Get Security, Liquidity and a Higher Rate of Return with These CD Strategies

Everyone faces the same dilemma with their savings. We want our money to grow, but we worry about risk. We want to protect our nest egg, but don’t want to miss out on a higher rate of return.

Finding that perfect balance of growth and security can be stressful, especially when the stock market is volatile. Thankfully, there’s an old standby savings strategy that can give you both, if you set it up properly

Maybe it’s been a while since you considered a CD, so let’s look at four big questions I often hear.

Why go with a CD?
It’s a guarantee. From the day you open it, you know exactly what to expect from a CD. As long as you don’t make any early withdrawals, you’ll get the entire original investment back, plus a guaranteed interest rate. No matter what happens in the market, you know exactly how much you’ll have at the end. If predictability is important to you, CDs offer it.

How do I keep some cash available?
That’s the sticking point for a lot of people. CD terms typically range from one to five years, so people looking for liquidity often pass them by. But they shouldn’t. By using a technique called “laddering,” you can establish a regular pattern of maturity that makes your cash available for use or reinvestment. Laddering keeps your CDs flexible but also predictable.

It works this way:

1. Open multiple CDs with staggered maturity dates. For example, put 20 percent of the money into a one-year term at a lower interest rate, 20 percent into a two-year term with a slightly higher rate and so on, up to the longest term and the highest CD rate. You now have a series of CDs with one maturing every year.
2. At the end of the first year, you can take the cash or reinvest it into a new, long-term CD at the higher rate.
3. At the end of the second year, the next CD matures and you have the same option. And so on and so on.
4. When the last initial CD matures and you reinvest it, you’ll have 100 percent of your original investment in long-term CDs with higher interest rates. But they’ll still mature annually, giving you better liquidity.

How much should I start with?
The answer is different for every person. If you start small, your returns will be smaller, too. If you go larger, you’ll get more in the long run. Is the higher rate of return worth locking the money away for one to five years? That’s up to you. Laddering could be a good option if you’re worried about liquidity for larger amounts.

Can I put large amounts into a CD?
The FDIC has limits on how much can be insured at a single institution, so if you need an option for larger amounts, talk to a financial advisor about something called CDARS (pronounced “cedars”). This service lets you put up to $50 million into a single CD that’s shared among multiple banks to help with FDIC insurance limits. CDARS simplifies it by letting you go to a single bank and giving you a single statement, while we make it all work behind the scenes.

Uncertainty over terms and liquidity shouldn’t be a barrier to smart saving. You can have flexibility, higher rates of return and security all in one package. All it takes is a conversation with your financial advisor about your needs and appetite for security vs. growth.

Cheryl Plummer is the office leader for Pinnacle’s Green Hills office in Nashville, TN. She can be reached by email at Cheryl.Plummer@pnfp.com or by phone at 615-743-3517.