With uncertainty around interest rates, CD ladders may capture higher yields while offering flexibility. Here's what investors need to know about building one.
Typically, a CD ladder involves splitting equal amounts of cash among multiple CDs with different maturity dates. As the shorter terms expire, you can invest the proceeds into longer-maturity CDs.
"A CD ladder gives someone an opportunity to harvest a variety of yields over varying timelines," said Bankrate senior economic analyst Mark Hamrick. "And if you're searching for the highest yields, that can be quite rewarding." For example, investors may purchase five CDs, with maturities ranging from one to five years, freeing up 20% of their original investment every year.Mark HamrickAlternatively, you may build a ladder with shorter-term CDs, such as three-month to one-year terms, which provides more flexibility.
While shorter-term ladders offer faster access to cash without a penalty, the trade-off may be missing the opportunity to lock in higher rates for longer-term CDs, Tumin said. Of course, the decision ultimately hinges on your goals and how soon you'll need access to the money, he said.Typically, investors can expect higher yields from longer-maturity CDs than from shorter-term CDs., with long-term government bonds paying lower yields than shorter-term bonds, Tumin said.. These rates are the highest 1% average. By contrast, most five-year CDs are paying well below 5% on average.
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