Retirement Income Blog

 
Thanks to the FDIC, millions of Americans are able to sleep peacefully at night, knowing that their savings are protected by government-backed insurance. Since the thirties, certificates of deposit have become synonymous with safety of principal. Bank customers who shop for CDs concern themselves only with the rates and terms that are available as CD investing is riskless within the insured amounts.  When financial planning for retirement, CD investing can be a cornerstone of those plans.

Unfortunately, the safety that comes with FDIC insurance comes with a price. Will Rogers once said, “It’s not the return on my money that concerns me, it’s the return of my money.” This famous saying exemplifies the attitude of many bank customers. While CD investments are among the safest types of investments available, their rate of return is correspondingly low. If interest rates are around 4%, then that is about what you can expect a short term CD to pay. While longer term and jumbo CDs can pay slightly more, it is very difficult to see much real growth (i.e. after inflation and taxes) from them over time. CD investing is easy and safe, but doesn’t often pay very well.

However, there is another option available for those seeking higher rates on their guaranteed CD investments. Unbeknownst to many CD buyers, many brokerage and investment firms offer CDs. While these brokered CDs do differ from their cousins in the banking system in some respects, they are still FDIC insured up to $250,000 per owner or beneficiary (through 12/31/2009). CD investing is easy through a brokerage because you can choose from among many banks or diversity amongst banks all on one statement. Furthermore, brokered CDs generally pay a higher rate than bank CDs, and they often contain other features, such as put or call options that allow either the buyer or the issuer to redeem the certificate prematurely without penalty. (Use the retirement calculator to see the impact of an additional 1% interest over time). For example, a brokered CD with a 20-year maturity could be “puttable”, after five years, if the buyer so desires. That means that five years from now, if rates have gone up and the buyer wishes to move the money in this CD to another one, then he or she can put the CD back to the issuing bank for return of their original principal.  But read the fine print.  The put feature is often subject to available of funds and is not a guaranteed feature.

Call features give the issuing bank a similar privilege as prior to maturity, the issuing bank can return the investors principal. CD investing can also get more complex and profitable if you want to take advantage of another’s misfortune as you can buy brokered CDs on the secondary market from a person who needs the money early (and will likely need to sell to you at a discount). Note that the FDIC guarantee will only apply for investors that either hold their certificates to maturity or redeem them in a put or call transaction so if you buy a CD on the secondary market, check the quality of the issuing bank. If the certificate is sold prematurely in the secondary market, then the owner may receive more or less than his original investment, depending on market conditions. But those who hold their CDs to maturity can enjoy higher rates of income.  These long term CDs should be considered illiquid investments even though there may be liquidity possibilities.

Note that brokered CDs usually are of a longer term or have features not typical of the CD from your neighborhood bank.  Brokered CD investing may not be right for you.  Just understand all of the features to decide.

Post provided by Javelin Marketing

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The attraction of a certificate of deposit (CD) is its higher interest rate over your bank’s regular savings account rate. Also, federal deposit insurance secures it up to $100,000 per institution ($250,000 if an IRA). CD returns today offer new options that seniors who seek short term secure investments should be aware of.  CDs can play an important part of the conservative porion of your retirement investing portfolio.

Traditionally when you purchase a CD, you invest a fixed sum of money for a fixed term – six months, one year, five years, or more for a fixed CD return. The bank pays you a fixed interest rate and you receive your investment back when the CD matures. If you redeem it earlier, you pay an “early withdrawal” penalty or forfeit a portion of the interest. So you need to plan your cash needs accordingly to not be penalized.

Today, CDs offer more options perfect for retirement investing . You can choose among variable rate CDs and long-term and callable CDs. You can even buy them through your broker. But not understanding each type’s exact features can leave you with an investment you didn’t mean to buy.
 
Some long-term, high-yield CDs have “call” features. The issuing bank may call (i.e. terminate) a CD after only one year or some other fixed period of time, perhaps because interest rates are falling. You’ll receive your full investment back plus accrued interest, but you lose out on your high interest payments in the future.

On the other hand, if you’ve invested in a long-term CD and interest rates subsequently rise, you’ll be locked in at the lower rate unless of course you pay the early withdrawal penalty.

Before you consider purchasing a CD, make sure you fully understand its terms. Know its maturity date and don’t confuse it with the call date.

As an example, don’t assume that a “federally insured one-year non-callable” CD matures in one year. It doesn’t! These words mean the bank cannot redeem the CD during the first year, but have nothing to do with the CD’s maturity date. A “one-year non-callable” CD may still have a maturity date 15 or 20 years in the future! In other words, when you see a high CD return make sure you understand why the return is so high.

Investors have accidentally bought 10 year CDs when they only wanted to tie up their money for 1 year. If you have any doubt about your CD’s maturity date, ASK. Fully understand the CD’s call features confirm when it matures.

Always remember that you’re insured only up to $100,000 per institution under federal deposit insurance rules ($250,000 throuigh 12/31/09). So, if you buy CDs through a broker, make sure that your CDs are held among institutions so that you don’t exceed $100,000 at any one or use different titling to increase your FDIC coverage.

How much should you invest in CDs for sensible retirement investing?  That depends on the results from your retirement planning calculators and you asset allocation among insured investments and those with greater risk yet higher return.

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