CDs Remain Useful Despite Low Yields

SeaBreeze

SeaBreeze

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We have some CDs along with IRAs, they are a safe and stable investment although the yields these days are very low. More HERE.

Many investors, probably most, start as a child with a simple bank account. Later come stocks, bonds and funds, with bank accounts mainly used for everyday expenses. They're safe and convenient but don't pay much.

A top-yielding certificate of deposit might pay a bit more than 2 percent if you're willing to tie your money up for five years, for example, while the Dow Jones industrial average is up more than 18 percent since the start of the year.

Why, then, would anyone buy a CD?

There may be several good reasons, experts say, mainly because of safety. That's especially so at a time like now when other interest-paying investments, like bonds, are in danger of losing value from rising interest rates.

"Yes, there is a case for CDs today," says Chris Robbins, investment advisor and fixed-income analyst for Bartlett & Co. in Cincinnati.

"CDs can be a good fit for risk-averse investors with a specific future cash need, or those trying to create some income stability within a larger portfolio of other assets," Robbins says. "But investing in CDs won't give you the same yield as something that carries more risk, like corporate bonds. So there's a tradeoff."

CDs are meant to be the generous option in bank savings. Because investors must lock their money up, typically for three months to 10 years, banks will pay more on CDs than in savings accounts, money-market accounts or interest-bearing checking accounts that allow withdrawals at any time. Cash stashed in CDs is available for the bank to put to work in mortgages or other loans.

The longer you're willing to tie up your money, the more you'll earn.

An average one-month CD will yield about 0.2 percent these days, while you can get nearly 1 percent on a two-year deal or about 1.5 percent five years, with better deals available if you're willing to go to the most generous providers wherever they are. That's better than next to nothing earned on a savings or checking account, but won't make you rich. In fact, a shorter-term CD will lose money when inflation is considered.

On the other hand, making a killing isn't always the chief goal. Many investors want safety, at least for a portion of their holdings, and CD holdings up to $250,000 per person are insured against loss by the Federal Deposit Insurance Corp. Making 1 or 2 percent would seem like a killing if your stocks tumbled 20, 30 or 40 percent.
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I'm very insecure when it comes to money and investments so I tend to keep more cash on hand than most investment professionals recommend. When rates were better I kept my cash in a ladder of CD's with a little something coming due every six months to a year. These days, with the low rates, I keep my cash in a money market account. I know that keeping cash may cost me some potential income and growth but you can't put a price on peace of mind.

J.P. Morgan once had a friend who was so worried about his stock holdings that he could not sleep at night. The friend asked, ‘What should I do about my stocks?’ Morgan replied, ‘Sell down to your sleeping point’ Every investor must decide the trade-off he or she is willing to make between eating well and sleeping well. High investment rewards can only be achieved at the cost of substantial risk-taking. So what is your sleeping point? Finding the answer to this question is one of the most important investment steps you must take.– Burton Malkiel
 
CD rates are just too low. When we get too much in our bank account I invest in quality companies that have a record of paying good dividends. I try to buy when the price is low but that isn't a prime concern. The price of the stock will go up and down but it's the dividends that make money for you.
 

I gave up on CD's a long time ago, but have one little one that I keep missing the maturity date to cancel. When it rolled over the first time I *think* they changed it to a 5 year, but I could be wrong. Anyway it's 5 years now.

Can you go to a bank any time and arrange to have one terminated the *next* time it comes due?
 
NancyNGA said:
I gave up on CD's a long time ago, but have one little one that I keep missing the maturity date to cancel. When it rolled over the first time I *think* they changed it to a 5 year, but I could be wrong. Anyway it's 5 years now.

Can you go to a bank any time and arrange to have one terminated the *next* time it comes due?
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Not sure.

My bank always sends a thirty day renewal notice explaining the new rates and terms.

I would ask if they will allow you to cash it in and wave the penalty. The rates are so low these days that even paying the penalty wouldn't sting too much.
 
NancyNGA said:
I gave up on CD's a long time ago, but have one little one that I keep missing the maturity date to cancel. When it rolled over the first time I *think* they changed it to a 5 year, but I could be wrong. Anyway it's 5 years now.

