Retirement Income Blog

Are you disturbed by the rates on CD savings at your bank? Not enough to satisfy your retirement income plan goals?

Many banks are FDIC insured, just like your local bank. Shop around for the best Certificates of Deposit. Check out other banks and saving institutions in your neighborhood, and in other states. Their rates could be higher than what you can get locally. In fact, the highest rates offered by some banks could be 40% higher than national averages… sometimes more.

How do you shop for a competitive rate? You could spend hours searching the Internet and maybe find a few. Alternatively, many financial planners and retirement consultants can do the shopping for you.  You don’t actually pay a fee for this service.  The CD you purchase for $100,000 will be sold to your retirement consultant for $99,000 so he earns 1% for shopping and assisting you.

Here are various types of CD savings accounts available, beyond what your local bank offers:

Callable CDs

“Callable CDs” are a variety of CD savings accounts that often pay more than regular (non-callable) CDs. The Federal Deposit Insurance Corporation insurance, full principal repayment at maturity and above-average yields appeal to safety-conscious retirees looking for income.  Although FDIC insured, they have features you must understand so read the brochure completely.  If you don’t, you could be stuck in a CD for 15 years.

Banks offer callable CDs to shift interest-rate risk to the depositor. Because the depositor is taking on this interest-rate risk, a callable CD savings account 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. They may have terms of 10 or 20 years. Therefore, these CDs are typically suitable for a retirement income plam that does not require liquidity and requires higher returns than a non-callable CD and the safety afforded by the FDIC protection.

Index-Linked CDs

These CD savings pay interest based upon the overall performance of a stock market index, and your principal deposit is FDIC insured up to current limits. Here’s an example of how one of these CD savings accounts work. Please note, however, that the various features of these CDs vary from company to company (e.g., maturity, interest rate determination, withdrawal penalties).

Here’s a hypothetical example. You make a deposit, say $10,000. The CD has a 3.75 year maturity, non-callable. At the end of 3.75 years, you would receive your deposit back plus interest based upon the movement of a pre-selected stock market index, such as the S&P 500.² Let’s assume that the index increased 3% per calendar quarter over the next 3.75 years. In this hypothetical example, you would receive $12,271 (interest rates are subject to change and your actual results will vary). Please note that this example is used for illustration purposes and is not a prediction of future market performance.  Few retirement consultants will recommend these index linked CDs as they prefer to recommend equity indexed annuities which pay them more commission.

FDIC Insurance - Do You Really Understand It?

Most people realize that their CD savings are insured up to $100,000 per person, per institution. To ensure that all your accounts are fully insured, you could just spread your money among different banks. However, you can also keep accounts at the same banks and get several hundred thousands of dollars of insurance if your accounts are organized correctly.

One strategy is to use trusts or “pay-on-death” designations. Accounts that have named beneficiaries are insured $100,000 per named beneficiary. Here’s an example of how two parents and one child can insure $1.2 million of deposits using the correct designations on accounts:

How a husband, wife and one child
may have insured amounts totaling $1,200,000

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