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Ally Bank's New Online CD Ladder Tool - CD Ladders Still Useful?

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Ally Bank

Ally Bank launched an online tool yesterday which is intended to help customers plan a CD ladder. As described at the Ally Bank blog, the tool "helps you estimate the savings created by your CD ladder by guiding you through the projected timeline of your ladder and giving step-by-step instructions for when you need to take action." I gave Ally's CD ladder tool a try, and it works well in helping you plan a basic CD ladder with Ally Bank CDs.

CD Ladders Still Make Sense?

In May I asked the question if CD ladders still made sense in today's low interest rate world. For those who responded in the poll, 42% said they are still using CD ladders. However, 22% said they have made changes to their CD ladders.

I thought it would be interesting to compare two other savings strategies with a standard CD ladder as described by Ally Bank.

Five 5-Year CDs Instead of a 5-year CD Ladder

One strategy is to just put all of your money into Ally Bank 5-year CDs. Instead of starting with a 1-, 2-, 3-, 4- and 5-year CDs, you would start with 5 equal 5-year CDs. The benefit of this is that the 5-year CDs have higher rates. So you'll maximize your returns. The downside as compared to a standard CD ladder is that you will have to worry about early withdrawal penalties at the annual intervals. As we know, the current Ally Bank EWP is small, so this can be a better deal even with the penalties.

One potential problem with using all 5-year CDs is that if you don't break the CDs early, all of them will mature at the same time in 5 years. One benefit of a CD ladder is that the CDs renew in regular intervals (like every year). That eliminates the need to guess about future rates. If rates go up, you slowly benefit with higher rates as you renew each CD.

How much more interest will you have after 10 years if you just invest in 5-year CDs instead of a CD ladder with 1-, 2-, 3-, 4- and 5-year CDs? If you assume a total $10,000 deposit and the 5-year CD rate remains the same for the next 9 years, the final balances are:

  • A) Total from 5-yr CD ladder after 10 yrs: $11,737
  • B) Total from 5-yr CDs after 10 yrs (early closures to mimic ladder): $11,799
  • C) Total from 5-yr CDs after 10 yrs (no early closures): $11,824

As expected, the CD ladder (A) results in the smallest total due to lower rates of the short-term CDs. Using all 5-year CDs and mimicking short-term CDs by closing those 5-year CDs after 1, 2, 3 and 4 years (B) results in a slightly higher total return. Finally, using all 5-year CDs and keeping them until maturity and renewing them (C) results in the highest total return. However, the differences between these 3 strategies are not much. So if you want to keep things simple, you may want to consider a basic CD ladder.

Keeping Everything in a Savings Account

Another simple strategy is to just keep everything in a savings or money market account. This gives you maximum liquidity. It also gives you more flexibility if hot deals become available. The downside is that may result in the lowest return. If you assume today's Ally Bank savings account yield of 0.95% remains the same for the next 10 years, the total return for an initial $10,000 deposit is $10,992.

My Take on CD Ladders

It might seem unwise to renew CDs that mature today into new long-term CDs which have such low rates. However, many had those same concerns two years ago. I'm sure many readers who opened long-term CDs two years ago are glad about their choices. The problem is no one knows about how interest rates will change. The CD ladder provides a strategy that doesn't require you to guess about future rates.

CDs don't have to make up one's entire portfolio. For the fixed-income part of your portfolio that you want to keep safe, CDs and CD ladders can still make sense. For example, Allan Roth who writes for CBS News has written that he has "roughly" 70% of his "fixed-income portfolio in high-paying CDs that have easy early withdrawal penalties."

CD Ladder Overview, Strategies and Tips

We have more CD ladder info in our CD ladder overview with an infographic. There are ways you can tweak a CD ladder. I described some of these ways in my post on Alternatives to CD Ladders. There are issues that can mess up your CD ladder and reduce your CD earnings. I reviewed some of these in my posts Issues to Consider for Your CD Ladder and 10 Gotchas to Avoid for Bank CD Investors.


  Tags: CD rates, Ally Bank

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Comments
6 Comments.
Comment #1 by Anonymous posted on
Anonymous
It looks to me like trying to build a ladder out of a maturing Ally CD won't work.  The bank currently offers a 25 basis point "loyalty reward" for CD renewals but, if I correctly interpret past e-mails I've received from it, the bonus applies only to the account number of the maturing CD.  So, if I try to take a $100k maturing CD and break it into a ladder of 5 $20k CDs, I'll only get the loyalty reward added to the $20k CD having the same account number as the original CD.

Does anyone have a different take based on experience with Ally?

2
Comment #2 by Kaight posted on
Kaight
Dunno about that "buy all five year CDs" strategy.  I'm afraid that would only work in very limited circumstances . . . for example . . . if the Federal Reserve promised "near zero" short rates ad infinitum!

4
Comment #3 by Bozo posted on
Bozo
Building a 5-year CD ladder from scratch is something I posited over at Bogleheads forum. It is not terribly complicated, and involves shifting bond fund assets to 5-year CDs over a 5 year period. As low as CD rates are, the rates on 5-year CDs still tend to outpace the SEC yields on similar bond funds. 2% is pretty much the "going rate" these days. As in, "you're not paying 2%, I'm going."

3
Comment #4 by Anonymous posted on
Anonymous
IMO CD Ladders still work. I have one running through January 2021 and it is currently paying over 5%. It is composed of some very unequal rungs and maturities which has been because deals on CD's have not been around as much. A big help is that we never cash in early and basically stick with Pentagon FCU and Navy FCU. Just purchased $8K from NFCU paying 4% for one year and then it will mature into a 3% (current rate) one year CD - so in this environment it is not too bad to get $8K CD at a 2 years blended APY of 3.5%.

3
Comment #5 by lou posted on
lou
Anonymous #4, I wasn't aware that Navy Federal was currently paying 3% for one year CD's. Can you show me any evidence of this?

1
Comment #6 by lou posted on
lou
Anonymous 4, are you talking about the following:

"Limit one Special EasyStart Certificate per member. This offer, including the stated APY, is effective March 28, 2011. $3,000 maximum balance. Certificate owner(s) age 18 and older must have Direct Deposit of Net Pay (minimum $300 per Direct Deposit)"

So, I am not sure why you think you will get 3% one year from now for $8,000 of certificates. According to this language, it would only be available for a $3,000 certificate, and you would only qualify if this offer is still in effect one year from now. You also have to do a $300 direct deposit into a Navy Fed checking account.

2