A Guaranteed Return Solution for Uncertain Times
One of the responsibilities included in my full-time job is to set deposit rates for my financial institution. On days like today, I wish I managed pricing on the asset side of the balance sheet. As I type, HELOC owners everywhere are rejoicing in the Fed’s 0.75% rate cut. Individuals with certificates of deposit (CDs) maturing in the next few weeks aren’t nearly as excited.
It’s hard to be a retiree (or someone nearing retirement) when the markets are tanking and bank deposit rates don’t even keep up with inflation. When I was a personal banker, the solution I would typically propose for clients who needed a guaranteed return was a CD ladder.
How Laddered CDs Work
Let’s say you have $100,000 that you want to invest at a CD (you want to stay away from market risk and like the idea of a guaranteed rate of return). Instead of locking all $100,000 into a CD with a single fixed maturity, I recommend staggering (or “laddering”) multiple CDs with varying maturities. Depending on your liquidity needs, I would put you in either a quarterly, bi-annual, or annual ladder.
Here’s an example of what the $100k would look like in a quarterly ladder:
|
Amount |
Term |
Rate |
|
$20,000 |
3 months |
4.20% |
|
$20,000 |
6 months |
4.35% |
|
$20,000 |
9 months |
4.45% |
|
$20,000 |
12 months |
4.50% |
|
$20,000 |
18 months |
4.60% |
When the first CD comes due, you can either cash it out, or reinvest it in a 1-year (12-month) CD which essentially creates a 15-month maturity for the ladder. The ladder can continue indefinitely, and it allows the customer to take advantage of the higher rates in the longer maturities without tying up funds for a year.
This technique is especially effective when applied to annual maturities at times that the yield curve isn’t flat (as it is now) and there’s more benefit in investing in five-year CDs (at today’s rates, I wouldn’t bother with maturities past two years unless you find a great special somewhere).
If you’re really ambitious (and don’t plan on needing to leverage a strong banking relationship with a single institution anytime in the future), you can rate shop at every maturity and place CDs at multiple banks. If you are a rate shopper, checkout this blog - it’s my go-to source for the latest regional and national rate specials.
Stumble it!
January 23rd, 2008 at 5:34 pm
I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.
Allen Taylor
January 23rd, 2008 at 5:55 pm
I really like the CD ladder idea as something we can do once we have more investing money. And especially once we’re closer to retirement and keeping more money in safer accounts.
With the ING APY fall I’m kind of annoyed that I didn’t have more to put in CDs.
January 23rd, 2008 at 9:47 pm
I really like the idea of a CD ladder. Now to have the money to start one!
January 25th, 2008 at 10:26 am
[…] A Guaranteed Return Solution for Uncertain Times - Stock market got you down? The Fed rate cut hurting your savings? Banker Girl has a strategy that might help ease the pain if you’re looking for some steady and reliable returns. […]
June 30th, 2008 at 8:28 am
[…] I asked on Twitter if anyone had done something similar and Banker Girl pointed me to the following directions: A Guaranteed Return Solution for Uncertain Times. […]