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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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What to Do with Maturing CDs? Choosing Long-Term CDs with the Highest Rates

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Many 5-year CDs with interest rates over 5.00% will be maturing this year, and several readers with these CDs have been trying to decide what to do with that money. Unfortunately, there isn't any great option for money that you want to keep 100% safe. No one likes to lock into long-term CDs with today's low rates. Also, no one likes earning less than 1.00% in savings accounts and short-term CDs.

Yesterday I reviewed one strategy in which you choose the best long-term CD with a mild early withdrawal penalty. Today, I'll review another strategy that's similar. That strategy is to choose the best long-term CD regardless of the early withdrawal penalty. As I mentioned yesterday, some of the best CDs have early withdrawal penalties so harsh that it would be too costly to close the CD early for the vast majority of situations. Also, as I described yesterday, there are risks with planning to close a CD early. It may turn out to be more difficult or costly than planned.

One example of a top CD rate with a harsh early withdrawal penalty is at Melrose Credit Union which offers a 2.68% APY 5-year CD (as of 1/17/2012). That's the highest 5-year CD rate that's nationally available. However, Melrose has a harsh and confusing early withdrawal penalty. I have more details of the EWP in my last Melrose Credit Union CD review.

Another example is US Bank which has the best 5-year CD APY at a nationwide bank. It's a special 59-month CD that has a 2.25% APY (as of 1/17/2012). As I described in my US Bank CD review, US Bank will charge a penalty of at least one-half of the interest that would have been earned on the funds withdrawn if held for the entire term. For a 59-month CD, that's 29.5 months of interest.

Capital One is tied with Discover Bank for the highest CD rate at a bank that's nationally available. Both have a 10-year CD with a top APY of 2.55% (as of 1/17/2012). At Capital One, this is available to Costco members. The yield is 2.50% for others. Capital One's early withdrawal penalty may be very harsh since it increases as interest rates rise. I reviewed the details in my Capital One CD post.

If you're going to invest in one of these CDs, it's a good idea to plan to avoid early withdrawals of principal. A CD ladder approach can minimize the risk that you'll need to make an early withdrawal. In a CD ladder you divide up your CD money and invest that money into multiple CDs separated by regular intervals of time (i.e. every year). Once a CD ladder is in effect, you should have a CD maturing in regular intervals. That money can then be used for expenses or it can be reinvested into a new higher-rate CD (if interest rates are rising).

In 2010 I reviewed some CD ladder alternatives. One alternative is to avoid short-term CDs and use savings accounts or reward checking accounts instead. When you start CD ladders, short-term CDs are typically used so that you won't have to wait too long before the first CDs mature. There are some downsides of this approach. First, short-term CD rates are currently so low, they don't have much advantage over savings accounts and reward checking accounts. Second, liquid accounts make it easier to quickly take advantage of CD deals. If a CD deal pops up, you might not be able to take advantage of that deal if your short-term CD still has another two months before it matures.

One question that's hard to answer is how much money should be kept in savings accounts or short-term CDs versus long-term CDs. People might want to keep significant amount of their money in savings accounts even if they won't need that money in 5 or more years. The reason is that they don't want to be locked into a long-term CD when interest rates shoot up. This strategy won't pay off if interest rates stay the same or continue to fall as they have been in the last four years. Below are three possible scenarios about future interest rates assuming you keep the money in a savings account. Each year I list the average interest rate earned on that savings account. I then provide an average for the five years. These 5-year averages can be compared to current 5-year CD rates.

Future Savings Account Rates: Potential Scenarios

  • 2012: 1.00%
  • 2013: 1.00%
  • 2014: 2.00%
  • 2015: 3.00%
  • 2016: 4.00%
  • AVER: 2.20%
  • 2012: 1.00%
  • 2013: 1.00%
  • 2014: 3.00%
  • 2015: 5.00%
  • 2016: 7.00%
  • AVER: 3.40%
  • 2012: 1.00%
  • 2013: 3.00%
  • 2014: 5.00%
  • 2015: 7.00%
  • 2016: 9.00%
  • AVER: 5.00%

In the above scenarios, I assume the savings account rates will eventually rise. Even though you can currently get over 1.00% in a savings account, there's a good chance this will go down so an average of 1.00% is still reasonable. For the first two scenarios, I assume rates don't start rising until late 2013 or early 2014. So the average rate remains 1.00% for 2012 and 2013. For the second scenario, I assume rates start rising faster than the first. I assume a very fast rise for the third scenario. My guess is that the first scenario is probably most likely to occur, but that is just a guess.

