Smart people here often recommend a 5-year laddering of CD's for many reasons. I haven't seen any discussions against using ladders though they may have occurred. Though I'm sure a CD ladder may be best for some investors I do not think it will maximizes returns over the next 5 years. Is this guy nut?…. wait let me explain. CD rates start at about 3% (1yr) and go up to 5.25% (5 yr at Pentagon Federal CU). If we knew rates would stay the same or go down over the next five years… would anyone improve their return by setting up a ladder instead of putting everything into the 5 yr CD? I'm not raising my hand. Two out of three is not bad…but everyone knows rates are going up so isn't it best to setup a ladder? No… I choose load up on the 5.25% and if rates go up more then roughly ½ % wonderful, sell them (pay the six month penalty) and buy the new higher yielding 5 year CD's. You will still stay ahead of the ladder, because only 1/5 of the laddered funds will get the new 5 year rate. It's works even when rates start falling, you just hang on to what you have, while the ladders return fade away. As you can tell I don't have a clue why anyone would set up a ladder. Please tell me, thank you.mjcalb
MJ,You don't have a 5-year CD ladder. You have a ladder of CDs of different maturities, which you may then be planning to roll over into 5-year CDs as the shorter maturities come due. It is unlikely that, during the building period, your total return will match putting the lump sum into a 5-year CD at the beginning, even if interest rates go up.The easiest way to create a fixed-income ladder in by allocating new money into the best paying option available—5-year CDs, 5-year T-bills, EE-bonds. I've been buying 5-year CDs, because they are paying better than 5-year T-bills, even 10-year T-bills. Every time an older 5-year CD comes due, I roll it over into a new 5-year CD (gritting my teeth).If you are starting with a lump sum of money, not dripping new money in, you have to break up the lump sum into CDs with shorter maturities, gradually building into a ladder of 5-year CDs over the first 5-years. Eventually, you will be able to get the average yields on 5-year CDs, but during the building period, you probably will lose out. The problem with CDs, however, is liquidity, and having some huge CD coming due every 5-years and nothing in the interim can be a liquidity problem. So, sometimes it is necessary to eat the lower returns while you create a ladder of 5-year CDs to solve the long term liquidity problem.
Loki:Alas, the last of my CDs earning 7% or better mature this year. Renewing them with anything is going to hurt.brucedoe
"Alas, the last of my CDs earning 7% or better mature this year. Renewing them with anything is going to hurt."Bruce, ny friend, we have to be adult about this. Unless we want to get pushed into reckless asset allocations out of desperation and acquiescence to the stock market bias of the tax code, we have to stick with the best we can get. A 4.6% 5-year CD makes my stomach turn, but it's better than a 4.2% 10-year T-bill, it's better than Vanguard's Total Bond Market Index Fund, unless interest rates go down over the next 5 years, and it's probably going to be better than 5-year TIPS. I must admit I'm thinking about 10-year TIPS, but that's really only going to be a winning choice if the official inflation rate (not the one you and I have to contend with) is higher than the traders are expecting.My "net worth" is actually well ahead of schedule, right now. But that's assuming the stock market doesn't crash again, nor real-estate. My "fixed-income" portfolio is behind schedule, and falling, despite concerted effort to save more, and I don't believe my actual expenditures, under inflation, have slowed enough to compensate.If I didn't have Social Security inked in at zero, I wouldn't be worried.
