CD Ladder Discipline

[COcheesehead]

For OP, I started with a ladder strategy about 5 years from planned FIRE, so it was a 5 year ladder. Then couple years ago I just knew rates had to rise so I started doing rollovers to 2 years. Now I wish I had kept discipline, but not worried. I don’t have a plan to start using it is just there in case we need it for spending. Already have next year funded, so if we hit a big drop in 2021 I can take some.

Best is to try and stay with disciplined plan, just not always what I do

I was buying long bonds when everyone was saying rates are going up. I kept telling myself this is stupid, but the purchases filled the last rung on the ladder so I held my your nose and did it.
I am really glad I have those bonds now. Who's to say we don't drop another .5% - 1% from here? That is a big drop percentage wise and will drive NAV's even higher. Stick with the plan, that's why its called a plan.

 

[gayl]

+1
We switched a 2 year ladder into this concept and went into a credit union for the first time to max the rates.
It is only 9% of the total portfolio anyways.

I'm thinking about going 20% to fixed securities. My 1st thought was to add to PWZ increasing it to 5% (currently 4.5%) then 15% either SWVXX or CDs. What do I need to know 1st? I've only invested in equities before. It was individual stocks until I went into indexes a few years back

 

[teej1985]

With the rates dropping, I might nab a 5 year fixed annuity @ 4%?

 

[gayl]

With the rates dropping, I might nab a 5 year fixed annuity @ 4%?

Not sure how those work. Do I get the entire amount + 4% back in 5 yrs? What's the annuity part?

 

[teej1985]

Not sure how those work. Do I get the entire amount + 4% back in 5 yrs? What's the annuity part?

Some let you collect the income payments as you go. Blueprintincome.com probably has the easiest to use website. Don't know what you mean by whats the annuity part. Fixed annutiies have been aroudn forever they are insurance company equivalents of CD's or Bonds. Obviously they aren't FDIC insured though.

 

[Spock]

Not sure how those work. Do I get the entire amount + 4% back in 5 yrs? What's the annuity part?

Be aware of the credit rating of whoever is issuing the annuity.
There was somebody on here awhile ago trolling with stuff that was only rated B+, which is not investment grade.
https://wolfstreet.com/credit-rating-scales-by-moodys-sp-and-fitch/

 

[pb4uski]

Not sure how those work. Do I get the entire amount + 4% back in 5 yrs? What's the annuity part?

It works similar to a CD but is issued by an insurance company rather than a bank... so no FDIC insurance but in most cases still pretty safe... certainly investment grade and in addition state guarranty fund protection.

Rather than an early withdrawal penalty stated as a number of days of interest it is stated as a percent of the amount withdrawn... and the surrender charges are generally higher than early withdrawal penalties.

The interest isn't taxed until you receive the interest.

I prefer CDs.... more straightforward.... but in certain situations a deferred annuity might make sense.

The annuity part is they all include an option to receive the end value as annuity benefit payments rather than as a lump sum. The inclusion of that contractual option, even if it is rarely exercised, qualifies the deferral of the interest as income for tax purposes.

So for example, if you put in $100 and it was 4% for 5 years, at the end of 5 years your balance would be $100*(1+4%)^5 or $121.67.

 

[gayl]

So in my case it isn't a lot. Maybe 120k. Keeping my PWZ separate (but including as part of 20%+ fixed) as I've been satisfied with that. I 'may' draw on it in 2-3 years. Does an annuity make more sense than just getting CDs? I'm trying to simplify most of my holdings and living off pension

 

[teej1985]

Be aware of the credit rating of whoever is issuing the annuity.
There was somebody on here awhile ago trolling with stuff that was only rated B+, which is not investment grade.
https://wolfstreet.com/credit-rating-scales-by-moodys-sp-and-fitch/

Right now on BlueprintIncome there is a 5 year at 4% by SBLI which is rated A. It does have an IRS 10% early withdrawal penalty if under 59.5 though. I'm not sure if all fixed annuities work like that or not.

 

[pb4uski]

Right now on BlueprintIncome there is a 5 year at 4% by SBLI which is rated A. It does have an IRS 10% early withdrawal penalty if under 59.5 though. I'm not sure if all fixed annuities work like that or not.

