I’m just as surprised to read this good article in the Wall Street Journal about how to build a h CD ladder as I was when the WSJ wrote about I-Bonds last year. Nice of them to finally spend a little time helping the risk-averse.
Make This Simple Move to Get More Return on Your Cash
A CD ladder can help savers navigate today’s high interest rates
By Oyin Adedoyin and Joe Pinsker, The Wall Street Journal, Updated April 24, 2023 11:58 am ET
Billions of dollars in cash are pouring into one of the most staid investments, the certificate of deposit, though many savers aren’t unlocking their full potential.
Balances in CDs swelled to $480.2 billion in February, up from $36.5 billion in April 2022, according to the Federal Reserve.
CDs are supersafe assets that pay out interest over a set period, like a bond. Some one-year CDs now yield a bit over 5%, according to Bankrate.com. Five-year CDs top out around 4.5% annually, nearly a full percentage point more than a 5-year Treasury note, and don’t have the purchase limits of an I Bond. [CDs do not adjust their interest rate when inflation changes, like an I-Bond does. – W]
When the first CD matures, the investor can decide to withdraw the money or to continue the ladder by buying a 5-year CD.
One can also make a US bond/treasuries ladder and thus escape state taxes on most/all the interest.
BL Home Fool
(who does a bit of both, using brokered CD’s and bonds for flexibility and ease of sale if needed early)
Yes, but as the article notes, a few years out, the CDs are yielding a full point higher than treasuries right now, and that outweighs the state and local taxes (an extra 1% over 4% is 25% which is far more than any state+local taxes).
This is the best choice of all for a ladder. Find the types of stuff you are comfortable with risk-wise and then use those for each tier of the ladder opportunistically. So, right now the short ends of the ladder would likely be treasuries, and the long ends of the ladder would be CDs, and the middle parts of the ladder could be either depending what is available on the day you need to buy the next one.
BL Home Fool
There is nothing that says a ladder has to have equal rungs. I happen to think interest rates are near their peak, and that inflation is coming down, albeit slowly. If that’s true then I am better off tilting the ladder so I put more into longer duration assets and less into shorter.
Of course that ties up more of my money, so if the stock market offers opportunities I will have less to play with, or suffer the rate penalty for early redemption. Depending on the issue, that penalty may not be severe, so it might be worthwhile investigating the longer end of things.
That said, an outbreak of war or a supply cutoff (think: oil) would surely push inflation higher, and therefore interest rates higher, so it is a bet, to be sure. Then again, there are cases where, like remortgaging your house to get a lower rate, you can take the CD penalty, cash out, and immediately reinvest at a higher-enough rate to make it worthwhile.