sit since I have no earned income with which to make additional deposits). I use PENFED (Pentagon Federal Credit Union), NFCU (Navy Federal Credit Union), VyStar Credit Union and one bank; Capital One. VyStar is a just a Credit Union I was using when we lived in FL and I just kept using it out of past loyalty. If I have extra cash I just look at which has the best rate out 5, 7 or 10 years. I virtually never even consider a maturity of less than 7 years to avoid the low rates on shorter terms. All money is moved on-line through ACH pulls or pushes without any fees or charges. I have direct deposits going to a couple of these institutions so moving money at will is pretty simple. Kind of a turtle versus hare process.

 

[FIREd]

I have a hard time finding longer maturities CDs. They often propose 5-year CDs or shorter when I look at my local bank or brokered CDs. In all my searching I found only 1 10-year CD. Are they pretty common at the financial institutions you listed?

 

[OAG]

Current Maturities: Capital One up to 10 years, PFCU and NFCU 7 years, VyStar 5 years.

 

[FIREd]

Another question: when you buy longer term CDs, do you have a rule to determine what is and what is not a good buy?

For example: a CD paying 6%+ is no brainer, load up on it. A CD paying 5%+ is good deal. Never buy any CD paying less than 4% etc...

Can you share that with us?

 

[OAG]

I try to beat the current AVERAGE return rate of all CD's - Current ladders have an average of 5.74. I cannot currently beat that rate since the best rate I can find is an APY of 5.1; so that becomes my "base rate". Fortunately, I do have some "other uses" for maturing CD's and "new money" so it becomes a trade off (frivolous spending or CD's below the "desired" current average rate). I have always tended to just "bite the bullet" and buy the highest lower rate as long as I can increase the total return (in dollars) of the ladder which means a maturing CD has to be reinvested with "new money". I am starting to question that method (in my mind) due to my age and "other uses" for the new money (family gifts, trips, etc.,); but that is a whole another story.

 

[DblDoc]

One could say the same thing about the stock market - "accumulate a "sizable fortune" and put it in the market on 10/15/2007." Inflation has been an AVERAGE of 3.1% over the past 30 years while most stocks are down about 30+ over the last 15 months (I know this is far from an apples to apples comparison). It seems (at least to me) to be all about timing (includes the "time you have left") and luck. The older one gets the less the impact of inflation BUT the impact of a market downturn will hurt more, specifically because you do not have time to recover, maybe permanently. It also can be impacted by a COLA'd pension or other retired pay, cost of health care, and the amount of one's SS benefit. So "it depends" and "to each his own".

All true. If you can accumulate a large enough portfolio of CD's and don't need to assume risk or, as you have, alternative sources of income it is doable. Can someone accumulate $1m 2009 dollars and retire early with only a CD ladder and prospect of SS - I don't think so unless you are really LBYM.

I plan on having a CD ladder for 3-5 yrs of expenses but it will be only part of my planned portfolio.

DD

DD

 

[samclem]

OAG,
Since you've got no market risk, your biggest risk is inflation. The inflation risk would be lower if all your CD's were shorter term, since you'd be able to more frequently buy-in at the expected higher CD rates if inflation rises.

What's your plan if inflation goes to 6-10% and looks like it might stay there? Do you own TIPS or other offsetting investments, would you just hold on and take the hit, or would you likely withdraw your long-term CD's before they mature (taking the interest/penalty hit) and buy new CDs at the higher rate?

 

[OAG]

OAG,
Since you've got no market risk, your biggest risk is inflation. The inflation risk would be lower if all your CD's were shorter term, since you'd be able to more frequently buy-in at the expected higher CD rates if inflation rises.

What's your plan if inflation goes to 6-10% and looks like it might stay there? Do you own TIPS or other offsetting investments, would you just hold on and take the hit, or would you likely withdraw your long-term CD's before they mature (taking the interest/penalty hit) and buy new CDs at the higher rate?

Sam: I agree but, inflation would be more of a concern if I was 40 or so (I have spent a lot of time on this board to realize that) but, being 68 eases a lot of the concern about inflation. However, that being said the ladders have a, more or less, proportional 15% maturity every year so there would be a significant amount to "roll" each year. Actually, inflation (and higher inflation rates are a minor hope of mine). However, I have, in the past weathered a couple of inflationary periods. including 1979-1981 and 2000, not cashed out early to get the higher rate, just put maturing and "new money" in at then best available rate. As late as 2005 I had CD's at Capital One paying 8% APY and I did not like rolling them to a rate of 5.5% in 2005. I Currently do not own any TIPS (I do have a Treasury Account with the new card) and have owned Savings Bonds and I-bonds in the past but do not own any now and currently do not intend to buy any.

 

[FurBall]

Sam: Actually, inflation (and higher inflation rates are a minor hope of mine).

Is inflation a hope of yours so you can lock in long term higher interest rates?

 

[OAG]

Of course AND so that my two fully COLA'd annuities will go up too.

 

[Dawg52]

Although I have most of my IRA in VG Wellington, I'm trying to get a taxable account going and am considering putting all of it in CDs because the volatility of the stock market has really taken a toll on me emotionally and financially. I don't want to take a chance with the market crashing again in 10 years and losing all gains, like the past 10 years. My question is: I like the security of CDs despite the modest returns and I'm wondering if anyone has accumulated a sizeable portfolio ($1 million+) by just investing with CDs over the course of their lives? Thanks.

