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Are CD Ladders Still Worth The Effort?

pencil eraser pushing the plus sign on a calculatorWith yields set to rebound once the Federal Reserve ends its effort to keep interest rates artificially low, is now the right or wrong time to start a CD ladder?

Laddering, of course, gives you liquidity – the ability to access your money without incurring early withdrawal penalties – along with a regular opportunity to reinvest at the highest CD rates available.

The risk in this strategy is that the longer-term CDs you buy today could be paying below-market rates in a couple of years.

If that happens, you’ll either have to accept those lower rates or pay the early withdrawal penalty and reinvest at higher rates.

But a third purpose of laddering is to prevent yourself from trying to time the market. This is why we think the effort still might pay off.

In the long run, you should come out ahead with laddering, because even if rates are lower some years, only a portion of your total investment is earning less-than-ideal returns.

CD laddering also offers protection against inflation, because CD rates tend to rise as inflation rises.

Right now, the annualized inflation rate is about 1.5%.

As long as you don’t mind tying your money up for a while, a CD ladder makes more sense than stashing your money in an online savings account, the best of which pays just 1.01% APY

That doesn’t mean it’s easy to find a CD that beats inflation.

Are CD Ladders Still Worth The Effort?

How laddering works

A CD ladder is a group of CDs that mature at regular intervals. You start out with CDs of different terms. You might split a $10,000 investment equally as follows:

  • 1-year CD, 0.95% APY.
  • 2-year CD, 1.10% APY.
  • 3-year CD, 1.25% APY.
  • 4-year CD, 1.70% APY
  • 5-year CD, 2.25% APY.

Each CD represents a rung on the ladder. The earliest maturity is the bottom rung; the latest maturity is the top rung. After one year, you reinvest your $2,000 plus interest (about $19) in a new five-year CD.

You repeat this process each year until you have five 5-year CDs that mature at one-year intervals.

Since interest rates might start rising in six to 18 months, the best laddering strategy right now is to compose your ladder of either CDs that mature every six months, to be more conservative, or every 12 months, to take a more moderate approach.

The catch is that you’re unlikely to find the 42-month or 54-month CDs you’d need for the conservative strategy.

You might have to space the higher rungs of your initial ladder in 12-month rather than 6-month increments and temporarily sacrifice some liquidity later on.

Even with the 12-month ladder, your CDs need not be perfectly spaced.

Slightly irregular intervals might give you better yields, depending on what banks are offering for various terms.

You also shouldn’t feel compelled to stick to a single bank to create your CD ladder.

You’ll earn the highest returns by shopping around for the best CD rates.

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