I used to actively hunt for the best CD rates, allocating about 5-10% of my investable assets into these risk-free assets. The aim is to accelerate reaching my retirement goal either by saving more or earning better returns. Currently, 80% of my cash is tied up in 5-7 year CDs, averaging a 5% yield. Each year, as I save more, the challenge is deciding where to invest these new savings.
Understanding CD Rates: Duration, Yield, and Market Trends
Up until recently, the longest CD term I’d come across was seven years. However, lately, I’ve noticed more financial institutions are starting to offer ten-year terms. This shift is largely due to banks aiming to secure long-term deposits at low rates while lending at higher rates, benefiting from the net interest margin. In times of financial instability, banks prioritize stability to prevent potential bank runs.
By opting for longer-term CDs, banks secure more stable funds. As someone who continually seeks high yields for the longest terms, this aligns with my strategy, especially as I regularly save and invest new funds each year. This allows me to constantly capture the best available yields.
However, the current 3% yield on a ten-year CD has made me reconsider if locking in for such a long duration is worthwhile.
Banks’ Strategy and Consumer Caution
Historically, interest rates are low, yet inflation remains relatively tame according to official reports. It’s reasonable to expect that inflation, and consequently interest rates, will rise, based on economic principles. By offering 3% on ten-year CDs, banks anticipate locking in cheap long-term funds, predicting that they may need to offer higher rates in the mid-term future.
The Realities of a Ten-Year CD
Committing to a ten-year CD raises several considerations. Will I live to see the maturity of this investment without needing to cash out early? It’s likely inflation will rise within the next decade, and as long as I continue working and saving, I may not need to access these funds prematurely.
Investors should consider what banks consider: with ten-year CDs becoming more common, it suggests a demand for longer, low-risk investments from consumers who are wary of inflation and prefer the safety of fixed returns.
Alternatives to CDs in a Low-Interest Environment
Given the low interest rates, I’m exploring more lucrative investments. Real estate and private growth companies offer higher potential returns. Platforms like Fundrise allow both accredited and non-accredited investors to diversify into real estate, offering stable returns even when the stock market falters. Meanwhile, investing in private growth companies through platforms like the Innovation Fund can expose investors to sectors like AI and FinTech, which are poised for significant growth.
Managing Finances Efficiently
Tools like Empower consolidate all financial accounts in one place, offering tools to track investments, minimize fees, and plan for retirement. It’s a valuable resource for maintaining oversight of your financial landscape and ensuring you are on track for retirement.
Final Thoughts
While traditional CDs offer safety, the returns in the current rate environment may not justify long-term lock-up periods, especially considering potential inflation and personal liquidity needs. Diversifying into real estate and emerging technologies may provide better growth opportunities while still managing risk effectively.
