I thought it was a good time for another comparison of the top long-term CDs if the CDs are closed early. Unfortunately, two of the banks that were in my last comparison have cut their rates. As you might have expected, Ally Bank continues to make small rate cuts. The cuts have slowed a bit over the last couple of weeks, but there was another tiny rate cut yesterday that lowered the 5-year APY from 2.04% to 2.03%. Discover Bank slashed its 10-year CD APY from 3.00% to 2.50% last month. Due to that big cut, I've replaced Discover with Pentagon Federal Credit Union's 7-year CD. As I described yesterday, PenFed's 7-year CD has a large early withdrawal penalty of 1-year of interest. That's the reason I have excluded it from my recent comparisons. However, the rate is now high enough (relative to the others) to offset this large penalty.
One risk with this long-term CD strategy is that the bank or credit union could raise the early withdrawal penalty on the existing CD. As we learned with Fort Knox Federal Credit Union, this is an actual risk. As I reported last month, the NCUA ruled in favor of Fort Knox FCU. It should be noted that even though the institution may be able to increase the early withdrawal penalty, they do have to give you 30 days notice, and during this time you should be able to close the CD with the existing EWP.
There may be risks that it could be more costly than you had expected to close a CD before maturity. However, there's also the risk that interest rates will stay low for a long time. Using CD ladders with long-term CDs is a good strategy to help with both of these risks.
With Discover Bank removed from the comparison and PenFed added, I now have three credit unions in addition to Ally Bank. I consider all three of these to be all-access credit unions in that anyone can join by first joining an association. PenFed makes this easy. As I described yesterday, you can join the association online while you are applying for PenFed membership, and the minimum cost is $15. Velocity Credit Union also makes it fairly easy in their online application, and the cost is also $15 (see my review). It's a little more difficult and expensive at Garden Savings FCU. There's no online application, and the cost to join the association is $50 (see my review).
Below is a comparison of the four CDs. The table shows the yields for each year after the CD is opened. These yields take into account the loss from the early withdrawal penalty. Ally Bank no longer has the best yield when the CD is closed at year one. Due to its recent rate drops, Ally's CD is now tied with Garden Savings FCU. Soon after year two, Velocity Credit Union's post-penalty yield takes the lead. Due to PenFed's large early withdrawal penalty, its early closure yields stay below the other credit unions. However, PenFed has an advantage over Ally Bank in year 4 and 5.
The early withdrawal yields listed below are based on the spreadsheet developed by Bogleheads forum members. It's available from the Bogleheads Wiki: Comparing CDs. It should be noted that the following simple formula comes very close to this spreadsheet:
Post Penalty APY = (Full APY) x (D - P) / D
D = days into term when the CD was closed.
P = days of the early withdrawal penalty
These CD rates are based on the rates listed at the institutions' websites as of 10/06/2011:
Approximate Yields After Early Withdrawal Penalties
|Year of Early Withdrawal||PenFed 7-yr 2.75% CD latest rates||Velocity CU's 2.62% 5-yr CD latest rates||Garden Savings FCU's 2.26% 5-yr CD latest rates||Ally's 2.03% 5-yr CD latest rates|
|Early Withdrawal Penalty||12 months||6 months||3 months||2 months|
|year 5||2.19%||2.62% (no penalty)||2.26% (no penalty)||2.03% (no penalty)|
|year 7||2.75% (no penalty)||n/a||n/a||n/a|
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