A certificate of deposit is a savings product that guarantees the principal and earns interest at a set rate as long as no early withdrawals are made.
A five-year CD requires investors make a minimum deposit and leave the principal intact until the maturity date. Withdrawals made before five years have passed can result in a penalty, although interest can be taken or allowed to accumulate in the CD.
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Advantages of a 5-year CD
In general, the longer the term, the higher the interest rate, so a five-year CD usually offers a higher interest rate than a standard savings account, money market account or shorter-term CD.
Five-year CDs also offer the advantage of guaranteed return of principal as long as the investor keeps the money in the account until the maturity date.
Considering the volatility of the markets, it’s no surprise many people opt for the safety of a five-year CD to protect their savings. CDs offered by banks are insured up to $250,000 per depositor by the Federal Deposit Insurance Corp.
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Disadvantages of a 5-year CD
While a CD is certainly safe, a long-term CD is not likely to earn as much as a riskier investment, such as stocks.
In addition, because of the penalty incurred for early withdrawal, CD investors have little flexibility to take advantage of rising interest rates. One way some CD investors overcome this disadvantage is by “laddering” their CDs, with maturity dates for different CDs every few months to allow for reinvestment flexibility.
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Who benefits most from a 5-year CD?
Financial planners always recommend people have a mix of investments, including some that are riskier than others.
Investors who prefer a safe investment will be attracted to five-year CDs because they normally offer a higher return compared with short-term CDs, yet are virtually risk-free.
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