Author Topic: How do you use CDs in your FIRE or POST-FIRE strategy? Which banks?  (Read 2352 times)

aperture

  • Bristles
  • ***
  • Posts: 472
  • Location: Colorado
In my last 8 months of work, I am considering funding a 3 year CD (certificate of deposit) ladder for cash that would otherwise go into the mortgage.  My goal would be to have zero risk and a small return on money that would otherwise be held as cash.  It got me wondering whether others are using CDs, and if so how? Also, what banks?  TIA, aperture.

CD ladder: https://www.ally.com/bank/cd-ladder/step-by-step.html#local=step-by-step

Clean Shaven

  • Pencil Stache
  • ****
  • Posts: 821
  • Location: Wild Wild West
Re: How do you use CDs in your FIRE or POST-FIRE strategy? Which banks?
« Reply #1 on: October 25, 2017, 08:09:18 AM »
Posting to follow, am interested in the positions people have on this.

We only have about $35K in cash, almost all in CDs at about 2% "interest. Used to have more, but decided that putting it all into the taxable account made more sense: it's relatively a drop in the bucket compared to the entirety of our investments, so why not put it to work like everything else?

DTaggart

  • Bristles
  • ***
  • Posts: 264
Re: How do you use CDs in your FIRE or POST-FIRE strategy? Which banks?
« Reply #2 on: October 25, 2017, 08:36:43 AM »
I'm FIREing early next year so I decided I wanted to have ~2 years minimal expenses in cash due to the high stock market valuations. If stocks tank, I'll spend from the cash and not have to sell stocks when they're down. Maybe not ideal for long term growth but I sleep soundly with this set-up, and I am confident I will not panic in the event of a downturn.

I have about 1 year's worth of this money in 4 different 12-month CDs, one set to turnover every 3 months. They'll just keep auto-renewing if everything is ok, but I figure if things get hinky and I feel the need to start using the cash instead of selling stocks, I'll never have to wait very long for one of the CDs to mature, thus relieving me of worrying about cashing it out early and losing interest. I have other cash in various sinking fund accounts I can always tap if I need something ASAP.

The second year's worth of cash is split between a 5 year CD and a Money Market in one of our IRAs. I chose the 5 year CD just to maximize the interest rate when things are good. If I really need the money I'll just have to sacrifice a few months of interest to cash out the CD. The IRA cash isn't a lot, but I just did it so I'd have the full 2 years worth of spending in cash.

I use Ally Bank for all my CDs because they have good rates and are easy to use. I've been with them for several years now (have a savings account there too) and have been quite happy with the rates and their online services.

Honestly I think my system is probably way more convoluted than necessary, and I know I am not maximizing returns, but my primary goal with this money is to help me feel secure through an eventual downturn and it works for me. If I was completely rational I'd probably just put it all in a 5-year CD to get the maximum interest rate and accept the small risk of losing a few months interest should I need to cash it out early.

ZiziPB

  • Magnum Stache
  • ******
  • Posts: 3327
  • Location: The Other Side
Re: How do you use CDs in your FIRE or POST-FIRE strategy? Which banks?
« Reply #3 on: October 25, 2017, 09:37:36 AM »
I currently have one CD and a savings account at Ally of about $27K total which constitutes my emergency fund.  The CD is set to mature around the time I will FIRE next year.  Not sure yet what I'm going to do going forward.  I also have $40K in I Bonds and will put in another $10K there before I FIRE. 

foghorn

  • 5 O'Clock Shadow
  • *
  • Posts: 91
Re: How do you use CDs in your FIRE or POST-FIRE strategy? Which banks?
« Reply #4 on: October 25, 2017, 09:57:28 AM »
Great question and I am glad to see I am not the only one using CD's to help manage cash.

For clarity sake, I am not quite sure I am FIRE yet as I was laid off from my job a few months ago and now giving FIRE much more thought.

With that said, I have 2 CD ladders: 

 - A shorter term one (9 months) with three CD's that turn over one CD every three months. 
 - A second CD ladder is longer term (3 years) with three CD's that turn over one CD every year. 

I initially set these up when I was working as a better way to utilize some of my cash - rather than have it sit at the bank earning almost nothing. 

I utilize the CD option at Fidelity as they offer CD's from many different banks.  I can watch all the CD's from one place and is easier to diversify across banks so I do not run into FDIC insurance limits at one bank.

EngineeringFI

  • 5 O'Clock Shadow
  • *
  • Posts: 96
  • Age: 34
Re: How do you use CDs in your FIRE or POST-FIRE strategy? Which banks?
« Reply #5 on: October 30, 2017, 07:34:57 PM »
My IPS calls for the fixed income portion of my portfolio (bonds/CDs/cash) to be the greater of (a) 20% of the portfolio or (b) 5 years of expenses. The rest is in stocks - I don't have a separate emergency or cash fund. Since my portfolio is about 30x expenses, I have about 6 years in bonds/CDs/cash. I started building an I bond ladder a couple years ago and will continue to do that as I'm still working and like the tax deferral aspect. Once I reach our I bond purchase limit for the year ($30k), new savings go to CDs.

I'm not very excited about getting 2%, which is why we decided to reduce our fixed income allocation and pay off our 4.6% mortgage.

Can I ask where you are getting 2% on a CD? It seems like the CD rates I always see are lower; comparable to an online savings account (1.2%) and to me the lack of liquidity in a CD makes it less attractive than a savings account when both earn roughly the same interest rate.

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1714
  • One Does Not Simply Work Into Mordor
Re: How do you use CDs in your FIRE or POST-FIRE strategy? Which banks?
« Reply #6 on: October 30, 2017, 08:40:19 PM »
I don't right now, but when I am using the money to live I think I would have a rolling 3-5 year ladder with each year having 1-3% of the value of the rest of my investments at the time I make it, to help even out the ups and downs. I would hold each  rung to maturity. To keep it simple(r) I'd only have one CD per year. One option is to go chase the highest FDIC yield, and I wouldn't have to deal with more than five financial companies at a time to make the ladder. But, that might be too many things to deal with. It might be better to give up 0.1% yield and get the highest FDIC non-callable brokered CD at Vanguard. I won't have to do this for several years yet so I don't know what I would actually do.

Can I ask where you are getting 2% on a CD? It seems like the CD rates I always see are lower; comparable to an online savings account (1.2%) and to me the lack of liquidity in a CD makes it less attractive than a savings account when both earn roughly the same interest rate.
Here is one place. https://www.depositaccounts.com/cd/3-year-cd-rates.html

Otherwise Vanguard brokerage CD's, but there can be some caveats there.