The important thing to note above is the 5-year averages. You can compare these to the current 5-year CD rates. If the first scenario occurs, you'll do better if you had chosen a 5-year CD. If the third scenario occurs, you'll lose out on the high rates for the last 3 years if you had chosen today's 5-year CD. I would not consider this a catastrophe.

As I mentioned at the start, there isn't any great option for money that you want to keep 100% safe. Hopefully, this post will help you evaluate the trade-offs between locking into long-term CDs and earning low rates in savings accounts and short-term CDs.

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To search for nationwide CD rates and CD rates in your state, please refer to the best CD rates section of DepositAccounts.com.


  Tags: CD rates, Melrose Credit Union, US Bank (OH), Capital One Direct Banking

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Comments
25 Comments.
Comment #1 by Anonymous posted on
Anonymous
Ken - In a future articule, it would also be interesting to see your thoughts and some calculations as to going ahead and investing in longer term CD's now, as opposed to investing in shorter term savings accounts while waiting for rates to increase, i.e. how much rates would have to increase in a given five year period or so in order to make the wait beneficial.  Perhaps you have done this before but, if so, a refresher might be worthwhile.

1
Comment #2 by Anonymous posted on
Anonymous
Interest rates are never going to increase........any of you thinking they will are wasting your time. Those days are over for good. You will never see CD rates anywhere close to 4 or 5%. So if you want safety.....I would suggest to go ahaed and do a long-term CD.  Ally Bank has a very low penalty.....I believe only 2 months interest. Also look at I bonds for small investments.

Low interest rates have become a political issue.....neither party will allow them to increase. And there is way too much pressure on them from big business. They want access to low rates for borrowing and they want your money invested in their stocks......not in CD's.

 

The savings strategy,for all practical purposes,is over.  Ballgame. Done.

 

8
Comment #3 by Anonymous posted on
Anonymous
When other countries reduce their buying of US Treasuries, rates will go up. Because the US Treasury will have to offer higher interest rates to sell them. That will push all interest rates up. May take a few years, but it will happen. Like everything in finance, interest rates are cyclical.

17
Comment #4 by Anonymous posted on
Anonymous
#3-Wrong. Interest rates in USA will never be allowed to increase. never. We have already been conditioned to accept 1-2%......and that will never change. Just like we have been conditioned to accept $3-4/gallon gas....and so many other high costs. And you're also wrong about demand for US Treasuries. If it does go down(which it will not).....the fed will just print money rather than increase rates. Interest rates are NOT cyclical anymore......they are low for good and permanently.

1
Comment #5 by Jane (anonymous) posted on
Jane
Anonymous #2  is basically saying that the economic cycle has been repealed, that the ups and downs of interest rates is no longer the case.  That's like those who are saying that real estate prices will never recover, that the present downturn is a "new reality."  I think that a stronger case has to be made for such an opinion. 

11
Comment #6 by Anonymous posted on
Anonymous
Jane......Wrong. Fail. Who said anything about a downturn???  I'm talking about interest rates.... not anything else.You're so brilliant, Einstein?  Rates have been low for years.....it's the new reality. It's not something that has been just going on a few months.  When was the last tiome you could get anywhere close to 5% on a CD? Years.

 

Einstein.

2
Comment #7 by Anonymous posted on
Anonymous
Talking about interest rates, I watched last night and one of the candidates was talking about changing Social Security so that young people could put their money into a savings account and in 30 years they would all have SO MUCH saved they would not need social security!!  WHERE do these idiots who believe in this think our young people are going to put their money which will not be a terrible risk to them??  They could save a million dollars and if the stock market crashes when they need their money, they are toast!! What SAFE place can they use for saving which will give them more than 2%?  I agree with the earlier poster that days of 5% CD rates are gone forever.  How I would love for those candidates to come to my city and give a town hall meeting.  I would love to be able to face them about this issue.

