CD Savings Rate - Earn More When You Share Risk with the Bank

Your local bank likely offers among the lowest CD savings rate--not a good thing for your retirement investing.  The local bank has the expense of rent, the tellers' salaries and highly unproductive service representatives that will waste an hour opening a checking account.  The expense of running a bank branch is enormous and therefore, the CD savings rate offered by the local bank won't be your best bet.  What if they could avoid all of these expenses and pay you a better rate?

That's exactly what Internet banks do.  They have no buildings in high rent retail centers (they can have their offices in the warehouse district because they don't have customers visit) and they don't waste time opening checking accounts.  The customers serve themselves online.  An Internet bank can offer a higher CD savings rate because their expenses are lower and that means more for you, the investor.

But it can even get better than that if you share some risk with the bank.  The rate offered by the bank is limited by the potential risk they have.  If they give you 5% locked in for 5 years, they have the risk of not being able to earn 5% each year when then lend their money out for mortgages, etc.  But, if you allow them to cancel your CD in case they cannot earn the promised rate, then you can get a higher CD savings rate.  These CDs where you share the risk are called "callable CDs."  The bank is permitted to call your CD (pay you off) before the end of the term.  These callable CDs are usually offered in terms of 5 years and up so they are appropriate for long term investors who desire a higher CD savings rate.

Another way to get a higher CD savings rate is with an indexed CD.  Such a CD has interested tied to the stock market.  Don't worry, the FDIC insures your investment so you can't lose money.  But if the stock market does not rise, you wont make money either.  With such a CD, the rate is typically measured at the end of the term, e.g. 5 years.  A typical CD may pay you 50% of the increase in the stock market.  So if the market rises 80% over the 5 years term, you get 40%--equivalent to 8% simple interest on your invested principal.  Not bad.  But if the stock market stays the same or declines, you get your money back with no interest.  Like the callable CD, if you are willing to share some of the bank's risk, you can get a higher CD savings rate.  So check your retirement planning calculators and start figuring!

If you've ever had the thought that it's good to own a bank, you can participate in the two CDs just described and share the banks risk, earn a higher CD savings rate and see how you like being the banker as well as the investor.

Last, let's not forget that the rich get richer.  Jumbo CDs ($100,000+) typically pay higher CD savings rates and for larger amounts, say $250,000 and above, the CD rate is negotiable. You simply show the best rate you find and ask your local banker to beat it.  You may be surprised that the rates are not fixed and your banker has some room to negotiate.

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