Finance - HL 363 (1)

Helpful miscellaneous articles regarding our retirement plan and planning.  Like you, I review my retirement nestegg and plan from time to time.  Recently, I went though some continued education for some credentials I maintain and it occurred to me that we all could use a review about these issues.  So with your help, we will share and post articles and info that may be helpful and of interest to many of you in this section.

 

Consumers Wary Of Recession Turn To CD Ladders For High Yields, No Long-Term Commitment

Written By

Rachel Witkowski

Correspondent/Editor

Dawn Nici

Reviewed

|Personal Finance Editor

Updated: Jul 19, 2024, 1:09pm

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.

Americans are more afraid of commitment these days.

Many economists are predicting a recession heading into 2024. Feeling unsure about when that recession might come, some consumers are reluctant to tie up their money for long periods of time.

Enter certificates of deposit (CDs). More people are shifting their extra cash into shorter-term CDs, where annual percentage yields (APYs) have been unusually high.

“Given the uncertainty with the economy and rate environment, in 2023 we have observed members moving their savings to fixed rate products, especially short- and mid-term certificates,” says Jaspreet Chawla, senior vice president of savings products at Navy Federal Credit Union.

Consumers want high yields, but not at the risk of locking up all their funds for too long. Many choose multiple CDs with different maturities, staggering them so they come due one after another rather than all at once. That way, funds become available steadily throughout the year.

This strategy, called CD laddering, is now growing in popularity.

“When we started on this whole deposit fight—and I actually call it a fight because it’s very, very competitive out there—we only had about 1% of our balances held in CD ladders,” says Arijit Roy, head of consumer segment and solutions at U.S. Bank. “We don’t have ads on this, but 15% of our CD balances are now held in CD ladders. That’s a huge, monumental shift in about six months.”

Typically, longer-term CDs—of 12 months or more—have higher rates, but some shorter-term CD rates are catching up.  As of June 20, the national average for a six-month CD was 1.26%, not far below the 12-month CD average of 1.63%, according to the Federal Deposit Insurance Corp.

At many financial institutions the best CD rates are above 4%, even for maturities as short as six months.

How CD Laddering Works

With a CD ladder, you take the amount you would usually put in one CD and divide it across several CDs with different maturity dates.

This allows you to take advantage of various interest rates and gives you greater flexibility. As your funds are gradually released, you can put the freed-up cash into another CD at the current rate or keep it for another purpose.

“Put yourself in the shoes of someone that is approaching a major life event, let’s say retirement or a kid graduating, and there’s uncertainty about the liquidity needs of the family,” Roy says. “What a CD ladder allows you to do is actually break those funds up and give you a little bit of flexibility.”

For instance, a consumer could take out three CDs: one for six months at 4%, a nine-month CD at 4.25% and a 12-month at 4.5%.

Every financial institution offers different terms for the number of CDs and maturity dates that you can include in a ladder and for how to reinvest at renewal. For example, Navy Federal allows members to renew CDs up to 21 days after the maturity date, according to Chawla.

“Laddering your certificates is an excellent way to ensure you earn the best rates possible,” Chawla says. “You’re putting away the same amount of money, but with the potential for higher returns and the option to access your money if needed.”

But Chawla warns that even with laddering, it’s still a CD product. That usually means your funds are locked away for a certain period of time; early withdrawals are penalized with a fee.

For maximum CD flexibility, there are no-penalty CDs. The best no-penalty CDs are earning rates that compete with standard CDs.

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Where CD Rates Are Headed

Some observers expect some softening in CD rates after the Fed decided to pause its rate-hiking campaign during its June meeting. But Fed Chairman Jerome Powell told Congress that the Federal Open Market Committee (FOMC) will likely raise its rate another one or two times later this year.

That gives depositors more incentive to invest in short-term CDs now, while the rates are high, and free up their money for later this year, when CD rates could increase further with more Fed rate hikes.

“It has now gotten to a point where it is less attractive for banks to offer high rates of longer tenor CDs and you’re starting to see some of those rates dip,” says Roy. “But for shorter tenor and middle tenor—like six, nine months—it still is pretty attractive to go lock in funds. And I suspect for the shorter tenor, you’re still going to see some increases in rates.”

Chikako Tyler, chief financial officer at California Bank and Trust, says, “We may peak in interest rates over the summer.” But, she says, the bank expects to see depositors choosing longer-term CDs as well.

“Astute investors who watch forward interest rates will likely want to take advantage of locking in higher-yielding, safe investments while they can,” she says. “However, it’s always important to remember that no one can predict interest rates, so it is essential to diversify.”

 

 (As with any of these informative articles, anyone who needs someone to talk to about

this very subject contact me and I can direct you to a knowledgeable advisor).

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