How to Maximize the Return of Current CD Rates

Sara Stringer

October 30, 2013

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When you’re saving for retirement, you have to make money work for you if you want to survive in the future. If you relied on your paycheck alone, you might not make it through the week, let alone through your retirement.

Medical bills are the dark side of retirement, but costs like travel and board can become problematic too. If you don’t save for these expected costs, you may find your retirement fund short of your expectations. This is a problem faced by thousands in the so-called “Boomer” generation.

If you don’t want your savings squeezed dry, start building your investments now.

What is a CD Ladder

Certificates of Deposit are agreements you make with a bank to take a certain amount of your money for safekeeping, and to earn interest on it. CDs are a common short-term strategy to grow money without much risk, so this method helps hedge against an uncertain economy. The term “ladder” could also be referred to as “stagger” as the idea is the same.

If you had a savings of $20,000, you could space out that savings like metaphoric rungs of a ladder so that you invest a small portion each year over a series of years. By dividing your cash into 5 equal parts, you have the chance to grow your money with liquidity on your side. Small business owners who find themselves with extra cash on hand can use CD laddering to save for retirement and account for market volatility with the option to pull out some extra cash if needed.

Why Laddering Works

A long-term CD usually pays out at the highest interest rate. So it might seem tempting to put all your money on a 5-year CD and call it a day. The trouble comes on that year when you lose a job or can’t make a payment on something. Regardless of the reason, your money is locked into a 5-year CD and you can’t move it until it matures.

Laddering helps safeguard against that, but it also gives you the chance to reevaluate the rates you’re getting. Say you hear about another 5-year CD with a higher rate of return. You can take the money you earned (plus interests) and put it back into the ladder. Each year you will receive a payout for holding your money, and you have liquidity in case something happens.

A high-yield savings account paired with a strong strategy of laddering is the key to growing your money. You can add thousands to your retirement income with patience and good financial sense.

What Makes a Good CD

CDs have two qualities that you need to be aware of:

· The rate of a CD does not change. That means that when you put your money into a CD, you don’t get to renegotiate the rates if the markets go up. If the markets trend downward you might be happy for the higher rate, but you still can’t change it.

· Liquidity is an issue. Liqudity refers to the money you have on-hand to cover expenses you need (like a new car or repairs to your house). CD terms are fixed, and since the highest yields come from long-term savings you end up with money locked away for a long time.

The good news is that the bank will guarantee the interest rate for the term of the CD, so you want CDs from established banks that have a relatively high interest rates (one percent or more). You can view current CD rates on Bankrate, CNN Money and bank websites. Online banking removes a lot of the personnel involved with savings and loan operations, so these banks tend to provide great rates. Find out about Discover Banks current CD rates and see if the return is worth your investment.

Other Methods of Retirement Savings

Life Insurance can help pay for college or housing if something happens to the primary bread winner of the house. By submitting to a medical exam and paying into a premium, you can be sure that your family members will have money to fall back on in the event of an emergency.

High-interest savings accounts are great for long-term holding of a lot of money. If you have more than $10,000 in your savings it could be worth it to move your money to a high-yield savings account.

Money market accounts typically pay higher than your average savings account but may require a larger deposit or a deposit that happens at a set time. These accounts pay you interest based on market rates, and they are good for people with a regular income that can afford to pay into their accounts monthly.

Whatever your savings strategy, it’s good to have more than one. If you’re relying on a 401k, or social security, rethink your position and make your future money work for you.