bank rates

CD Rates Strategy: In Bad Savings Era, Find Longest Term With Highest Return

There are some 7- and 10-year CDs that still offer decent rates.We’re stuck with lousy CD rates for years to come.

So savers need to look for ways to maximize their safe investments in a bad environment.

One strategy to consider: Find the longest terms with the highest CD rates and buy now.

We now know the Fed will hold interest rates at their record-low levels until at least mid-2013.

It’s terrible news for savers, but it means we can buy CDs with long maturities without having to worry the decent deal today (in relative terms) will look terrible tomorrow.

We’ll get into specific bank and credit union offers in a post tomorrow, but there are a number of institutions offering 7- and 10-year CD rates of at least 3%.

The number of strong offers has declined since the Fed announcement, and it’s unclear how long even the best deals will last.

Even so, these long-term certificates of deposit offer considerably better returns than you’ll find on our CD Rates Leaderboard.

And they are likely to hold up as good deals for some time.

Assuming the Fed begins increasing rates in a couple of years, it will do so gradually, meaning it will take awhile to see significant improvements in short-term CD rates.

When they do improve, you can consider breaking your contract (if the bank allows) and taking the early withdrawal penalty.

If you don’t think you’ll hold onto to your CD until it matures, find one that offers the most lenient charge of between six- and nine-months’ interest.

Any larger penalty, and you’ll be sacrificing the earning power of your investment.

For example, if you buy a 10-year CD that pays 3.0% APY, your investment will have grown to about $11,255 after four years.

If that CD has a nine-month penalty, and you break it after 48 months, you’ll lose about $225 in interest.

That makes the effective APY about 2.48%, still better than just about any 4-year CD available today.

And the longer you hold onto to that CD, the more your effective APY increases.

One note of caution: If you’re looking for a safe place to put your money and you also need to get quick access, purchasing a long-term CD may not be right for you.

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Comments (5)
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5 Existing Comments
  1. Earl said:
    on August 25th at 10:50 pm

    Yeah, and some credit unions also revert to a lower interest rate as well as a penalty if you withdraw your money early.

  2. Justin said:
    on August 26th at 04:03 am

    Please note that the interest earned is taxable income, yet the fee incurred for early termination of the CD is not a deduction.

  3. Joe George said:
    on August 26th at 07:39 am

    Ally bank’s four year CD, which allows you to change the rate twice is a great deal in a sea of bad deals. While the rate is only 1.80%, the penalty for cashing in is only two months loss of interest and you are protected if rates rise because you can bump up the rate (just make sure you do it!). I am putting a lot of $$$ in this product.

    FYI…Justin…..line 30 of Form 1040 allows you to deduct the interest penalty.

  4. B said:
    on August 29th at 10:04 pm

    CDs are safe but a risk given inflationary concerns. Targeted equities are still the better bet, even with the increase in risk.

  5. SeniorSaver said:
    on August 30th at 09:13 am

    I just saw that, this morning, Discover slashed its 4-year rate from 2% to 1.8%, and its 5-year rate from 2.35% to 2.2%. It left the 10-year rate at 3%. I guess it’s trying to send us a message about where it wants us to put our money!