Think Carefully Before You Buy a Five-Year CD (For Goodness Sakes)

Over the last two days, I have been contacted by a number of people who have asked me about 5-year CDs.

I am not sure why this is all happening at once.

I did learn today that TD Ameritrade is apparently pushing a 5-year brokered CD offering 3.30% which is currently higher than any online 5-year CD rates offered on BestCashCow and at least some of their brokers are directing people to compare rates on BestCashCow. It should be noted that BestCashCow does show many local bank and credit union 5-year rates that are higher than the 3.30% TD rate. Moreover, BestCashCow has always strongly advised against brokered CDs because they are a different animal that provides less protection to the holder and cannot be terminated with the payment of an early withdrawal penalty (and we redouble that advice here).

I also think that many people – quite correctly in hindsight – bought 5-year CDs with their cash in 2013 and are on a laddering program or some other program and feel that they soon must buy another 5-year CD. My advice to these people is to put their programs away. The more likely direction of interest rates at this point in the cycle is for them to increase. The Federal Reserve and Jay Powell are pretty unequivocal. We are in September now and the Fed funds rate is clearly going to be raised twice before the end of 2018 (to 2.25% - 2.50%). The Federal Reserve’s most recent forecasts continue to guide towards a 3.125% Fed funds rate at the end of 2019 and a 3.375% Fed funds rate at the end of 2020. And, there is risk to those numbers. This Administration’s ridiculous trade “policy” could cause inflation that could drive the Fed to move by 2020 to a much higher Fed funds rate. So, if you are going to lock in for 5 years, I think you want a significant premium over that rate and the premium just isn’t there right now.

If you must buy something to augment your current savings rate, you would be much better off looking at 1-year rates. Several online banks are currently offering 1-year CD rates as high as 2.65%. If inflation comes soon and interest rates spike, you could even regret those purchases. But, the term is short and the opportunity for a significant mistake simply is not there.

See all of the best online 1-year CD rates here.

Editor’s Note: Marcus Bank and Synchrony Bank are both advertisers on BestCashCow. Please read our Advertiser Disclosure here.