(Brucedoe:)"Alas, the last of my CDs earning 7% or better mature this year. Renewing them with anything is going to hurt."_____________________________It's been a big problem and worry for my MIL, too.If Greenspan was assassinated, she would be a suspect.Bill
The problem with Cds, however, is liquidity, and having some huge CD coming due every 5-years and nothing in the interim can be a liquidity problem. So, sometimes it is necessary to eat the lower returns while you create a ladder of 5-year Cd's to solve the long term liquidity problem. Yep, buying a big one and dumping it around the first year is not good. (Could it be that one is compensated for this risk by being right two out of three times [see original post]?) But after that approximate one year it is smooth sailing. Over time the extra interest accumulated from the 5 year Cds increases faster then the "ladder of different maturities" but the early withdrawal penalty stays fixed. Yes buying one huge CD would force one to take an unnecessary hit if some of those funds were needed, good reason to always buy multiple small Cd's, even if it is a pain.mjcalab(one who didn't do the right thing while accumulating funds and can't stand the medicine)
Author: mjcalab | Date: 1/20/05 3:47 AM | Number: 11666 CD rates start at about 3% (1yr) and go up to 5.25% (5 yr at Pentagon Federal CU). If we knew rates would stay the same or go down over the next five years… would anyone improve their return by setting up a ladder instead of putting everything into the 5 yr CD? I'm not raising my hand. Two out of three is not bad…but everyone knows rates are going up so isn't it best to setup a ladder? No… I choose load up on the 5.25% and if rates go up more then roughly ½ % wonderful, sell them (pay the six month penalty) and buy the new higher yielding 5 year CD's. You will still stay ahead of the ladder, because only 1/5 of the laddered funds will get the new 5 year rate. It's works even when rates start falling, you just hang on to what you have, while the ladders return fade away. As you can tell I don't have a clue why anyone would set up a ladder.I tend to agree with you. CD ladders seldom make sense for the very reasons you cite, and the strategy you suggest if often used. The main reason that CD ladders usually don't make sense is that when you sell a CD you normally get face value for it (minus the penalty as you pointed out).On the other hand, Bond ladders make sense, because in a rising rate environment, if you sell early, you will normally receive several percentage points less than par value. Whereas, laddering bonds always assures you get par value when they mature.Also, many people quit laddering bonds in a falling interest rate environment, and load up on long term ones.However, there is one big caveat before tossing away the idea of laddering CDs. You have to be very careful that you understand all the rules for selling your CDs early. Sometimes they sell for less than face value instead of a simple 6 month penalty! This can cost a lot more and can make laddering attractive.Russ
A 4.6% 5-year CD makes my stomach turnAgreed but why this rate when Pentagon Federal Credit Union is currently offering 5.25%? What am I missing?mjcalab
"A 4.6% 5-year CD makes my stomach turnAgreed but why this rate when Pentagon Federal Credit Union is currently offering 5.25%? What am I missing?"4.6% is what i can get at my credit union. Ing is offerring 4.1%, and the other credit unions and banks in my community are all lower than Ing. The Pentagon sounds like a big winner.My problem is, unless I'm missing something, I don't qualify for the Pentagon Credit Union—what I get for using the same draft dodge as Karl Rove (who, of course, lies about it).There seems to be a lot of variation between credit unions as to yields, I presume because of local supply and demand issues for loans. I suspect the reason the Pentagon is paying top rates to savers is because it has an exceptionally high demand for loans, which would be consistent with what we hear about service personnel being strapped for cash, to the point of being easy targets for predatory lenders (most of them operating within the letter of the law).
Loki,It looks like anyone can join:https://www.penfed.org/membership/eligible.asp If you did not fall within any of the previous groups for qualification, you may still be able to join Pentagon Federal. Join the National Military Family Association, a leading advocate for military families, and you'll be eligible to join Pentagon Federal.Ken
It looks like anyone can join:https://www.penfed.org/membership/eligible.aspYes it only takes a small donation to a worthy cause.https://www.penfed.org/loanapps/membapp/nmfa/mbapnmfa.htm
I joined the National Military Family Association for one year ($20) to try this out. I've long seen the Pentagon Federal ads in the Washington Post. They sure beat my Interior Department Credit Union.Incidentally, you can get a 7 yr CD with Pentagon with a 5.5% APY if you wish. I once was offered one of these at 7% by Household Finance as an incentive to not remove my sizable IRA CD (They had bought my S&L and were calling the existing CDs). I took it, and it turned out to be a good deal.brucedoe
Incidentally, you can get a 7 yr CD with Pentagon with a 5.5% APY if you wish. One difference between the 5 year and 7 year is that the early redemption penalty on the 7 year is twice that (365 days of interest) of the 5 year.
"Yes it only takes a small donation to a worthy cause."Sounds good. Definitely worth pursuing next installment (I think sometime in February, I have to do a rollover).The rules on membership in credit unions got loosened a few years back. I know when we first joined our university one, c. 1980, only university employees and students could have accounts, not even spouses (except joint). Then they opened to spouses, and a few years ago parents and children. By now its probably sisters and uncles and cousins by the dozens (and his aunts).With this "trick" for joining the Pentagon Credit Union, they might as well give up any restrictions and just let anybody join any credit union they want. But I think there could be a real downside to that, just as with the loss of local Savings and Loans. I think of a very small credit union near Lake Superior, which pays too little on CDs for us to use, but which is important in providing loans (and simply being available for local transactions) in a community the big folks could not care less about.