Can you go to a bank any time and arrange to have one terminated the *next* time it comes due?
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There usually a one week grace period when a CD matures and changes can be made to it or it can be withdrawn without penalty. We usually get a notice in the mail beforehand, telling us the time is approaching. We also keep a list on paper at home that shows maturity time on our CDs, so we can check on that whenever we like easily. The most the bank would have done if you didn't contact them with any directions, is to renew it at it's current term, so if it's a 5 year, then it would be renewed as a 5 year CD. It's always been like that for our CDs.

The only time you can terminate a CD or withdraw the full amount and close it, receiving a check for the full balance, without penalty at all, is at the time of the maturity date. So, as far as I know, you just can't go into a bank at any time and tell them what to do when the maturity date rolls around. Once it matures, you can make whatever changes you like with no penalty.

If you desperately need the money immediately, you can cash it in before maturity, paying a penalty. I would contact the bank and find out what the penalty would be first before doing something like that. We've always waited until the CD matured before doing anything with it. More about it HERE.

I don't like doing anything with stocks, to me it's like gambling and I don't have the kind of money that I want to play with. I know a couple of people who lost big investing in stocks, don't want to lose any of my hard earned money, not when I was younger and definitely not now in my old age.
 
Aunt Bea said:
.... The rates are so low these days that even paying the penalty wouldn't sting too much.
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Great idea! I can't seem to get out of that "save a penny to lose a dollar" mentality without someone kicking me sometimes. I'm tired of thinking about it.

It would gain that loss back in a short while in a good conservative mutual fund. I think ours only gives a 10 day notice. It just came due at a very inconvenient time last time.
 
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a penny saved is a penny earned but alas it will always be a penny . in order to grow money you need growth vehicles for longer term money . i would never keep more than current year spending and a bit of an emergency fund in cd's
 
I am a CD fan, I am like the stock market. I hate uncertainty. I have my PenFed CD's maturing in December of 2019, they are at 3% currently. I hope there is a comparable rate then.
 
with the gains the markets have seen the last 8 years we can lose 1/2 our money and still blow cd's out of the water . that is why after a while the dips mean little .

had we not invested we would be farther behind then the dip would leave us and recoveries rarely take long .
 
ShokWaveRider said:
I am a CD fan, I am like the stock market. I hate uncertainty. I have my PenFed CD's maturing in December of 2019, they are at 3% currently. I hope there is a comparable rate then.
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I'm like you ShokWaveRider, don't have a lot of money, but what I do have I worked hard to earn and save....don't like the idea of gambling with it and taking chances in my old age for sure. Have some CDs and IRAs at PenFed too.
 
gambling is not investing .

in fact gambling would be trying to draw 4% inflation adjusted from just fixed income in retirement .fixed income failed more than half the 117 rolling 30 year time frames we had here in the states . a 50/50 mix has a 96% success rate . anything under 90% success rate is to risky to use . odds are a pay cut will be likely .

in fact here has never been a typical retirement time frame where a 50/50 ever lost money .
 
With interest rates at 3% or above we live like Kings, why do we need to risk out nest egg for just the extra that we will never spend? no Kids or family to leave anything to. When we kark it, all our stash goes to the blind dogs.
 
the answer is it all depends on how much of a percentage your draw is and for how many years will you plan around.

if you are planning around drawing 4% a year inflation adjusted then fixed income only has had a 45% chance of lasting 30 years . it has failed to last more than 1/2 the 117 rolling 30 year periods we have had to date .

50/50 has made it through 95% of all time frames . anything under 90% is considered way to risky .

if you tell me you are drawing 3% or so i would agree you need a minimal amount of a growth vehicle .

because of inflation and sequence risk the exact same average rate of inflation and returns can have up to a 15 year difference in how long the money last just based on the order of gains and losses . fixed income is subject to negative real returns which can drastically cut how long the money last .
 
here is a nice success rate chart showing how the various allocations did so far . you want at least a 90% success rate .that means you would have made it through at least 90% of the time frames without running out of money .

you can see that the results are the opposite . the more conservative you are the higher the risk of running out of money at any given draw rate .once you get around a 4% draw fixed income is way to risky to support 30 years in retirement . . you need at least 40% equities to stand a good chance of making it through the worst case scenario's we have had .

being to conservative has been responsible for more financial failure ,without taking a pay cut f than being to aggressive has . even at 65 we have money we will not be eating with for possibly 20 to 30 years . that is still long term money .

