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Help for retirees’ CD yields?

By Claes Bell ·
Monday, April 30, 2012
Posted: 4 pm ET

Right now, investing in short-term CDs is the way to go, mostly because it's unlikely CD yields will remain at their current multidecade lows past the end of 2014, when the Federal Reserve says it will begin raising interest rates. After all, you don't want to be locked in to a five-year CD paying 1.8 percent only to watch rates begin climbing halfway through the CD's term.

On the other hand, longer term CDs are paying a substantially better rate than short-term CDs. Our weekly rates survey finds five-year CDs averaging 1.13 percent versus just 0.33 percent for a one-year CD.

Last week, Kelly Greene of the Wall Street Journal reported on an option for CDs that she writes could give retired CD investors the best of both worlds, called estate-feature puts or simply "death puts":

Death puts guarantee that when the owner of the bond or CD dies, the heirs can redeem it at face value, meaning they get back all the money that originally was invested. The fees usually amount to about 0.125 percent a year, and come out of the interest payments.

As Greene points out, that gives retirees who want to earn better yields now, but don't want to lock heirs into a multiyear CD at record low rates, a potentially better option.

That said, with even long-term CD rates fairly depressed, I wouldn't expect this strategy to pay off in a huge way, especially with that 13 basis-point fee factored in. And should you live long enough for the CD to mature, you'll have missed out on any rate increases that happen during that time, and may even be earning a negative real return should inflation rise beyond today's roughly 2 percent number.

A better option, in my opinion, if you want to stick with CDs, is a truncated CD ladder made up of (relatively) high-yield online CDs. That way, you'll have CDs maturing at regular intervals so you can take advantage of rising rates while still reaping some of the rewards of long-term CD rates in the present. True, in the short term, a 10-year CD with a death put might get you a better return in the present, over the long term, it seems to be a less attractive option.

What do you think? Would you ever buy a long-term CD with a death put to boost yields? Anyone out there done it?

Follow me on Twitter: @ClaesBell.

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