With this "trick" for joining the Pentagon Credit Union, they might as well give up any restrictions and just let anybody join any credit union they want.Even draft-dodging peers of Karl Rove????(heh...couldn't resist, now that I can associate you with the right)
Sis,I don't know if you followed the story during the election. Kerry went after Rove for being a pro-war (Viet Nam) draft dodger. Not me, said Rove, I dropped my student deferment and exposed myself to the draft. Kerry backed off, basically apologized, and at that point, I knew he was dead meat.I dropped my student deferment and exposed myself to the draft (I think it was 1971, but might have been '70). So did hundreds of my classmates, including all the pro-war Young Republicans I knew. You see, we did it at a time there was a zero percent chance of actually getting drafted.I don't know if the loophole was intentional, though by '70 or '71, when Vietnamization was in progress and troop levels going down, the Selective Service could easily fill its cannon fodder quotas with lower class draftees and the military had become wary of filling its ranks with anti-war college students. At any rate, as long as you were classified I-A on the records during a particular draft year, if you didn't get drafted that year, you got pushed below any of the next year's lottery numbers, which essentially meant you were out for good. The trick was, you didn't have to decide at the beginning of the year to give up your deferment and go I-A. You could wait until it was clear how high up the lottery numbers the draft was going to go, and if your number was above that (mine was 123, but the draft that year didn't go above 100) you went I-A, because it wasn't clear if the next year would be as safe. Nice trick, glad I did it, but I'm not going to pretend it was noble or brave or honorable. But, then again, I haven't built my career bashing opponents of the war in Viet Nam as unpatriotic.
Loki,I am with you. I joined the NROTC in 1949 but failed the physical after the second year so I joined the Naval Reserve (a three year enlistment that was extended to a 4th year by Truman.). Note I couldn't pass an NROTC physical but I could pass a Naval Reserve physical. I had student deferments until 1960 when I was 29. Finally when I was 35, I got a draft notice to report for a physical. I called up my draft board and asked if they really were drafting men 35 years old. They said no, it was a mistake.Incidentally, I don't like Dub ya because of his lower taxes for the wealthy while sending our troops into harms way (Such a sacrifice we non troops have made!). But I never have been critical of Dubya's military record. It could have been better, but it sure looks good compared to mine. As I never did any active duty in the Naval Reserve and still got an Honorable Discharge. They used to take us electrician strikers and lock us in a room because there was no one to train us. so I started to bring my homework. Then we were told that they weren't paying us $3/night to do home work so we just had to sit around shooting the breeze. After a month or so of this, I just stopped going.).So far as I am concerned, Kerry's service was super. He volunteered for combat and spent one year shipboard and four months in hard combat. That's all I need to know. But I doubt a Viet Nam vet can be elected president as some group or other will take potshots at them (some of which may be true but most just lies). It was true of McCain, true of Gore, true of Kerrey (note the second e), even true of Max Clelland who was only running for the Senate. No doubt it will be true of Chuck Hagel if he decides to run. A sad state of affairs, but that is the way it seems to be.brucedoe
<<<"A 4.6% 5-year CD makes my stomach turn Agreed but why this rate when Pentagon Federal Credit Union is currently offering 5.25%? What am I missing?">>>United Bank has an ad in the 1/23 Sundy Washington Post that is offering a 4%, 30 month CD. True, it is not 5.25%, but it is also for half the time period. I think this is a great deal and a good alternative. Also you don't have to join anything. Here is a link to their site:http://www.unitedbank-va.com/cod.aspNorm
"United Bank has an ad in the 1/23 Sunday Washington Post that is offering a 4%, 30 month CD. True, it is not 5.25%, but it is also for half the time period. I think this is a great deal and a good alternative. Also you don't have to join anything."My Credit Union is offerring 3.7% on a 3-year CD, so this is certainly a good deal compared to that. However, if we're looking to put the money away for a least 5-years, in order for a 30 month CD at 4% to beat a 5-year CD at 5.25%, you'd have to be able to get 6.5% in July '07. Perfectly possible, but I wouldn't bet on it.
Lokicious: <<<My Credit Union is offerring 3.7% on a 3-year CD, so this is certainly a good deal compared to that. However, if we're looking to put the money away for a least 5-years, in order for a 30 month CD at 4% to beat a 5-year CD at 5.25%, you'd have to be able to get 6.5% in July '07. Perfectly possible, but I wouldn't bet on it.>>>I totally agree with you. However for someone who doesn't wish to get locked in for 5 years, the 4% rate is excellent for 30 months. I was offering it as an alternative. I haven't seen anything anywhere as good for only 30 months. In July I have a very large CD coming due. I am planning on buying the best 5-year bond or CD I can find for 20% of the money and do the same every year for 5 years to build a ladder. If I could get a reate that good for 30 months in July, I would consider putting half of the total in a 30 month CD. I do want to keep all of this money in CD's or bonds though. I guess it depends upon what rates are like then. Things could change a lot by then.Norm
Hi, Norm, the 4% rate is excellent for 30 months. It is indeed, but going out 6 more months currently gets you 4.5% at PenFed CU. What I don't know is whether they always have such great rates, or whether this is temporary. But come July (or a bit earlier), you may want to check them out to see how they compare.Ken (hoping PenFed keeps their rates high for a long time)
Things could change a lot by then.This has been like a mantra for me over the past couple of years. In the meantime, I've been sucking up low yields by sticking to short term CD's waiting for rates to go upWith the benefit of hindsight, I would've been better off not trying to time the increase rates and gone into a ladder. Yet here I am still marching in place - actually I've been reinvesting in even shorter term CD's.Loki, just for clarity, I was barbing you for having an association with a neocon, not about draft avoidance.Having missed having to even ponder registration, I've no place to even hint of criticism in that regard.Bruce, as always, I enjoyed your snippet of personal history. Real life experience is so much richer than what I've been fed via textbooks.
