What is the Best CD Term to Invest In?
February 5th, 2008
What is the Best CD term to invest in? A very difficult question that never really gets easier. There are so many variables and the answer is different for different people.
Hopewell CU blogs about various topics surrounding credit unions. They suggest 4 to 5-years may not be too long.
I believe if you don’t have a CD ladder set-up already, that 2Y – 3Y terms may be best. CD Rates are currently below where averages tend to be and a 2Y -3Y time frame will hopefully turn that around.
However, if you have plenty of maturities coming up in the next few years, going longer should be okay. You have the earlier maturities to take advantage of higher rates if they begin to go up, and you will also be putting some on the longer end, protecting your rate, in case rates stay down for an extended period of time.
Here is an example. If you purchase a 4.50% for 2-year today and invest $100,000, you will earn about $9,000. If you invest in a 1-year term at the same level, rates will need to be at the same level next year in order to earn the same amount. So do you believe, rates will be the same or higher next year at this time?
Since it still looks like the Fed may lower rates another time or two, it is unlikely rates will be higher or the same next year. What do you think?
-- By Chris Duncan
Another thing to consider are the early withdrawal penalties. I’ve seen some banks and credit unions with early withdrawal penalties that are half the total interest for the entire term. For a 5 year CD, that’s 2.5 years of interest penalty. If the penalty is only 3-months of interest, a 5-year CD would be less risky. If rates do shoot up in 2009 or 2010, you can do an early withdrawal without losing too much, and then put the money into the higher rate CDs.
That is an excellent comment. In the not so distant past, when rates reached these levels and lower, we helped many people find low penalty CDs.