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Unlocking Financial Success with CD Laddering

A significant concern in recent years is how to invest the fixed income component of your portfolio. Depending on your age, risk acceptance, and investment objectives, most people have 20% to 60% of their portfolio in fixed income investments such as bonds. 

Unfortunately, bonds have been doing terribly over recent years in a rising interest rate environment. For example, the S&P U.S. Aggregate Bond Index is down 4.8% over the past three years; this is painful when investors were getting a mere 3 or 4% yield on bonds during this overall period.   This leaves investors seeking an alternative investment to meet their fixed income objectives.

The best alternative is using CD Ladders.  It is not known where interest rates are going; however, the best bet from most market analysts is interest rates will continue to increase over the short term. 

Using a 2 year CD Ladder is a good method to ride out the short-term interest rate changes using a safe FDIC insured investment while also beating the rate of inflation.

Understanding CD Laddering

CD laddering is a strategy that involves spreading your savings across a series of CDs with varying maturity dates. The idea is to create a staggered or "ladder" structure, which allows you to access a portion of your funds at regular intervals while taking advantage of higher interest rates offered by longer-term CDs. As a the shorter team CDs mature; you will roll them into longer-team (the full-term time horizon for the ladder) CDs. Typically most investors consider a CD Ladder with a two year time frame as short-term time horizon, and a CD Ladder with a five year time frame as long-term.

There are numerous websites (including NerdWallet) which describe how to configure a CD Ladder in detail – plus many videos on YouTube.

Basic Description: How CD Laddering Works

1. Divide Your Savings: Typically you will split your savings into equal parts, but unequal parts may be used based on your investment objectives and views on the interest rate environment. These will be allocated to different CDs, each with a different maturity date.  
2. Choose CD Terms: Select CDs with varying term lengths, such as 3 months, 6 months, 9 months, 1 year, 18 months, 2 years, and so on.  For example, a 2 year CD ladder may include dividing your investments into 5 parts with 6 month, 9 month, 12 month, 18 month, and 2 year maturities.
3. Open the CDs: Purchase the CDs with your allocated funds. As each CD matures, typically you will reinvest it into a longer-term CD set at the full time horizon of the ladder (e.g. two year, five year).

Benefits of CD Laddering

CD laddering offers several advantages that make it an appealing savings strategy:

1. Liquidity: With staggered maturity dates, you have access to your funds at regular intervals. This liquidity can be crucial for unexpected expenses or to take advantage of investment opportunities if you decide not to simply rollover the money to a longer maturity CD.
2. Higher Returns: Longer-term CDs typically offer higher interest rates than shorter-term ones – but this is not currently true where the max yield seems to be at the 12 or 15 month benchmark generally. CD laddering allows you to capture these higher rates across a set time horizon while still being flexible.
3. Risk Mitigation: CDs are generally low-risk investments, making them a secure choice for your savings. Most are FDIC insured – even when they are brokered via Schwab or Fidelity.  A CD Ladder is much less risky than a bond fund or ETF.
4. Consistent Income: With regular CD maturation, you can create a reliable income stream if needed. For those of us who are retired this can be particularly valuable for providing a steady income str.
5. Savings Discipline: CD laddering encourages disciplined savings and investing, as you consistently reinvest or based on your needs access your funds according to your ladder's schedule.

A couple additional thoughts

• Consider setting your CDs for automatic renewal.  Most banks and brokerages allow this.  You can normally also select your re-investment maturity time period (e.g. rolling a 6 month CD upon maturity into a 2 year CD).
• Understand the penalties for early withdrawal.  Usually you will lose all or some of the interest you would have earned on the CD.

Rather than opening accounts at multiple banks in an attempt to get the best yields for different CD maturities and having to keep track of everything; there is a much better alternative.  Both Schwab and Fidelity offer FDIC insured brokered CDs from banks. You can search in their portals for the best yields for each maturity for new brokered CDs and perform all of your purchases in a single website. This makes tracking and following your CD ladder much easier; I also find that I get better yields since you can find the top yield across the U.S. when doing your purchase.

There are also numerous CD Ladder spreadsheets available online for download.  I am using the ExcelGeek's CD Ladder Spreadsheet to structure my 2 year CD Ladder strategy.  This spreadsheet can be downloaded as a zip file from - http://www.mdmproofing.com/iym/files/CD_Ladder.zip

There are also CD Ladder Calculator websites available online including -this one from Excel Bank - https://www.excel.bank/calculator/cd-ladder