An Introduction to CD Laddering

Certificates of Deposit (CDs) have long been considered a popular investment option for conservative investors as well as those who are seeking a current income stream. CDs pay interest at their maturity rather than throughout the life of an investment as is in the case of many other fixed income investments. For investors seeking current income, one of the most widely used strategies is called CD laddering. Understanding how to leverage this technique will enable those investors seeking current income and long term preservation of capital to build a suitable portfolio.

What is CD Laddering?
A CD ladder by definition is establishing a portfolio of multiple CDs, with varying interest rates and maturity dates. When an investor establishes a CD ladder, they are seeking an income stream that is both consistent and ongoing.

For example, an investor who has $24,000 to invest into CDs may establish 12, $2,000 CDs that they will purchase over the next 12 months. After the 12 month, one CD will become mature each month with its original principal amount plus interest. At that time, the investor could choose to liquidate the entire CD, to take the interest and reinvest the principal into another 12 month CD or to allow the entire CD to roll over into a new CD if they did not need the current income presently.

Investors select when they would like the laddering to take place; whether it’s monthly, quarterly or semi-annually and then they establish both an investment pattern and a withdrawal pattern when leveraging CD laddering. Also, it is important to investors to choose the best CD rates, enabling them to receive the greatest income return on their investment when the CDs mature.

Why CD Laddering?

There are a variety of other investment benefits to CD laddering, including:

  • The ability to customize both the CD interest and cash distributions for when they are personally needed. Investors may select when they would like to have the CDs become mature, often selecting monthly or quarterly to generate regular income streams.
  • CDs are guaranteed by FDIC insurance in the event of a bank default, giving many investors peace of mind.
  • CD laddering works to assist investors to create greater CD rates than individually purchasing them without a long term strategy. By laddering, investors are able to dollar cost average their cash investments over time, taking the opportunity to have a variety of CD rates rather than a single rate with a single purchase.

Deciding Whether CD Laddering is for You
Many CD investors are seeking both preservation of capital and income from the interest on an ongoing basis. As with any investment, it is important to make sure that the risk tolerance and expected rate of return are in alignment with an investor’s personal goals. CD rates will fluctuate regularly, but are considered to be a safe investment and relatively simple to understand and to use within a portfolio. When creating a CD laddering strategy, it is advised to seek the advice of an investment professional.

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