Is Now the Time to Jump Off Your CD Ladder?

Interest rates are low, and they’re likely to remain low for “an extended period,” according to Wednesday’s statement from the Federal Reserve. But just how long that “extended period” will be remains an open question. In this uncertain environment, is it still worth setting up a CD ladder?

A CD ladder is a series of CDs that mature at different points – six months, a year, two years and so on – essentially hedging against changes in rates. To do so, you create pools of money that you can access and reinvest soon if rates start to rise, while keeping some of your money locked in at current rates, in case they fall.

If you already have such a ladder in place, there’s no need to worry about today’s low rates, says Greg McBride, senior financial analyst with Bankrate.com, a web site that tracks interest rates. “Laddering is an all-weather strategy,” he says. “The idea isn’t to time interest rates, it’s to diversify among a range of maturity dates so that you’re not overly dependent on the moves in interest rates.”

Although CD rates are low now, they can still be attractive to some investors who suffered big losses in the stock market. Plus, a CD ladder is helpful if you need to make money available to meet a series of expenses – like a child’s college tuition bill that comes due every six months, says Richard Barrington, a personal finance expert for rate-tracking web site Moneyrates.com.

Of course, consumers who don’t already have a ladder in place, and don’t need one to meet regular expenses, may not want to lock into longer-term CDs right now. The Fed’s “extended period” language likely means rates will stay low until the employment picture gets better, and the employment picture is likely to turn around well before a five-year CD comes to maturity. In the current environment, the difference between rates on one-year and five-year CDs isn’t large enough to justify locking your money in for that longer term.

Investors looking to maximize their yield in a low-rate environment could consider a “barbell” strategy, keeping half of their money in a savings or checking account and the other half in a five-year CD, Barrington says. “One and two year rates are not appreciably better than what you could get if you shop around for a savings account,” he says. The money in the savings account would be available to move immediately when rates pick up – and the average yield from a barbell would be higher than the average yield from a ladder under current conditions, Barrington says.

Because the picture could change quickly, investors should keep a closer watch on the rate environment than they usually would, Barrington says. “Different banks are going to react to changes at different rates of speed,” so look beyond the average rate for early signs of change, he says. Investors can also consider credit unions, which tend to offer better rates – and weren’t involved in the problems that gave the banks trouble.

As always, make sure any bank you consider is FDIC-insured, and make sure you don’t have more than the current limit of $250,000 at any one institution. If you are looking at CDs that mature after 2013, don’t keep more than $100,000 at one bank, because the limit is then scheduled to fall back to that level, advises McBride. Putting your money in different institutions is also the best way to shop around for the best rate for each individual CD, McBride adds, because “it pays to be a free agent.”

Here’s a list of some currently available yields on savings accounts and six-month, one-year, three-year, and five-year CDs*:

Savings Accounts:
National average: 1.33%
Ridgestone Bank: 2.47%
SmartyPig: 2.01%
Flagstar Direct: 1.79%

Six-Month CDs:
National average: 1.30%
Ascencia Bank: 1.62%
New Dominion Bank: 1.60%
The Palladian Private Bank: 1.59%

One-Year CDs:
National average: 1.60%
Umbrella Bank: 2.08%
Interstate Net Bank: 2.00%
H&R Block Bank: 1.99%

Two-Year CDs:
National average: 1.86%
Alliance Bank: 2.72%
Intervest National Bank: 2.67%
First Internet Bank: 2.62%

Five-Year CDs:
National average: 2.96%
Discover Bank: 3.30%
Ally Bank: 3.30%
Acacia Federal Savings Bank Online: 3.44%

* Data from Moneyrates.com and Bankrate.com. Restrictions such as minimum balances or online banking requirements apply to some products.