All of my letters to the President, Bernanke, senators etc. about this problem never get answered. I wonder why???

5
Comment #8 by Anonymous posted on
Anonymous
Anonymous #2,4. You cannot print money endlessly. Taken, the $1.5 trillion of printed money will be inflationary once the velocity of money picks up and banks start to lend. For now, we will enjoy a deflationary cycle until the end of 2016 and housing rebounds.  In 1970, paul vocker had to increase fund rate to 17%. Do you see this happening again?I guess no... why are u so adamant to see this...please enlight us.  

 

3
Comment #9 by Anonymous posted on
Anonymous
Interest rates are at an all time low and IMO will NOT be here forever, they run in cycles and the bull market in Bonds will end and eventually we will start a bear market in bonds. When that finally happens watch out above for interest rates.

6
Comment #10 by Louis (anonymous) posted on
Louis
Ken,

Anonymous #6 should be deleted from this forum for nastiness.  Terrible attitude.

9
Comment #11 by Anonymous posted on
Anonymous
To Anonymous No. 7,

Do you have an address for Bernanke?   I tried and tried to find one but was unsuccessful.   I, too, would like to give him a piece of my mind ---  that the Federal Reserve through the FOMC is legally stealing the earnings of my normal savings as well as all of my retirement savings as I do not trust the stock market.

If you have an address for Bernanke would you kindly share it through this post?

Thanks.

 

1
Comment #12 by Anonymous posted on
Anonymous
Anonymous #2,4 is obviously a mentally disturbed person that can not hold an academic and/or rational discussion.  Only ranting and raving about how he knows it will be.  This is a convenient forum.  In the end these people need help.

5
Comment #13 by Anonymous posted on
Anonymous
Louis is the resident tattle-tale for this board......remind ken to give us all homework, too.

4
Comment #15 by CraigPD posted on
CraigPD
E=mc2,
This time it's different?  Ever considered a non-myopic perspective or is that beyond analytic formulation of theoretical physicists, relativity speaking?

4
Comment #16 by Anonymous posted on
Anonymous
Anony #11  Getting an address for Ben Bernanke isn't easy.  I called my Senator's office and all they have is:        Ben Bernanke, Chairman of the Board of Governors

                   20th St. & Constitutional Avenue, NW

                   Washington, DC 20551

Hope this helps.

2
Comment #17 by Anonymous posted on
Anonymous
why don't folks willing to go out 10 years look for CDs at brokerage houses since their corporate CDs are currently at 3%.  Interest is not compounded, but these are FDIC insured in the same way as bank CDs.

 

martha

3
Comment #18 by Anonymous posted on
Anonymous
Martha:  In order to buy CDs from brokerage houses, don't you have to have an IRA or a special account with them.?  We belong to two brokerage houses and purchase our IRA CDs from them.  They usually give a bit less in the rate because they take their commissions that way, imo.  They will insist they don't but when I tell them I know they do, they don't argue about it.  I checked our two institutions and their rates are not very good now either and I am not going out for ten years no matter what.  However, for anyone who is willing to go out 10 years, if you found CDs for 3%, I guess it could be a good deal.  Just remember that if you need to get your money back with a brokerage CD, they have to be sold on the Secondary Market and you could lose a chunck of principal.  It's not like doing an Early Withdrawal Penalty with a bank or credit union. 

7
Comment #19 by Rick (anonymous) posted on
Rick
I'm a little wary about Ally.  I have heard that GM wants to start it's own finacial arm again.  Ally currently does a lot of business with GM.  So a long term CD may be a short term one with them. 

1
Comment #20 by Richard (anonymous) posted on
Richard
Some pretty negative posts here.  We're all in the same boat together.  That boat is now being storm tossed, but the seas will calm and the sun will rise.  We'll get through this.  It'll just take some time.

It's probably best to have a positive outlook (even though things are so bad) than to have a negative outlook.  Just my unhumble opinion.

9
Comment #21 by Anonymous posted on
Anonymous
I refuse to do any business with Ally due to the fact that their high rates have been due to an unfair competitive advantage given to them by the government through the bailout of GM.

Ally bank should have to advertise that they are the failed GMAC bank under a shiny new name. 