Charges on Excess Withdrawals
For any withdrawals beyond the free allowance during the contract term, surrender charges will apply as follows:

PERCENTAGE CHARGED TO WITHDRAWAL

Year	1	2	3	4	5
Percentage	9%	8%	7%	6%	5%

MARKET-VALUE ADJUSTMENT (MVA)
An additional charge will be calculated based on the change in interest rates between purchase and decision to surrender.

Beware.... steep surrender charges (similar to CD early withdrawal penalties) AND a MVA adjustment in addition.... so if you don't hold for 5 years the charges are high... even in the 5th year! CD EWPs are typically 180 or 360 days of interest... 2% to 4% for a 4% CD (if there was one).

Not interesting to me even though I plan to hold for the term.

 

[Spock]

Right now on BlueprintIncome there is a 5 year at 4% by SBLI which is rated A. It does have an IRS 10% early withdrawal penalty if under 59.5 though. I'm not sure if all fixed annuities work like that or not.

Just 30seconds ago I was looking at that one. It was the only offering that was competitive with a bank CD.
SBLI was downgraded by AM Best about 11 months ago... but they did up the outlook from negative to stable.
When it comes to insurance companies I'm sticking with "too big to fail" these days.

 

[pb4uski]

Just an observation... if for ACA or college aid purposes you need a MYGA rather than a CD in a taxable account to not have income on your tax return... that same site is offering A++ rated NY Life and Mass Mutual at 1.95% for years... similar return to 5-year brokered CDs and IMO slar credit risk.

 

[IMATERP]

I retired in December 2017 and in Jan or Feb 2018 I purchased CDs/Bonds for 7 years (laddered,) the same amount maturing each year. My average yield is 3.2%.

My first CD matures this Friday it’s in my tIRA. I’m planning to use part of the redeemed principal (17k) to convert to my Roth IRA. I’ll use the rest of the proceeds to add to my Wellesley Fund next week.

I’m turning 59 1/2 next June and will either make the same decision or take a small withdrawal (and replenish some cash) when the next fixed income investment comes due.

The bottom line for me was to ladder CDs until age 65 or 66 (Social Security.). I also have a pension that starts at age 60 - so the fixed income investments were purchased as a means of protecting a portion of my nest egg.

 

[Dtail]

I'm thinking about going 20% to fixed securities. My 1st thought was to add to PWZ increasing it to 5% (currently 4.5%) then 15% either SWVXX or CDs. What do I need to know 1st? I've only invested in equities before. It was individual stocks until I went into indexes a few years back

Sorry just saw this now. Looks like you got some responses.
My thought is that some folks including myself are taking advantage of 5 year CD rates in the 3.25 - 3.50% range right now. Not in a ladder concept, but as a locked in hedge against declining rates as it appears to be happening now.

 

[papaof2]

Taking your "return" in a totally different direction, have you considered blue chip stocks as a long term "interest bearing account"?

AT&T is currently around $34/share. It's paying $2.01/year dividends. In simple interest, that's close to 6%. Where can you do better?

A large investment in CDs may not fall under the FDIC insurance rules.

 

[pb4uski]

... A large investment in CDs may not fall under the FDIC insurance rules.

Please elaborate.

 

[53anddone]

A portion of our investment portfolio includes a 5 year CD ladder. One of our laddered CDs is maturing in about 2 months. The current falling rate environment has me second guessing my plan to renew maturing CDs to a new 5 year term.

I had hoped we had seen the end of the extremely low CD interest rates from previous years but this recent FED cut and another cut expected in the near future has me questioning locking money up for 5 years. Especially when the yield between a 1 year CD and 5 year CD can be so little.

But who knows... a 5 year CD in October at say 2.5% might be the best available rate for 5 years if the FED continues to cut and we enter a new period of falling rates to stimulate a slowing economy and a possible recession.

If you have a laddered CD plan... How committed have you stayed to your plan and renewed as scheduled and accepted the yield as it averaged over the life of the ladder?

I had exactly this dilemma this month with a ladder i bought in 2018. At the time 5 year rates were 3.4% and now fidelity offered me a replacement 5 year CD for the 1 year at 2.0%.

