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Layin’ It on the Line: The Catch-22 of high CD rates

Why the current offers may be too good to last

By Lyle Boss - Special to the Standard-Examiner | May 17, 2023

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Lyle Boss

Certificates of deposit (CDs) have long been a popular savings vehicle for many individuals, particularly those who are risk-averse and seeking a guaranteed return on their investment. In recent years, however, CD rates have been relatively lackluster, with many banks and credit unions offering rates that barely keep up with inflation.

But in 2023, the tides have turned. CD rates are soaring, with some institutions offering rates of 5% or more on long-term CDs. This has left many savers wondering whether now is the time to lock in a higher rate or if they should hold off and wait to see if rates will continue to climb.

Most people do not realize that fixed-interest-rate annuities are also available at extremely good rates. They are called multi-years guaranty annuities (MYGA). Many of these product will guarantee a fixed interest rate for a specific time period, two years to longer. The other difference beyond length of guaranteed interest time period with MYGA is if the earned interest is kept on deposit, the tax liability is deferred to a future date.

While the allure of a high CD rate can be tempting, it’s important to remember that these rates may not last. Here are some reasons why:

Interest rates can fluctuate

The primary driver of CD rates is the federal funds rate, which the Federal Reserve sets. CD rates tend to follow suit when the Fed raises interest rates, as it has done in recent years. However, interest rates can also fluctuate based on market conditions and other economic factors, and there is no guarantee that rates will remain high indefinitely.

Banks may adjust rates based on demand

When demand for CDs is high, banks may lower rates to manage their costs and profitability. Conversely, banks may raise rates when demand is low to attract more customers. Even if rates are currently high, they may not stay that way if demand shifts.

Inflation can erode returns

While a high CD rate may seem attractive, it’s important to remember that inflation can erode the value of those returns over time. For example, if inflation runs at 4% and your CD earns a 5% rate, your real return is only 1% (the difference between the CD rate and inflation). Even if CD rates are high, you may lose purchasing power over time.

So what should savers do in light of these considerations? Here are some tips:

1. Consider your investment timeline.

CDs are generally best suited for short- to medium-term savings goals, such as a home or car down payment. Suppose you have a longer investment timeline, such as for retirement savings. In that case, you may want to consider other investment vehicles, such as stocks or mutual funds, which have the potential for higher returns over the long term.

2. Shop around for the best rates.

Just because rates are high at one institution doesn’t mean they are the best available. Shop around to find the best rates and terms for your individual needs, and be sure to compare the interest rate and any fees or penalties associated with the CD.

3. Consider laddering your CDs.

One strategy for mitigating the risk of fluctuating rates is to ladder your CDs. This means investing in CDs with staggered maturity dates, such as one-year, two-year and three-year CDs. As each CD matures, you can reinvest the funds at the current market rate, which can help you take advantage of higher rates when available.

4. Keep an eye on inflation.

Inflation is an important consideration for any investment strategy. While CDs may offer a guaranteed return, it’s important to remember that inflation can erode that return over time. Be sure to factor inflation into your investment decisions and consider other investment vehicles that may offer higher returns over the long term.

If you’re looking for information on CDs and want expert advice to help you make informed decisions, don’t hesitate to contact a financial advisor. Take action today and schedule a consultation with a trusted advisor to get the guidance you need to make the most of your investments.

  • Many financial institutions are offering CD rates of 5% or higher; however, these rates may only last for a limited time.
  • Banks like to offer promotional rates to attract deposits; as demand shifts, so can interest rates.
  • Consider your investment timeline and inflation rates, and always shop for the best rates.
  • Consider laddering your CDs.

Lyle Boss, a native Utahn, is a member of Syndicated Columnists, a national organization committed to a fully transparent approach to money management. Boss Financial, 955 Chambers St,, Suite 250, Ogden, UT 84403. Telephone: 801-475-9400.


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