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Strategies for low CD rates

By Sheyna Steiner ·
Thursday, March 17, 2011
Posted: 8 am ET

For savers and investors living off interest income, typically retirees, low CD rates are a major problem. For people whose working days are behind them, persistently low interest rates have resulted in drastic reductions of income. In order to increase returns, many retirees have been forced to take on more risk in their investments but with a finite amount of resources. And losing money on a sour investment is something few can afford to do.

I recently e-mailed a couple of financial advisers to ask about their strategies for dealing with low CD rates and their experiences working with CD investors.

"Working with many seniors and retirees, they are choosing to do nothing. They have been taking it on the chin for over two years now, and suffered essentially an 80 percent pay cut over the last five years. And it looks like nothing is going to change for some time as the Japanese quake / tsunami / meltdown and higher gas prices work to stall the economy and encourage the Fed to keep rates ultra-low," says Robert Laura, president of SYNERGOS Financial Group near Howell, Mich.

For the diehard CD investor, he recommends going online to find high-yield CDs.

"ING and Ally offer rates that dwarf local banks and credit unions. The issue here is that some seniors aren't comfortable with the Internet," says Laura.

His second recommendation is to invest in dividend-paying stocks, but concerns about loss of principal keep many from taking the risk.

"So they end up hoping and cutting their medication in half," he says.

Louis Berger, principal and co-founder of Washington Square Capital Management in New York City, recommends fixed-income alternatives to CDs and sticking to very short maturities.

"We have looked at high-quality, taxable municipal bonds as an income option in lieu of CDs.  We also have considered Treasury inflation-protected securities, or TIPS, floating rate bond funds, and some variable-rate corporate notes.  We have been avoiding long-term bonds and CDs and staying on the very short end," he says.

"If given a choice, we think CD investors may be better off biting the bullet and taking the lower yield on short-term CDs rather than chasing yields on the longer end of the curve -- 5-, 10- or 15-year issues  -- particularly if they may need access to the money prior to maturity," says Berger.

What do you think? How have low CD rates affected you?

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April 09, 2011 at 5:14 pm

RE Erica R, The banks have already adjusted to that tactic. The penalties are either equal to the interest earned, or you will at best get one-half percent net when you close. If there are others that sitll have only a 60 day interest penalty on a 5 year CD, with a term rate of over 2%, I have not found them.

It's getting worse instead of better.

Yvonne Carlan
March 21, 2011 at 4:51 pm

How is it that the Feds expect the economy to pick up when they're keeping interest rates so low? I personally am spending money only on necessary things, such as food and gas. It's really getting to be a downer!

March 19, 2011 at 2:30 pm

Dear Erica R,

Could you give an example of a bank offering a 5-year CD with 60 days worth of of interest on an early withdrawal?

Gary Smith
March 19, 2011 at 1:38 pm

Does anyone know which internet bank will handle IRA funds?

Sheyna Steiner
March 17, 2011 at 3:17 pm

Excellent point, Erica. Thank you for adding that. With a reasonable early withdrawal penalty, savers can buy a longer-term CD, get out early and still earn more interest than is available on short-term maturities.

Erica R
March 17, 2011 at 1:02 pm

Something to keep in mind when investing with some of these online banks is a lot of their early closure penalties are very reasonable.. So if you invest in the 5 year CD, close it after a year, and take a 60 day penalty, you still come out ahead of a 1 year CD.

It's worth asking the online banks these kind of questions, and can mean the difference between a rate of 1% and 2%!