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  4. How Do You Measure The Impact Of Early Withdrawal Penalties?

How Do You Measure The Impact Of Early Withdrawal Penalties?

NeilStanley
  |     |   62 posts since 2013

I haven't found a calculator that depositors need to calculate the impact on their investment from early withdrawal penalties. So, here is a link to an Excel spreadsheet that you can use to calculate the impact of early withdrawal penalties

https://app.box.com/s/ocuposih32mz20kwh2o8p7qhj9yugrwe

It calculates the "Give-Up" Yield or the APY Needed to Reinvest the Net Amount after Early Withdrawal to Maintain the Original Value at Maturity. In other words, it tells you what yield you need to stay equal to the value of your current CD.

Let me know if you find this helpful. Also, if anyone has seen this or something equivalent somewhere else, please point me to it.

Seems like something CD owners should have been accessing long ago.

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5


Answers
Anitagirl
  |     |   16 posts since 2023
Check this one out :-

https://binfy.com/cd_early_withdrawal_penalty_calculator.php
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NeilStanley
  |     |   62 posts since 2013
Thank you. That one is new to me. Interesting, but it doesn't give me the yield I need on a new investment to end up with the same investment value at maturity of the current one. It also doesn't give me the ability to factor in the potential of getting a bonus for early withdrawal that banks are doing now and typically calling them Redeemable CD®
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Peri
  |     |   33 posts since 2023
Nice work. I always run out of fingers when counting it out manually, ha.
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1
Ltssharon
  |     |   471 posts since 2020
Unexpectedly I wanted to loan a son’s business.broke a cd with no regrets. It all worked out.

Unexpectedly wanted to move 2500 miles and pay cash for a condo. Did it no regrets.
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NeilStanley
  |     |   62 posts since 2013
The point here is that the approach banks take to early withdrawal penalties vary greatly. Depositors should understand their options to access THEIR money that they have in the bank. Ignoring your options to access your money means you are ignoring opportunities to maximize the value of your investments.

As I have studied this over decades, I encourage depositors to resist the notion that all bankers have effectively managed this issue. Don't assume that the bank has prevented you from benefiting from an early withdrawal. Most bankers are just hoping that depositors won't notice that sometimes depositors can improve their financial position by evaluating and seizing the financial opportunities to withdraw and reinvest these funds before maturity. Depositors are in control when they understand the details of the accounts they have and what options it gives them today.
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Ltssharon
  |     |   471 posts since 2020
I sold a home and had substantial $ to invest in a cd. Gte said 4.33 for a 60 month. Customer service swore 180 day penalty. They could not however find the written disclosure. But they continued to say 180day. I bought the cd and when I received the paper copy it said 365 day. I explained what had happened and asked the same customer service rep to ask higher ups to reduce to 180 days. She said she did and higher ups would change it for me and send a new cd. Fine, but 4 business days later I have not received the 180 day 60 month new cd. I have used early withdrawal in the past unexpectedly and will gently persist. I do not want the principal back and to start again somewhere else because I use a living revocable trust and it takes a while at new places to get set up plus rates may go down. Partly my own fault here. I should have persisted earlier on, but customer service at first said it was a complicated formula.I explained it most likely was just a particular number of days. Then she said she was busy and did not have time to do the research . Etc. I will fill you in on the outcome as time goes on
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NeilStanley
  |     |   62 posts since 2013
Today CD holders can use A.I. to evaluate their early withdrawal options. Any bank using X-months of early withdrawal penalty is vulnerable. Bankers have given a static penalty to a dynamic situation. In the past, few depositors could effectively evaluate the financial considerations. Today that is no longer the case. Chat GPT can tell a depositor at any point in time during the holding period of your deposit account if they would be better off executing the early withdrawal and pulling the money out of your account.

A depositor can now ask Chat GPT this question - "Consider the situation where I have a $100000 CD today at 2.5% APY that is scheduled to mature on 7/15/2026 and it has an early withdrawal penalty of 90-days interest. If I can reinvest the net proceeds after paying the penalty, should I take the penalty and re-invest?" This is the answer I got today...

Conclusion
If you can reinvest at a new rate above 3.01% APY, you'll benefit by taking the penalty and reinvesting.
If you cannot exceed ~3.01% APY, you're better off leaving the CD intact until maturity.
Bottom Line:
? Reinvest if the new APY exceeds 3.01%.
? Stay put if not.

