Evaluate more than rates with CDs

By Dan Danford

We received an e-mail this week from an out-of-state client who was disappointed with our quoted CD rates. He found a better rate at his local bank, and questioned why our rates weren't better. It's a great question - and one that deserved a thoughtful, thorough response. I am printing my response below to help everyone understand CD rates and how they factor into investment decisions.

Letter to the client:

I'm not surprised you found a better rate through a local bank. This issue - extremely low rates - is the toughest we face today. Even locally, there are days where one bank beats another. We aren't big users of bank CDs, but the challenge extends to bonds, bond funds, and money markets. It's another ramification of the recession and government's steps to fix it.

Banks that make FDIC-protected CD's available through (brokerage company) are trying to attract new "outside" deposits because their own local markets aren't soaking up the supply. Often, there are regional differences (as you've noted) and there will be times when either group outperforms the other. So, yes, you might do some better occasionally by "moving that money around" to the higher location.

These are some related issues we think about, though: Are bank CDs a good place for retirement money? CDs offer safety and stability that's appealing to clients. Yet, they only shine as investments during brief (often tumultuous) moments. The upsides are offset by a lack of liquidity and low returns. What looks like a good rate today may look dismal later as we wait for maturity.

How much "extra" can you make by shopping CDs? Is it worth the added effort? Everyone wants to get higher rates, but the actual dollars involved often aren't much. A half-percent difference in a $100,000 CD amounts to just $500 a year. I'm not knocking $500, but value also depends on safety, convenience, and other options. There may be better, easier, ways to earn that $500. And they may not be apparent right now, but one danger of locking in a CD is that it's not readily available if something better comes along.

I completely understand your points and I'm glad to help you move some more money down there if you want. My guess is that the rates you earn on the CD portion of your retirement portfolio will have modest impact on your future financial success. But, I want you to be comfortable with the money wherever it is. Whatever part that is up here, Jason and I will watch daily, and we will try to craft some lemonade from today's lemons. We'll not know how we did until we look back on these days several years from now. But, no one will give it as much attention or concern as me!