Retirement Income Blog

Your local bank likely offers among the lowest CD savings rate–not a good thing for your retirement investing.  The local bank has the expense of rent, the tellers’ salaries and highly unproductive service representatives that will waste an hour opening a checking account.  The expense of running a bank branch is enormous and therefore, the CD savings rate offered by the local bank won’t be your best bet.  What if they could avoid all of these expenses and pay you a better rate?

That’s exactly what Internet banks do.  They have no buildings in high rent retail centers (they can have their offices in the warehouse district because they don’t have customers visit) and they don’t waste time opening checking accounts.  The customers serve themselves online.  An Internet bank can offer a higher CD savings rate because their expenses are lower and that means more for you, the investor.

But it can even get better than that if you share some risk with the bank.  The rate offered by the bank is limited by the potential risk they have.  If they give you 5% locked in for 5 years, they have the risk of not being able to earn 5% each year when then lend their money out for mortgages, etc.  But, if you allow them to cancel your CD in case they cannot earn the promised rate, then you can get a higher CD savings rate.  These CDs where you share the risk are called “callable CDs.”  The bank is permitted to call your CD (pay you off) before the end of the term.  These callable CDs are usually offered in terms of 5 years and up so they are appropriate for long term investors who desire a higher CD savings rate.

Another way to get a higher CD savings rate is with an indexed CD.  Such a CD has interested tied to the stock market.  Don’t worry, the FDIC insures your investment so you can’t lose money.  But if the stock market does not rise, you wont make money either.  With such a CD, the rate is typically measured at the end of the term, e.g. 5 years.  A typical CD may pay you 50% of the increase in the stock market.  So if the market rises 80% over the 5 years term, you get 40%–equivalent to 8% simple interest on your invested principal.  Not bad.  But if the stock market stays the same or declines, you get your money back with no interest.  Like the callable CD, if you are willing to share some of the bank’s risk, you can get a higher CD savings rate.  So check your retirement planning calculators and start figuring!

If you’ve ever had the thought that it’s good to own a bank, you can participate in the two CDs just described and share the banks risk, earn a higher CD savings rate and see how you like being the banker as well as the investor.

Last, let’s not forget that the rich get richer.  Jumbo CDs ($100,000+) typically pay higher CD savings rates and for larger amounts, say $250,000 and above, the CD rate is negotiable. You simply show the best rate you find and ask your local banker to beat it.  You may be surprised that the rates are not fixed and your banker has some room to negotiate.

Post provided by Javelin Marketing

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Callable CDs

“Callable CDs” are a variety of CDs that often pay more than regular (non-callable) CDs. These CDs come with Federal Deposit Insurance Corporation insurance (FDIC), full principal repayment at maturity and above-average yields.  These insured CDs appeal to safety-conscious retirees looking for income.

Although FDIC insured, that does not mean they are not without risk. These FDIC insured CDs have features you must understand. Before you jump at the rate offered by some ad in the Sunday newspaper, here’s what you need to know about the features offered:

High Rate
The higher rate could be temporary. Some callable CDs are callable after a year or two, which means you can get paid off and your high rate stops. Although your principal may still be insured by the FDIC, you may be required to find another place to invest your money which could subject your investment to interest rate risk (i.e having to accept a lower rate than you were earning). Although the bank could have the option to pay you back after one or two years, you do not have the same flexibility.  If you want to terminate your deposit, it could cost you as described below.

Banks offer FDIC insured callable CDs to shift interest rate risk to the depositor. Because the depositor is taking on this interest rate risk, a callable CD will have a higher yield than the same maturity CD without a call provision. The additional yield is partial compensation for the depositor accepting the interest rate risk. Callable CDs typically have terms of 10 or 20 years. Therefore, these CDs are typically suitable for someone who does not need liquidity and wants higher returns than a non-callable CD and the safety afforded by the FDIC protection. Consider that earning more on your money could reduce the need for you to tap into your principal investments. If you buy such higher-paying CDs, it might be wise to keep other money for liquidity available in a money market account or bank account.

Although money market accounts are typically considered to be safer than many equity investments, money-market shares are redeemable at net asset value, which may be more or less than original cost. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in such a fund.

These callable CDs are suitable for:
• People who want to protect their “core” principal that they never want to spend
• People who want to leave money for heirs
• People who need to safely maximize income
• People who have adequate liquid resources

Take these precautions:
Someone may tell you that you can sell these CDs at any time. It is true that most banks will buy back the CD from you but it could be at a steep discount. The ONLY way to be sure to get all of our pricnciapl back is to hold the CD to maturity (could be 10+ years) or until called by the bank. With respect to principal repayment, the bank’s obligation is to pay you back at maturity.

You may be told that if you pass away before the CD matures, your heirs can “put” the CD back to the bank and get the principal. This offer however is dependent upon the bank having enough funds in the “put” pool. Your heirs will have priority but could wait to see cash, months if not years.

To find callabale CDs at 6%, just do a Google serach on “callable CDs” and you will encounter many offerings.  This site does not require any login http://www.bergencapital.com/clientservices/inventory/cd_inventory_new_issue.htm

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