Does a CD ladder still make sense?

  • Investors who shunned CDs earlier this year got burned when rates plunged.
  • The rewards of buying long-term CDs today are outweighed by risk.
  • To guard against inflation, you can supplement a CD ladder with bonds.

CD rates are at record lows -- at least since Bankrate began tracking rates in 1983. But building a CD ladder can still make sense in some cases. For investors such as retirees and conservative pre-retirees who need safe, income-producing investments, a CD ladder is a useful tool in their portfolio.

CD ladders maximize returns while they minimize risk. Investments in a CD ladder are constantly cycling out, so investors have more liquidity to take advantage of rising interest rates.

No one knows what will happen with interest rates or when it will happen, but sitting on the sidelines until something better comes along means you're missing out on returns right now.

For instance, investors who drastically shortened their ladders in anticipation of inflation earlier this year got burned when rates fell further. And they missed out on the relatively higher yields available at longer maturities.

"People were keeping rates very short and, in fact, their income stream has gone way, way down," says Herbert Hopwood, CFP and president of Hopwood Financial Services in Great Falls, Va. "The reason you want to do a bond or CD ladder is because you just don't know."

What to do now

A CD ladder being constructed right now should aim for short-term to midterm maturities, around five to seven years. Though the yields on many short-term CDs barely squeak by those of money market accounts, some not-too-horrible yields are available. Use Bankrate's rate tables to find high-yield CDs available locally or nationwide.

In a normal interest rate environment, investors are compensated for tying up money for a longer period of time.

In today's atmosphere, the rewards of buying long-term CDs are vastly exceeded by the risk of having a long-term stinker when rates finally do rise.

For investors focused only on safety and FDIC insurance, Kimberly Foss, CFP and president of Empyrion Wealth Management, recommends sticking to the short end of the yield curve. "If you're only going for a safety play, you wouldn't want to go out further than 24 months," she says.

For a little more bang for your buck, she suggests putting 50 percent of CD funds into maturities between 12 and 24 months; 25 percent into 24- and 48-month CDs and the final 25 percent laddered out to 60 months.

Similarly, Hopwood says the CD ladders he's recently put together have been five years and under.

Donald Cummings Jr., managing partner at Blue Haven Capital in Geneva, Ill., recommends building CD ladders out as far as eight years.


"Effective laddering is very dependent upon the shape of the (yield) curve. Right now, I would say laddering to about three years to eight years or so captures the very steepest part of the curve," he says.

Use Bankrate's CD calculator to determine the best CD ladder for you.

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