I took a pass on this replacement and created my own "CD replacement" of 4 equal parts of the following stocks: JNJ, JPM, VZ, PFE. Average dividend 3.71%. I have flagged these as an "experiment" in my portfolio and if the share price simply stays flat for a year I win. None of these companies are likely to cut their dividend so the income is there. Heck I can always hold for 25 years or more.

I know it put money into equities that I had flagged for fixed income but I could not live with a paltry 2%. The next ladder expiration is November for me and I'll see what the landscape looks like then.

I see comments here of 3.5% 5 year CDs but I cant seem to find them. Links would be appreciated.

 

[Dtail]

I had exactly this dilemma this month with a ladder i bought in 2018. At the time 5 year rates were 3.4% and now fidelity offered me a replacement 5 year CD for the 1 year at 2.0%.

I took a pass on this replacement and created my own "CD replacement" of 4 equal parts of the following stocks: JNJ, JPM, VZ, PFE. Average dividend 3.71%. I have flagged these as an "experiment" in my portfolio and if the share price simply stays flat for a year I win. None of these companies are likely to cut their dividend so the income is there. Heck I can always hold for 25 years or more.

I know it put money into equities that I had flagged for fixed income but I could not live with a paltry 2%. The next ladder expiration is November for me and I'll see what the landscape looks like then.

I see comments here of 3.5% 5 year CDs but I cant seem to find them. Links would be appreciated.

Navy Federal Credit Union was offering the 3.5% CD, but it is now 3.25%. There is also a served as a veteran/veteran in the family requirement.

I believe Space Coast Union in FLA is still offering the 3.5% for IRA CD's, but must live/work in specific FLA counties.

 

[Vincenzo Corleone]

I had exactly this dilemma this month with a ladder i bought in 2018. At the time 5 year rates were 3.4% and now fidelity offered me a replacement 5 year CD for the 1 year at 2.0%.

I took a pass on this replacement and created my own "CD replacement" of 4 equal parts of the following stocks: JNJ, JPM, VZ, PFE. Average dividend 3.71%. I have flagged these as an "experiment" in my portfolio and if the share price simply stays flat for a year I win. None of these companies are likely to cut their dividend so the income is there. Heck I can always hold for 25 years or more.

I know it put money into equities that I had flagged for fixed income but I could not live with a paltry 2%. The next ladder expiration is November for me and I'll see what the landscape looks like then.

I see comments here of 3.5% 5 year CDs but I cant seem to find them. Links would be appreciated.

I could be missing something (it certainly wouldn't be the first time), but aren't you taking on risk that you wouldn't otherwise take when putting the money in CDs? The stocks could tank and cause you to lose more than the dividends you're collecting (think IBM). That kind of defeats the purpose.

 

[53anddone]

You're not missing anything. Of course the share price could decline.

I have more like a 25 year horizon though and my point was that CD yield have gotten to the point (for me anyway) that blue chip dividend payers start to look more attractive. If I don't sell the shares for a very long time I simply collect more dividends than a CD interest would yield.

I think on a broader level this is why the likely rate-cutting coming from the FRB is considered to be propping up stocks. Some of the people looking for yield (like me) end up back in equities because of it.

 

[samclem]

I could be missing something (it certainly wouldn't be the first time), but aren't you taking on risk that you wouldn't otherwise take when putting the money in CDs? The stocks could tank and cause you to lose more than the dividends you're collecting (think IBM). That kind of defeats the purpose.

I think the trick to this system is to disregard the stock price, put it into a different mental accounting box, and just focus on the dividends. It can work for a long time, or maybe not.

"Stuff" happens.

JNJ just got hit with a $500+ million judgement payable to Oklahoma. Just 49 states left to go. Then, overseas.

 

[53anddone]

I think the trick to this system is to disregard the stock price, put it into a different mental accounting box, and just focus on the dividends. It can work for a long time, or maybe not.

"Stuff" happens.

JNJ just got hit with a $500+ million judgement payable to Oklahoma. Just 49 states left to go. Then, overseas.

Agree about mentally putting it in a different box.

JNJ has 57 years in a row of dividend increases and 150b or so in cash. Think they will be OK.