Laddering certificates of deposit is a way to provide a constant income stream at the top of the CD yield curve which, for most CD buyers, is five years.

But when mired in a low-rate environment, and when there’s little difference between the low and high ends of the yield curve, it can be tempting to shorten the ladder. Using the current average yields for high-yield CDs, it’s easy to see why someone would say why lock up money for five years when rates may start rising sometime next year?

Making the decision to lock up money for five years when only 37 basis points separate the one-year yield from the five-year can be difficult, especially when many consumers say 5 percent is the minimum they’ll accept to tie up funds for five years.

If you use CDs as a safe haven for a portion of your fixed income — you want a decent return but you don’t need the income — then shortening a ladder may be fine. But experts say shortening the ladder when the interest is used as an income stream is a bad idea.

“When you look at the estate of Aunt Betty who rolls three-month T-bills (or treasury bills) — she’s living off income that’s bouncing all over the place,” says Certified Financial Planner Herb Hopwood, president of Hopwood Financial Services in Great Falls, Va.

“You can’t live that way. You need to stabilize the income stream and protect it if rates really go way up and, conversely, if rates drop. What is the goal? What are you trying to do with the money? If you know your allocation is 40 percent equity, 60 percent fixed income and cash, I would say that tells you what to do. It’s like an insurance company matching assets with liabilities — you have money coming due when you need it.”

Low-interest rate environments can be devastating for people living on fixed income who need a certain yield to maintain their living standard. While financial planners might invest a portion of a client’s portfolio in 10-year government or corporate bonds to take advantage of higher yields, many do-it-yourselfers keep their maturities considerably shorter. Nevertheless, trying to beat the market can be a dangerous venture.

“Most investors who are trying to do this on their own probably should not be trying to time interest rate movements,” says CFP Lynn Mayabb, director of financial planning at BKD Wealth Advisors in Kansas City, Mo.

“You don’t know when the Federal Reserve will raise or lower rates. The whole philosophy of the ladder is to constantly be able to have exposure to the changing rates because you can’t time the rate market.”

Christopher Reilly, senior vice president at Philadelphia-based Firstrust Financial Resources, says consumers could consider other fixed income securities, such as high-quality, intermediate corporate bonds, to get a boost in yield if they can do without the FDIC guarantee. But, if you stick with CDs, let the maturities run.

“If all of your maturities are less than 12 months, you might find that 12 months from now we’re in the same situation. You locked in at 2.5 percent or 3.5 percent and you have to reinvest at similar rates. You’re going to wish you had some CDs on the longer end, maybe five years.”

If you want to ladder corporate bonds, consider corporate note programs, which are offered at most brokerages. These bonds sell for $1,000 each and can be easily laddered. A new list of notes is published weekly — here’s a look at what is being offered at Fidelity through its CorporateNotes Program. Maturities, in this offering, stretch from 18 months to 30 years. These bonds are investment grade, but there is always the risk of default with any bond purchase. Again, there is no FDIC insurance.

If you opt for a CD ladder, look for the highest yields you can find for each maturity. Certainly, it’s more convenient to have all your CDs at one bank, but it’s highly unlikely that you’ll get the best return.

Research CD rates at various banks on your own or use Bankrate’s high-yield database to put together a better yielding ladder than you’d get with standard CD rates. As of this writing, the best of the high-yield CDs are ranging from 4.5 percent for a one-year CD to 5.35 percent for a five-year maturity. Average yields for standard CDs are ranging from 2.4 percent for one year to 3.56 percent for five years.

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