Saving in a low-yield world
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Should savers break rules?

CD laddering

The intent of CD laddering is to invest your savings over a time horizon, rather than trying to lock in longer maturities when rates are high or staying in shorter maturities when rates are low or likely to head higher.

When you ladder, it's the CD equivalent of dollar cost averaging in the stock market, with one important difference -- with a CD ladder, savers typically put all their money to work at one point in time, and then reinvest the money when a CD matures.

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A five-year CD ladder would include everything from a money market account with some cash to CDs of various maturities up to five years. Each maturity is like the rung on a ladder. Unlike a real ladder, the distance between rungs doesn't have to be symmetrical.

Conventional wisdom would have you use the same-size ladder regardless of your feelings about interest rates. The whole idea behind laddering is to discourage savers from trying to time the market. Instead, savers purchase a new CD out to the end of the investment horizon each time a CD matures.

Bucking conventional wisdom makes sense here. That's because a typical CD ladder is initially purchased all at once, and because, with interest rates at or near historically low levels, there's really not much of a chance that rates will continue to head lower.

One approach that goes against convention is to build an extension ladder. Start with a shorter-term final maturity that is less than your investment horizon. Build that shorter ladder, but as CDs mature, extend farther out than your initial final maturity.

For example, let's say the initial CD ladder is three months to two years. Using the "extension ladder" approach, you'd wait for the first CD to mature and use the proceeds to buy a 2.5-year CD. Take this approach until your ladder extends out to your long-term investment horizon.

You can learn more about CD ladders by reading the Bankrate feature "Laddering: How to build a CD ladder." Try your hand at laddering CDs and see what your return will be with Bankrate's CD ladder calculator.

Retirement plan choices

Retirement account asset allocations should not be the same for every investor. Allocations vary depending on how close the account holder is to retirement, the investor's attitude toward risk and the investment options available in a retirement plan.

Conventional wisdom has early career, and midcareer investors allocating high percentages of these retirement assets to stocks. Stocks provide a better hedge against inflation than bonds or money market funds, and younger investors traditionally have been encouraged to take on more risk, as their relatively long investment horizon allows for "rebuilding years" should the market take a sudden plunge.

However, the industry now is struggling with the whole concept of "rebuilding years" at a time when the average annualized return on the S&P 500 stock index has been negative over the past 10 years -- approximately 1 percent negative annually through July 31, 2009.

That's not a reason for workers to turn their backs on investing in retirement accounts, especially if the firm has a program where it will match a portion of the worker's contribution to the account. A typical plan contributes 50 cents on every dollar contributed up to maximum employer contribution of 3 percent of salary. Don't turn away from earning up to a 50 percent return on your money.

If you are dissatisfied with recent returns, do some forensic work about what went on in your retirement portfolio and the changes that need to be made. That could include lobbying the plan provider for investments with lower annual fees and expenses. It could also include lobbying for other savings and investment options.

Remember, retirement accounts are just part of an investor's total financial picture. Consider integrating retirement monies into a holistic approach to wealth management. Get the big picture by working with a fee-based financial planner who can help map your life goals and how your finances can help you reach them. Part of the process will involve finding an asset allocation that's right for you.

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