Most investors have "core capital" — money that they wish to preserve and keep in a safe place. Certificates of deposit (commonly called CDs) are a good place for those funds. Since you plan to keep that money permanently, why not park it for a high rate? You can get long term CDs that pay much more than your local bank. These are often called high yield or brokered CDs. They are FDIC insured just as the CDs at your local bank.
Note that the average senior makes the mistake of getting CDs for 6 months or a year at a time. This is a bad mistake as
- these CDs tend to pay the lowest interest rates
- this violates a principal of retirement planning which is to match the longevity of assets to your longevity. So if you have an estimated 20-year life expectancy, then get 20-year CDs!
Before you pile all your money in the truck to take advantage of the higher rates, these high paying CDs do have some trade-offs, so please read on.
- These are long-term CDs. Buy them and forget them. You can get your interest semiannually, but the CD has a 10-year term or longer. So, this CD may outlive you. However, if you're a smart investor, you want your money to outlive you (the consequences of you outliving your money, let's not even discuss). At your death, your heirs have the option of "putting" (placing for redemption) the CD at face value, even if the term has not expired. Note that the put feature is a priority accommodation that the issuing bank makes to heirs and not a guarantee to immediately pay off the CD.
- These CDs have a call feature, which means the bank can decide to pay you back early. These are often named "callable CDs." In the case of the CDs identified in the footnote, the bank has the option to pay you back early (after 1 year) or at any 6-month interval after the first year. So if rates decline and the bank can borrow for less, they are likely to exercise this option.
- The CD has a step rate feature. If the bank does not call the CD after the first year, the interest rate may be stepped down for the remaining term (you will know this before you invest). Some CDs have a step up feature that pays you more over time.
- You have the option to sell your CD at any time in the secondary market, however, you could get less than you paid and there is no assurance of a buyer for your CD.
Every CD contains some of the above features so you must read the agreement or have someone read it thoroughly. In these times, such CDs could earn you 2 or even 3 times what your local bank offers.
So who are these CDs for? For people who want to put their money in the safest place (FDIC insured), who want a very high rate and who do not need access to the funds. These investors will have other funds set aside for liquidity needs and will have adequate medical and long term care insurance so that these funds can be left to earn a very high rate.
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