"Loki, just for clarity, I was barbing you for having an association with a neocon, not about draft avoidance."Keith,I know you're kidding. I'm not in a joking mood on this issue, however. My wife spent some time last week with a friend of hers for the first time since the friend's son was killed in Iraq, over a year ago. We all feel that, other than photo ops and damage control, the neocons frankly don't give a damn about the men and women fighting their wars. (I think Bush , unlike Chaney, Rumsfeld, Rove, Wolfowitz, Perle, and others, does personally care, when he goes on his photo ops, but he has the attention span of a flea and operates in an information bubble where he doesn't have to know about financial straights of families, combat disorders, disabilities of the wounded, etc.) Rumsfeld would much prefer high productivity warfare, where you don't have to pay labor costs (let alone pensions), and he doesn't react very well when reality just isn't as clean and easy as war games."This is the patent ago of new inventions/ For killing bodies, and for saving souls/ All propogated with the best intentions" (Byron, by way of Grahame Greene's The Quiet American, 1955, about neocons).
It is indeed, but going out 6 more months currently gets you 4.5% at PenFed CU. What I don't know is whether they always have such great rates, or whether this is temporary.They have had great rates in all types of savings and loan products (HELs, auto loans, CDs, etc.) for at least 2 years now.Acme
Loki; I am surprised to hear you have any money invested in the "stock market" which I assume means equity investments. May I inquire what % allocated to stocks and wether to indivdual stocks or funds?? Personally as some of you may recall I have been wrong about the direction of 10+year interest rates for about 14 months.Having admitted my error I am still of the opinion that interest rates are going to move up(twin defecits combined with excessive spending as a % of GDP reative to the rest of the world).With the year over year; inflation at 3.3%,PPI up from 144.8 to 150.8,CPI up from 184.3 to190.3 if present trends continue after considering taxes one would be losing wealth(not$) in the second year of a 5 year CD.
"Loki; I am surprised to hear you have any money invested in the "stock market" which I assume means equity investments. May I inquire what % allocated to stocks and whether to indivdual stocks or funds??"Hi Grey Fox, how ya been?Currently about 40% of our assets are in stocks. Theoretically, it should be about 45%, using the 100-age formula, but my calculations suggest we can reach conservative goals with room to spare with assigning no new money (except the pittance that goes into Roths) to stocks. Almost all is in the Total Stock Market Index Fund (Vanguard), with the Roth money in a Target Retirement Fund, along with some ancient rollover IRA. There are also a handful of highly speculative individual stocks that I don't really consider part of the overall plan—if one wins big over the next 10 years or so, that will provide capital for building our summer retirement place; if not, we may have to do without.I agree a CD ladder sucks, especially in a taxable account after taxes. At this point it does, however, beat any bond options, except junk, and losing money after inflation and taxes still beats huge losses in the stock market, which I consider too high a possibility to risk more than already committed. My idea, which would drive finance professionals crazy, if to achieve my goals of financial security with as little risk as necessary, not to optimize my returns by assuming historical statistics will continue in the future, because I know a lot more about real history and cause effect than anyone in finance.
using the 100-age formulaAs an aside to your discussion, Kiplinger's (the People mag of finance) had an article reviewing rules-of-thumb by financial planners.The 100-age formula got a thumbs down as being too conservative and just too grossly simplified to use as a rule-of-thumb. However, they note that for a conservative baseline rule, this be amended by using (110-age)*1.25 .By this measure I guess I'm hyper-conservative since I'm only about 40% stocks, which is about half of what the amended rule says I should have in stocks.My allocation is a tad skewed since I have a extra 20% chunk sitting in short-term CD's as swing money for a home purchase anticipated for a relocation north later this year. I just didn't have to confidence in market stability to leave this in equities, especially since it's for the near-term needs. Otherwise, it'd probably be in international funds.