1 million is a piece of cake if you are putting enough a way per year. I am a poster child of a poor investor. I have had individual stocks, stock funds and have always seemed to make poor decisions on when to buy and sell. If I had it to do all over again......I would take my chances on an all cd portfolio. I'm sure I would have at least as much as I do right now with much fewer sleepless nights.

 

[summer2007]

First off I want to say I'm OAG's biggest fan!

I have read a lot of his posts and it changed the way I thought about investing.

And Dawg what you posted it one of the things I thought of that peace of mind is definitely worth something!

I'm young (relatively) but I learned this already!!

Jim

 

[DallasGuy]

I currently have about 40 CD's with amounts ranging from $6,000 up to about $50,000. I probably have about $800,000 total in CD's. The rates range from about 4.35% up to 6.5%. I usually buy CD's that are no shorter than 3 years in length and will invest up to 10 years if I think the rate is really good. But in times like now where CD rates are really low, I won't buy any CD's that are longer than 12 months. In general I don't think rates stay low for very long (our current situation may prove otherwise though). The other thing is that I learned by experience and intuition what a good rate is. 10 years ago I was able to get CD's paying 8%...I condered that a good rate then. In the more recent past, I considered 5.5 - 6% to be a good interest rate. So I had to make my best guess at investment time based on current interest rates, how long I wanted to invest the money.

As far as getting a ladder going, that's probably the hardest part....but in general if I was to start a ladder from scratch, I would probably take a portion of my investment money and buy 5 CD's (1yr, 2 yr, 3 yr, 4 yr and 5 yr). In 6 months or so, I might do that again with another portion of my savings (buy 5 more CD's). So in 6 months I would have 10 CD's set up and they would be coming due every 6 months after that. When they came due, if I thought the interest rates were good, I'd re-invest them for another 5 years (or longer). If interest rates weren't good, I might reinvest them for just a year....so that if interest rates increase during the next year, I could take advantage of that a year from now. The part of re-investing is always a judgement call on my part.

NOTE: My CD investments made up about 65% of my total investments up until the recent market crash....now they make up about 75%. I know many people here worry about inflation eating away the value of CD's, but I found that if I invested more of my money in the stock market, I was a nervous wreck much of the time. For me, I need to know that if the market crashes or goes in a prolonged downturn that I can still continue with my early retirement.

 

[samclem]

Of course AND so that my two fully COLA'd annuities will go up too.

?? Isn't that like hoping your boat starts sinking so you can use the bilge pump? Seems like the COLA'd pensions and the higher CD rates would only help keep pace with inflation, not make any real money because of it. Plus, with the COLA'd stuff, we have to hope that the government calculations are not "cooked" and that the inflation rate for the things in their shopping basket is at least as high as for what we are buying.
I would have guessed you'd like the inflation numbers to stay moderate and the economy to stay humming so that banks need to entice people like yourself to give them money to lend out.

 

[Fastfade]

Although I have most of my IRA in VG Wellington, I'm trying to get a taxable account going and am considering putting all of it in CDs because the volatility of the stock market has really taken a toll on me emotionally and financially. I don't want to take a chance with the market crashing again in 10 years and losing all gains, like the past 10 years. My question is: I like the security of CDs despite the modest returns and I'm wondering if anyone has accumulated a sizeable portfolio ($1 million+) by just investing with CDs over the course of their lives? Thanks.

Why not consider Fixed Deferred Annunities that are paying ~5,0% for 5 yr. contract? You can ladder these as well (3-5-7 yr contracts if you desire)

No taxes to pay and you can, if needed, withdraw up to 10%/yr w.o penalty. It's not FDIC protected but there are lots of highly rated firms.

I'm a very conservative investor but Fixed deferred annuities have served me well over the years

 

[OAG]

?? Isn't that like hoping your boat starts sinking so you can use the bilge pump? Seems like the COLA'd pensions and the higher CD rates would only help keep pace with inflation, not make any real money because of it. Plus, with the COLA'd stuff, we have to hope that the government calculations are not "cooked" and that the inflation rate for the things in their shopping basket is at least as high as for what we are buying.
I would have guessed you'd like the inflation numbers to stay moderate and the economy to stay humming so that banks need to entice people like yourself to give them money to lend out.

Maybe, but what I hope has NO impact on what it is going to do, does it? However, I have seen my Army Retired pay triple in value (not real dollars) over the past almost 30 years (anniversary is Jul 1, 2009) also have watched SS increase in value (although I have just now started taking benefits). Over the past 30 years Inflation (CPI, cooked or raw) has been 3.1%. Also you may have missed the part where my age is 68 - so I AM on the last lap - and inflation becomes less of a concern as one ages, at least in my mind.

The thing that I think is holding interest rates down (and hurting the Stock Market) is the fact that Banks are not lending and consumers are not borrowing and spending; which impacts the demand for new money. Is that bad or good? I am not sure which it may be. I do know I have NEVER seen this situation occur over the past 50 years that I have been watching, at least to the extent it is now. Some would say we have "pent up demand" and all will be fine shortly and all we have to do is hang on (short of suicide I do not see any other real choice). Hopefully, this is true and will happen sooner versus later. I did not intend to imply by my comment on inflation that I wanted the country or its citizenry to be negatively impacted by it.