American First Assurance

Who should stagger CD maturities?

Like Baker, Deana Arnett, a CFP with Financial Planning Services in Manassas, Va., says she recommends CD ladders for people who have a well-established cash reserve fund of about six months' income. Because such an emergency fund usually has more money than most people want to keep in a savings or money market account, Arnett recommends keeping one or two months' income in a savings account and investing the rest in CDs with staggering maturities.
However, current interest rates make the strategy questionable for many advisers. "It's not that building a CD ladder is bad. Rather, it is the poor yields on CDs," says Dirk Anderson, a principal at Human Investing in Lake Oswego, Ore.
For instance, core inflation is around 3 percent per year. But the average 12-month CD pays about 0.5 percent interest, the average 10-year CD pays about 2 percent and the average 20-year CD pays about 3 percent.
"CDs just won't keep pace with the increasing cost of living, and when rates do rise, CD holders will get crushed if they only have long-dated CDs," Anderson says.


-By Nancy Mann Jackson