It will dollarize the benefit if you give it more information...
Conclusion:
At 4% APY, withdrawing early, paying the penalty, and reinvesting clearly makes sense, as you'll earn:
$1,227.74 more than keeping the CD until maturity.
? Recommended Action:
Take the early withdrawal penalty and reinvest at 4%.
A.I. Helps Depositors Find Unexpected Value in Term Deposits.docx | Powered by Box
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NeilStanley
  |     |   62 posts since 2013
Here is Perplexity.Ai's summary of this discussion so far. Do you see it as accurate?

The correspondence on the topic of early withdrawal penalties for certificates of deposit (CDs) features a range of perspectives and arguments. Below is a summary of the positions taken by participants:

NeilStanley
Main Argument: NeilStanley emphasizes the inadequacy of fixed early withdrawal penalties, calling them relics from decades ago that fail to account for dynamic market conditions. He advocates for tools like his Excel spreadsheet and AI-driven analysis to help depositors calculate the "Give-Up Yield" and determine whether breaking a CD early is financially advantageous.

Criticism of Banking Practices: He argues that banks often impose penalties that are either too lenient or too harsh, and suggests that intelligent bankers should offer bonuses for early withdrawals in high-rate environments (e.g., 5.5% CDs), as it would allow them to replace funding at lower costs.

Proposal for Reform: NeilStanley introduces the concept of "Redeemable CDs," which adjust penalties based on market relevance, contrasting them with traditional CDs that impose static penalties regardless of market conditions.

Anitagirl
Contribution: Anitagirl shares a link to another calculator for evaluating early withdrawal penalties but does not elaborate further on her opinion.

Peri
Commentary: Peri humorously appreciates the tools provided by NeilStanley, noting their practicality compared to manual calculations.

Ltssharon
Personal Experience: Ltssharon shares anecdotes about breaking CDs for personal reasons, such as funding a business or buying property, expressing no regrets about these decisions. She also discusses challenges with customer service when attempting to negotiate penalties and emphasizes persistence in dealing with banks.

Criticism of Banking Transparency: She highlights issues with banks failing to provide clear disclosures about penalty terms, recounting her experience with GTE Financial where promised terms were not honored.

LLovinSomeCDs
Skepticism Toward Calculators: LLovinSomeCDs argues that early withdrawal calculators are "useless" because they fail to account for future market conditions, which are critical in deciding whether breaking a CD is worthwhile.

Preference for Long-Term Strategy: Advocates for "laddering" CDs to minimize the impact of rate fluctuations and stresses focusing on averages over decades rather than short-term calculations. They dismiss detailed number crunching as overly complicated and unnecessary.

P_D_1
Defense of Calculators: P_D_1 counters LLovinSomeCDs' skepticism by clarifying that calculators serve an objective purpose: comparing yields after penalties versus other market options. They argue calculators are not meant to predict future markets but rather provide immediate financial comparisons.

Concerns About Industry Response: Warns that public discussions about exploiting penalty structures could lead banks to increase penalties across the industry, reducing depositor flexibility.

Ally6770
Historical Perspective: Ally6770 shares detailed anecdotes about past financial decisions, including laddering CDs and avoiding penalties during specific economic crises (e.g., dot-com bubble). They also highlight how banks have adjusted practices over time due to external pressures like FDIC insurance premiums and market collapses.

Advocacy for Fair Treatment: Emphasizes the need for fairness in how banks treat depositors, arguing that fixed penalties harm both depositors and the banking industry itself.

Key Points of Debate
Effectiveness of Early Withdrawal Calculators: While NeilStanley and P_D_1 see calculators as useful tools for decision-making, LLovinSomeCDs dismisses them as inadequate due to their inability to predict future rates.

Banking Practices and Penalty Structures: NeilStanley advocates reforming static penalty systems into dynamic ones (e.g., Redeemable CDs), while others like P_D_1 discuss the profitability implications for banks.

Personal Experiences vs. Market Analysis: Participants like Ltssharon and Ally6770 focus on personal anecdotes and practical challenges with banks, contrasting with NeilStanley's technical analysis and proposals for systemic change.

In conclusion, the discussion reflects diverse perspectives ranging from technical analysis and reform advocacy to anecdotal experiences and skepticism about current tools.
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NeilStanley
  |     |   62 posts since 2013
The only point that I would clarify in this summary is "that intelligent bankers should offer bonuses for early withdrawals when coming out of high-rate environments to lower-rate environments".

These bonuses do not represent callable CDs where the depositor has no choice. These are offers that depositors can choose to accept or reject. So, if the Redeemable CD is structured to never have a penalty greater than the traditional retail CD and the banks can offer bonuses that the depositor can make their own decision about, how can this structure not always be a better choice?
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