i-SSMXJ5L.jpg
 
mathjak107 said:
here is a nice success rate chart showing how the various allocations did so far . you want at least a 90% success rate .that means you would have made it through at least 90% of the time frames without running out of money .

you can see that the results are the opposite . the more conservative you are the higher the risk of running out of money at any given draw rate .once you get around a 4% draw fixed income is way to risky to support 30 years in retirement . . you need at least 40% equities to stand a good chance of making it through the worst case scenario's we have had .

being to conservative has been responsible for more financial failure ,without taking a pay cut f than being to aggressive has . even at 65 we have money we will not be eating with for possibly 20 to 30 years . that is still long term money .

i-SSMXJ5L.jpg
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Thanks for the chart!

It makes me feel better to know that even if I substantially up my withdrawal rate in the final years of my life I have a good chance of making it across the finish line with a few bucks in the bank!

This topic makes me think back to when I started working at my first real job in 1974. At that time the Dow Jones Industrial Average was well below 1,000 and today it has grown to 24,290 plus over 40 years of dividends. It has had a slow and at times bumpy climb over the years but it is a good example of what conservative investing over time can do for the average person.
 
it is a good example of what any investing can do and even a greater example of how even being aggressive smooths out over time and ends up being volatile but almost very little risk over long periods of time .

like i said even at 65 you still have money that won't be needed for 20-30 years . that is still long term money
 
I'll be 76 in a few days and I haven't started withdrawing, in fact we're still adding to our investments. CDs don't even keep up with normal inflation at today's rates. Sure the money is safe but it's worth less when it matures than it was when you put it in.
 
"...There is a nice success rate chart showing how the various allocations did so far . you want at least a 90% success rate .that means you would have made it through at least 90% of the time frames without running out of money...".

I agree with the sentiment, but I really dislike relying on charts that use 'standard' algorithms to tell you how much you can withdraw, or what you're investing mix should be. Wife and I early retired and before doing so, we tracked our expenses for several years, quite literally, to the penny. We then did the best we could to project and amortize future expenses. It has been shown, in many studies, that people vastly underestimate their living expenses. They forget about including the $10,000 for a new roof on their house, or the $500 a year for maintenance/repairs to their car (along with all sorts of other expenses if you have a house and car).
If you're going to be conservative and invest through CD's which provide little income, then be very conservative and put in the time and effort to really assess your finances.
 
retiredtraveler said:
"...There is a nice success rate chart showing how the various allocations did so far . you want at least a 90% success rate .that means you would have made it through at least 90% of the time frames without running out of money...".

I agree with the sentiment, but I really dislike relying on charts that use 'standard' algorithms to tell you how much you can withdraw, or what you're investing mix should be. Wife and I early retired and before doing so, we tracked our expenses for several years, quite literally, to the penny. We then did the best we could to project and amortize future expenses. It has been shown, in many studies, that people vastly underestimate their living expenses. They forget about including the $10,000 for a new roof on their house, or the $500 a year for maintenance/repairs to their car (along with all sorts of other expenses if you have a house and car).
If you're going to be conservative and invest through CD's which provide little income, then be very conservative and put in the time and effort to really assess your finances.
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I think that is great advice for everyone to follow!
 
retiredtraveler said:
"...There is a nice success rate chart showing how the various allocations did so far . you want at least a 90% success rate .that means you would have made it through at least 90% of the time frames without running out of money...".

I agree with the sentiment, but I really dislike relying on charts that use 'standard' algorithms to tell you how much you can withdraw, or what you're investing mix should be. Wife and I early retired and before doing so, we tracked our expenses for several years, quite literally, to the penny. We then did the best we could to project and amortize future expenses. It has been shown, in many studies, that people vastly underestimate their living expenses. They forget about including the $10,000 for a new roof on their house, or the $500 a year for maintenance/repairs to their car (along with all sorts of other expenses if you have a house and car).
If you're going to be conservative and invest through CD's which provide little income, then be very conservative and put in the time and effort to really assess your finances.
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standard algorithms ? no such thing used in this chart or in any good calculator .


if you were building a house and wanted it to stand up to the worst hurricanes your area ever saw you can easily build to standards that can withstand the worst conditions you ever had and then some .

charts like the above and good calculators simply take the WORST retirement time frames we have had to date and simply give you a spending level that made it through the number of years you are stress testing for .

there is no algorithm's going on ,. it is just simply stress testing the worst of the past , rolling time frame by rolling time frame which to date have had time frames worse than anything we have seen the last 50 years .

so as an example here is the results of 100% fixed income , drawing 4% inflation adjusted over 30 years .

