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Stay short for CD ladder

By Sheyna Steiner · Bankrate.com
Wednesday, March 14, 2012
Posted: 4 pm ET

Does anyone have a CD ladder at this point? As Claes Bell adroitly pointed out earlier this week, CDs aren't winning any popularity contests.

With yields as low as they are, have been and will continue to be, savers have headed for greener pastures in terms of yield or liquidity.

In more typical interest rate environments, CD ladders can be a great strategy for maximizing both of those: yield and liquidity. As laddered CDs mature at regular intervals, there is always cash either available or about to become available.

The Federal Reserve has, once again, pledged to keep rates at their current level until 2014. If the economy improves, their hand may be forced sooner but taking them at their word, savers have at least two years to muddle through with abysmal yields -- and hopefully no more.

According to Bankrate's rate research, savers willing to go out to five years can get yields twice those available on a 3-year CD. As of March 7, the yield on a 5-year CD was 1.15 percent while the yield on a 3-year CD was only .7 percent.

It's a risk going out to five years however. If rates do increase within two years, savers holding longer-term CDs will find themselves unhappily on the wrong side of interest rates.

With that in mind, this is how a CD ladder going out three years in 6-month increments could look, assuming $6,000 to start.

6-month CD $1,000
1-year CD $1,000
18-month CD $1,000
2-year CD $1,000
24-month CD $1,000
3-year CD $1,000

After the initial six months, the first CD comes due and the proceeds are reinvested into another 3-year CD. In another six months the one-year CD matures, the proceeds of which will go towards another 3-year CD.

As rates rise you'll be reinvesting in higher-yielding CDs and can consider lengthening the ladder to more rewarding maturities.

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2 Comments
Brownie
March 18, 2012 at 3:25 pm

The statement you would have to have enough CDs to own Texas is right. My ladding of cd is beginning to take a hit. They go from 5% to 2% for 5 years. Any investor or saver needs to consider another method of interst return. Banks must be hoarding all their money and not lending any out.

Dmitry
March 16, 2012 at 4:53 pm

CDs are worthless considering the inflation rate.

Who in the right mind would invest into 1.15% 5 year CD when core inflation rate is about 3% per year, and higher for products that are considered to be necessities: food and energy.

The only thing CDs offer is to lock the rate of loss.