Use ladder to climb above low CD rates

Don TaylorQuestionDear Dr. Don,
I have money sitting in a glorified checking account earning 1 percent interest. My husband and I have money put aside for emergencies and have money invested at higher risks. But today's low CD rates have left me wondering what to do regarding a CD investment.

I want to buy a three-year CD at 2.7 percent. I've been advised to buy several CDs that don't tie this much money up for three years. I don't see interest rates rising in the near future and I'd rather see us get as much as we can while we "sit and wait."

If interest rates rise a lot, can't we just do the math and see if it would be worth paying the six-month penalty to pull out early and reinvest?

My husband is 62 and retired. I'm 55 and enjoy working. We own our home and pay the balance off on our credit cards every month.
-- Faith Fulcrum

AnswerDear Faith,
While you can always do the math to determine whether it makes sense to pay the early withdrawal penalty, the idea behind a laddered CD portfolio is to avoid trying to time the market and to reinvest in longer-term CDs as the nearby maturities roll off.

A savings strategy that doesn't require you to pay an interest penalty to reinvest should keep your yields higher, on average, over time than a strategy of investing in longer-term CDs until it makes sense to cash out and reinvest.

The Bankrate feature "Laddering: How to build a CD ladder" explains this approach in greater detail. This approach keeps you from being "long and wrong"-- tying up money long term in a rising interest rate environment -- or "short and suffering," where you wait for yields to go higher.

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