3
Comment #23 by RealityCheck (anonymous) posted on
RealityCheck
The commentor above is correct when he says that interest rates won't increase for a very long time.  That is because we are entering an era of heavy financial repression, wherein governments will artificially suppress interest rates, by heavy bond purchases by the Federal Reserve, ECB, Bank of England, etc.  This is done to help governments pay their profligate spending bill and to induce heavy inflation, for the long run, so that the cost of servicing debt can be permanently reduced.  Essentially, it is taxation without representation, for as the dollar, pound, euro, etc. are debased the value of each one that existed before the quantitative easing (a/k/a money printing) episodes is reduced in terms of what goods and services it can command in the marketplace.  Interest rates will stay very low, while inflation goes very high, and government agencies, charged with the duty to report the consumer price index, utilize effective methods of falsifying inflation rates (see www.shadowstats.com). 

For example, under the inflation formula of 1980, the USA would have to report it is experiencing 11.2% inflation per annum.  The government doesn't want to report that, because it indicates total failure on the part of policy makers.  So, the Labor department falsifies the data, while still ostensibly "telling the truth" by changing the formula, adding various statistical gimmicks, and, in the end, reporting that the CPI is only about 3%.

The bottom line is that the economic recovery is being paid for on the backs of savers and bond holders.  Money is being stolen from careful hard-working folks and given away to Wall Street (and High Street, London) speculators and non-savers (a majority in the western world) in order to buy their votes.  Forget about long term CDs.   Your savings will be wiped out, in real terms, even though you will earn a small nominal interest rate.  As soon as we exit this depression, the inflation rate is going to jump even much higher than the current 11.2%.  Hyperinflation rates of over 100% per annum, after statistical gimmickry is removed, are probable, even as the government lies and tells us, during that time period, that inflation is, perhaps, running at 11%.

People who don't want to be wiped out need to save at least part of their money in metal.  Right now, platinum has lagged the other precious metals, and is a very good buy, because although it is a late reactor, it will eventually respond even better than gold or silver to inflationary pressure.  Gold and silver have already taken off, but are still worth buying.  I am putting 80% of my wealth in a combination of the three metals, but even a 20% allocation will leave you some valuable assets, at the end of this decade, as compared with no buying power at all, for your CDs.

4
Comment #25 by Anonymous posted on
Anonymous
Reality:  Yes, this does look bad for Romney but don't you think we could find many of the same type contributions given to others running for the Presidency?  Why don't you list Obama's cohorts?  If this list is so shocking, why hasn't any of it been brought out in the many debates?  All they talk about is Bain.  I wonder what Ron Paul's list looks like?  BTW, can you direct me to a webpage which will show the contributors for "all" those running?  Thanks! 

7
Comment #26 by RealityCheck (anonymous) posted on
RealityCheck
Ron Paul gets 48% of his money from contributors of less than $200, whereas Romney gets only 10%.  Paul hasn't had any 6 figure donors during the primary, and that means he probably won't have 7 figure donors in the general election.

Ron Paul's biggest contributors are listed in the same article, which is found at: http://seekingalpha.com/instablog/1118943-smarter-investor/253677-too-big-to-fail-banks-are-investing-in-mitt-romney

RON PAUL



US Army $24,503
US Air Force $23,335
US Navy $17,432
Mason Capital Management $14,000
Microsoft Corp (MSFT) $13,398
Boeing Co  (BA) $10,620
Google Inc  (GOOG) $10,390
Overland Sheepskin $10,350
IBM Corp (IBM) $8,294
US Government $7,756
DUNN Capital Management $7,500
Corriente Advisors $7,500
Greenstreet Co $7,500
Northrop Grumman (NOC) $7,272
Lockheed Martin(LMT) $7,208
Intel Corp (INTC) $6,855
US Dept of Defense $6,524
United Technologies (UTX) $6,316
Federal Express (FDX) $6,255
Entergy Corp (ETR) $5,950

5
Comment #27 by Anonymous posted on
Anonymous
Wow!  I can't believe Ron Paul is doing so well considering the small donations he is getting!!  What is his secret?  I know.  The young people love him!

1
Comment #28 by Anonymous posted on
Anonymous
Not just the young people!

3