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The real return on CD rates

By Sheyna Steiner ·
Wednesday, November 6, 2013
Posted: 3 pm ET

Unless you're starting with a vast fortune, the interest paid on a certificate of deposit at today's rates won't be worth a hill of beans. Actually, it's possible that a hill of beans might be out of your price range if you're investing only in CDs.

That's because CD rates have been on a downward slide since Dec. 2008 when the Federal Reserve lowered short-term interest rates to close to zero.

The free fall in rates abated in September. Now, CD rates are stable but floundering at record-low levels. The average one-year CD rate is 0.23 percent and 0.79 percent for five years.

What will that get you? Using Bankrate's CD rate calculator, we can see that a $1,000 deposit would grow to $1,040 after five years with annual compounding. I wouldn't turn down $40, but the real return on that CD will be quite a bit less, thanks to inflation.

Inflation is relatively low. The last reading by the Department of Labor showed that the U.S. Consumer Price Index, with volatile food and energy prices stripped out, increased at a rate of 1.7 percent over the past year. The historical average rate of inflation is 3 percent.

In general, that means the price of everything increases incrementally over time, but your money doesn't. That's why gum that was a quarter when I was a kid now costs a dollar. Unless your savings are earning interest of at least the rate of inflation, you're not going to be able to buy as much. When I was 8 years old, if I had tucked away 25 cents to purchase a pack of gum in 20 years, I would be out of luck today.

For today's CD investor, that $1,040 at the end of five years has actually lost some purchasing power. At today's relatively low rate of inflation your $1,040 will be more like $956. There's more bad, but not surprising, news. Taxes will further decrease the amount of money in your pocket.

Use Bankrate's inflation calculator to see how taxes and inflation will eat at your returns. How do you keep your savings from being eroded?

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Follow me on Twitter @SheynaSteiner.

Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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November 12, 2013 at 1:47 pm

There are 5 Year CD's available on this site from banks offered at 2% which is a $100 after 5 years. Wake up.