Building a CD Ladder for Steady Income


The stock market’s struggles have spooked many investors into looking for safer ways to earn money on their savings. With volatility showing no signs of going away -- the Dow dropped more than 3% on Monday before rebounding back the very next day -- building a “ladder” out of certificates of deposit (CDs) is one way to earn interest without sacrificing safety.

Building a ladder involves staggering the maturities of a set of investments, including CDs and bonds, so that you can benefit from longer-term interest rates while remaining flexible with your money. Hank Hanau, a certified financial planner and founder of New York-based HFH Planning Inc., typically builds bond ladders for clients, but says that CDs are good for smaller amounts. "CDs work well because there's no cost to getting into them," says Hanau. "It's difficult to buy a few thousand dollars of municipal or corporate bonds."

When setting up your CD ladder, it's critical to choose maturities that work for your financial goals. As a way to earn better interest on money you need to stash somewhere for a short period of time, a short-term ladder built with three-month, six-month and nine-month CDs may do the trick -- six-month CDs earn almost twice the interest offered on money market accounts according to the rate index. But if your goal is a steady source of income, Hanau recommends starting with five CDs, ranging in maturity from one year to five years.

When the first CD matures after one year, you'll replace it with a five-year CD. When the two-year CD matures, you'll replace it with a five-year CD as well. By the fifth year of this strategy, you'll hold five five-year CDs, all maturing one year apart. The rolling nature of the CD maturities means you'll benefit from any future rise in rates, unlike holding a single five-year CD which locks in your money for full five years. "From that point forward you're getting the highest risk-adjusted yields," says Hanau. "And you stand to benefit from the best rates available."

For example, say you have $10,000 with which to construct your CD ladder -- that means buying five CDs at $2,000 apiece. Your first step will be to shop around for the best rates, since they vary from institution to institution. Use BankingMyWay’s CD rate search and enter your ZIP code to see rate offers from local institutions.

Right now, residents of California can get a 12-month CD from Citibank (Stock Quote: C) with an interest rate of 2.3%, or one from US Bank (Stock Quote: USB) offering 2.5%. Meanwhile, rates on 60-month CDs include 3.3% and 3.25%, respectively, from those same banks.
Internet bank Discover (Stock Quote: DFS) offers 2.47% (12-month) and 3.45% (5-year) rates on their CDs.

To calculate the interest you stand to earn from your CD ladder, take a look at's CD laddering calculator.

Just remember that when dealing with CDs, whether as part of a ladder or a stand-alone investment, withdrawing money before the maturity date can incur a hefty early-withdrawal fee. Make sure you are comfortable with the gap between when sequential CDs mature before setting up your ladder.

For more on CD laddering:

"Setting the Strongest CD Laddering Strategy"

"Adjust Your CD Ladder to Lock in Higher Rates"


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