CD 2.0

By: Max Valavanis, CFP®


A Certificate of Deposit (CD) is generally a Federal Deposit Insurance Corporation (FDIC) insured loan to a bank. Once the customer deposits the money into the bank, they will receive a “certificate” or “promissory note.” This means the deposit will be returned to the customer on time, with the stated interest rate. These CDs are popular and have been an ongoing part of many conservative investor portfolios. In case of a bank failure, the FDIC will currently insure the return of the customer’s deposits (not the interest). This very feature of insurance is the primary allure of CDs. The limit of this insurance is $250,000 per account per depositor. So, in essence, the customer could own several insured accounts with numerous banks if desired.

CDs can be issued in any denomination and have maturities ranging from one month to five years. Generally speaking, the longer the CD maturity, the higher the interest rate. If the funds are needed before the CD matures, the investor can withdraw them with a penalty. The penalty for every bank is different and can range from a fee to a reduction of the stated interest rate, so be sure to inquire before investing.

In the past, CD rates of return were fairly attractive to conservative investors. Historically, these returns hovered between 3%-7% on average for a 1-year CD. Except for several crazy years between 1975 and 1982, where rates bounced between 10% and 17%, CD performance was steady and predictable. Now the story is strikingly different.

With a miserable stock market upon us and a checkered economic past, the current CD rates are relatively poor. Per, as of Aug 21st this year, the average 1-year and 5-year CD rates are 5.0% and 4.5%, respectively. As it stands, CDs are barely keeping up with the surging cost of living. In fact, depending on the bank, you may lose money annually if you focused on CD rates alone. This begs the question, what do you do if you want to invest conservatively? It may be best to learn about the alternatives in today’s environment. Millions of other investors are reaping the benefit of higher rates, shouldn’t you? CD alternatives have always existed but are experiencing more popularity due to the stagnating CD rates.

If you are willing to accept a longer time horizon, say 5 to 10 years, and allow for some intelligent design of your portfolio, higher rates exist that are still guaranteed. Your willingness to commit to a longer time frame may be quite rewarding. Ask yourself questions like these: “How often do I need my money?” or “Am I penalizing myself by tolerating these low returns?”

Our office helps young and old investors tailor conservative plans for your hard-earned savings. Many options exist, so give us a call and see what’s cooking on the other side of the rate chart. We can help you earn higher rates without tying up all your liquid cash.

Max ValaVanis, CFP® is a co-owner of ValaVanis Financial in downtown Melbourne and in Rockledge. Max specializes in lifetime income planning for Retirees while protecting principal.  Max can be reached at 321-956-7072.