Sis,My formula, and I think yours, is a lot more sophisticated then Kiplinger's or most financial planners'.1) Figure out realistic long term financial needs using conservative assumptions about returns and inflation (i.e., not "historical returns").2) Look at current lifestyle and expenses and how to maximize savings, without sacrificing to the point of not enjoying life (in my case that means seeing buying a high status car as a complete waste of money and only going out to eat when we want to, and then not going to places the in-crowd thinks cool).3) Calculate a savings and investment plan that will allow for indefinite maintenance of lifestyle given conservative assumptions.Obviously, this plan will not maximize how much money you die with or allow you to live high on the hog on the hope stocks will do well.But if economic reality beats the laissez faire religious belief that the future is always bright, even though they can't explain specifics or how real world problems (like disappearing resources and demographics) can be dealt with, protecting my ass will beat historical financial statistics as a cause of future historical statistics (pure nonsense from the point of view of research).
My formula, and I think yours, is a lot more sophisticated then Kiplinger's or most financial planners'.IMO, there needs to be some oversimplified rules-of-thumb cause that's the most terms you'll get the bulk of the populace to think within. If you can get them to think about anything long term at all.This may seem too primal to preach and practice in Fooldom, but we're a sampling of the public that's skewed towards those that want to take a hard look at our finances.As far as you and I, we're not far apart at all - which really isn't a formula, but sitting down, apply real costs to every aspect of my life and crunching numbers. The thought seemed overwhelmingly tedious. I didn't do it until I was in my 30's. It didn't take several evenings that I had anticipated, in fact it took less than 2 hrs. And there I had my lifestyle in cold hard numbers. No assumptions, nor SWAG percentages for this or that. Reality with a bottom line.After that, it's philosophy of lifestyle choices. I could step-up my lifestyle and still proclaim LBYM, but for what? "Because I can" wasn't a really compelling reason, so I've just kept life simple, yet far from basic.Which leads me to today where by most formulas, I'm invested uber-conservative. I can look at our economic trends with disdain, but not have an overwhelming dread associated with it. That is short of an economic collapse, which at that point, all bets are off no matter where I have my money stashed.1) Figure out realistic long term financial needs using conservative assumptions about returns and inflation (i.e., not "historical returns").This leads to a question to you Loki. What are the conservative assumptions you're working with today?I've used 4% and 7%. It's not feeling as conservative today as it was when I chose those numbers.
The 100-age formula got a thumbs down as being too conservative and just too grossly simplified to use as a rule-of-thumb. However, they note that for a conservative baseline rule, this be amended by using (110-age)*1.25 .Wow, I'm supposed to be 106.25% invested in stocks. I guess they want me to use margin or something.TW
"IMO, there needs to be some oversimplified rules-of-thumb cause that's the most terms you'll get the bulk of the populace to think within. If you can get them to think about anything long term at all."Sis,I don't disagree, but simply giving a formula, instead of also insisting on the necessity of learning to budget and work through different possibilities will, for most people, be counterproductive. Anyway, the idea that a 55 year old should be 70% in stocks, unless a very wealthy person, is pretty scary, but of course, the finance industry looks at the world from the point of view of people who don't have to worry about not having money around to live on during big market downturns."This leads to a question to you Loki. What are the conservative assumptions you're working with today?I've used 4% and 7%. It's not feeling as conservative today as it was when I chose those numbers."Well, 3% above inflation would be considered pretty conservative by most of the retirement planners I've seen. I'm currently looking at 2% above inflation, across asset categories, and ignoring social security, real estate, and annuitizing some assets, if necessary. I figure if we can reach an accumulation projected for July 2014 with an initial withdrawal of 3.75% with 2% above inflation, and my latest numbers say we are ahead of that goal, the will get us over 100, with options if we can't get 2% above inflation. Having doubled more than doubled tax deferral, with whatever the plan added to 401 (k)s for non-profits is called, has helped a lot, though we will have to pay taxes on the principle down the road.
http://www.nytimes.com/2005/02/01/opinion/01krugman.html?hpPaul Krugman has a nice piece, number crunching, that sums up my concerns about future stock returns (and the claims of privatizers of social security using historical returns) pretty clearly. I've talked about my worry that if people keep putting more and more money into stocks, without any direct consequence of higher profits, all you get is P/E inflation. According to Krugman, using the slow growth assumptions that are being used to suggest the SS Trust Fund will run out of cash in 2042, in 75 years P/Es would be at 100 (more than NASDAQ in 2000 before the crash).
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