FIRECalc looked at the 117 possible 30 year periods inthe available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared ineach of the117cycles. The lowest and highest portfolio balance at the end of your retirement was $-517,560to $2,349,575, with an average at the end of$187,979. (Note: this is looking at all the possible periods; values are in terms of thedollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio wasdepleted before the end of the 30 years.FIRECalc found that 64 cycles failed, for a success rate of 45.3%.


here is 50/50


FIRECalc looked at the 117 possible 30 year periods inthe available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared ineach of the117cycles. The lowest and highest portfolio balance at the end of your retirement was $-223,952to $4,145,063, with an average at the end of$1,136,507. (Note: this is looking at all the possible periods; values are in terms of thedollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio wasdepleted before the end of the 30 years.FIRECalc found that 6 cycles failed, for a success rate of 94.9%.

and for those that think being 100% equities in retirement is risky , here is how you would have done with 100% equities (diversified funds ,not individual stocks )

100% equities

FIRECalc looked at the 117 possible 30 year periods inthe available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared ineach of the117cycles. The lowest and highest portfolio balance at the end of your retirement was $-931,017to $8,509,297, with an average at the end of$2,691,022. (Note: this is looking at all the possible periods; values are in terms of thedollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years.FIRECalc found that 8 cycles failed, for a success rate of 93.2%.


which allocation , over and over would you think would have been given you your worst odds for running out of money ????????????????????? correct , 100% fixed income if you wanted around 4% or so .

but the math is much more useful that is derived from the above .

studying the results , you need at least a 2% real return (after inflation ) over the first 15 years of a retirement . to maintain 4% inflation adjusted spending mathematically . every single time frame that failed failed because the first 15 years averaged less than a 2% real return .

no matter how good things got after the 15 year mark , it was to little to late to save things without taking a pay cut .

so if you are drawing about 4% and 5 years in you are averaging less than a 2% real return a red flag should go up . by 10 years you better start taking pay cuts .

so these charts are not based on averages , expected returns or the best markets . they are simply building your portfolio to withstand the worst conditions we have had to date . anything better is a plus and merely increases your odds .

once you consider life expectancy statistics , few of us will last 30 years in retirement so that adds to the success rate of the portfolio success rate making it even more likely the draw will hold just fine even under worst conditions .


 
I'm still not understanding how useful these numbers are. I understand that they are based on a single stock asset class being the S&P. Then, a single bond class of gov't intermediate term. I could endlessly argue that the numbers are too simplistic, and argue that inflation numbers are pretty useless. I also don't subscribe to the idea that even though so many scenarios have been taken over a long period of tine, the markets, micro and macro economy, and inflation, have changed drastically over the decades.
I just don't see this as being very helpful going forward. It's certainly better than nothing, but again, one needs to really look at their personal finances, mostly their expenses (and assumed expenses later in life). Then you have to decide if the S&P is a good representation of all the variations in the equity asset class, along with all the variations in the bond asset class.
 
but the math that comes out of these studies and calculators and the worst case scenario's is timeless and it is very relevant . you cannot get 4% withdrawals mathematically to hold up without getting at least a 2% real return average with ANY ASSET CLASSES over the first 15 years .

that is the bottom line to all the stress testing of the rolling periods of time .

although the original studies were stocks and bonds , the high speed numbers crunching of those assets were able to give us a mathematical number we can hang our hats on .

so any assets you care to use , must return an average of a 2% real return the first 15 years since that was the common denominator behind every failing time frame .

every failing time frame had an average 30 year outcome return wise , but they all failed in the first 15 years when spending down and got less than a 2% real return .

even the greatest bull market in history could not save the 1965 and 1966 group .
 
i keep 1 years spending money in a money market and cd's . the rest goes in to an income portfolio that consists of 5 assorted funds with a time frame of being needed in 2 years to 6 years or so .

all the rest goes in to a 60/40 growth and income model .
 

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