If you are among the millions of American savers who heeded the call last year to lock in high interest rates before it was too late, you may have already started getting notices from your bank that you need to decide what to do next when your 1-year CD matures.
By October, some $950 billion in time, or term, deposits will come due, according to an analysis of FDIC data by the Financial Brand, a banking trade publication. And that’s just the first wave of what author James White, a banking consultant at Total Expert, calls a “maturity tsunami” — because about $2.5 trillion will mature over the next 12 months.
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And then what? When a CD matures, you have a couple of choices: roll it over into a new CD at the prevailing rate, move it to a CD at another institution to get a better rate, or do something else with the cash proceeds.
The dilemma for savers who picked 12-month CDs last year is that the new rate they are likely to get will be lower than what they had. The whole point for savers to lock in for a long-term CD or other fixed-income product is to jump over an interest-rate dip and hope that rates rebound by the time their maturities come due. The thing is, if you jumped last year at a 12-month CD, you’re about to land in the middle of the pond.
“It’s tough,” said financial adviser Jeremy Keil. “The highest rate today is the shortest rate, and so if you lock again for a year or more, you’ll probably get a lower rate than you could today with a money market.”
As rates drop, though, that money-market account will eventually shift downward, too. And if you lock in for just three or six months, you’ll just face the same situation again very soon.
This is the core of what professionals call “reinvestment risk,” which is that when your bond or other fixed-duration investment comes due, you can’t get as high of a rate. If you picked that 12-month CD because it had the highest rate at the time, that was because the risk was built into the pricing, essentially. You would have lost a few basis points if you picked a 2-year CD or a longer-rate 4- or 5-year CD — but now you may be kicking yourself that you didn’t.
Which CDs to pick now
If you have cash on hand that you don’t need immediately but also don’t want to risk in the stock market, locking in for a couple of years to a decent interest rate is still a good move. You just don’t want to pick option No. 1 from above — that is, rolling over what you have now into another CD at the same institution.
“Do not be asleep at the wallet and let your CD automatically renew,” said Mary Grace Roske, head of marketing for CD Valet, an online marketplace for CDs. She noted that about 25% of CDs on the market are from the four major national banks, which tend to offer lower rates than their competitors.
So if you’re at one of those, either get on the phone and try to negotiate a better price than what’s automatically offered, or jump ship for an online bank or credit union offering a better rate. If you were already with one of the more aggressive banks, it’s smart to make the same moves — because in such a cutthroat environment, it pays to shop around.
Also think about which maturity you want to secure next. If you had a 12-month CD and it left you in this dilemma, think about going longer now if you can. “It matters most when you need the money,” said Keil, “but if you can, right now it pays to lock in for longer.”
It can be hard to get people off that 12-month timeframe, though. Public interest at CD Valet is starting to tick up for 2-year CDs — with a 60% increase in traffic in August over July, and a 50% increase in 4- and 5-year maturities — but that still does not top the interest in 12-month CDs, according to Roske.
If you start thinking about locking in these longer time frames, then you should also consider some other investment vehicles for that money that may offer you better returns in the long run, but with more risk involved. Keil steers some of his clients to multiyear guaranteed annuities (MYGAs), because the top rates on those are higher right now than for CDs. The drawbacks: higher penalties for surrenders and no FDIC insurance (although there are other insurance guarantees, Keil noted).
The stock market is not always your best alternative for midterm money. “It’s always best to have short-term money in short-term investments and long-term money in long-term investments,” Keil said. “I wouldn’t get out of CDs and into the stock market just because rates are dropping.”
Keil often finds that his clients forget that their time horizons for retirement get shorter every year, and they have to adjust to keep what they need liquid.
“Everyone is a year closer to retirement than they were last year,” he said, and so maybe it’s actually time for some people to think about moving more into short-term cash products to lock in their gains and have the money ready.
“I spoke to somebody a year ago who was going to retire in a year and a half, and he had $2 million then. Now he has $2.4 million and is going to retire in six months,” Keil said. “I suggested he cash out that $400,000 in gain and have it as guaranteed money. It isn’t that I think the market is at its high point and he needs to retreat; it’s that it’s high and he needs money in six months.”
If your high ground in the coming maturity tsunami looks similar, it’s time to start shopping for where you will move your cash next.
Got a question about investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write to me at . Please put “Fix My Portfolio” in the subject line. You can also join the Retirement conversation in our .
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