CD Laddering and Inflation Options

A CD ladder is a financial strategy in which you stagger the purchases of multiple CDs instead of putting a lump sum into one CD. This strategy allows easier access to your funds, including the new interest you’ve earned, as each CD matures.

The maturity dates play an important role in CD laddering because the longer the CD term length is, the higher the CD’s interest rate is. The higher the interest rate, the more money you’ll receive when the CD matures.

“Think of it as an actual ladder. What you’re doing with a ladder CD portfolio is staggering the purchases of your CDs. You’re buying CDs with different maturities. So instead of putting all your money in one CD, one interest rate and one time for maturity — you would divide the money and buy a three-month, six-month, nine-month and 24-month CD,” Barbara O’Neill, CFP®, CEO of Money Talk and author of Flipping a Switch, told RetireGuide.

After each CD matures, you can decide if you want to reinvest it or use the funds towards your retirement plan.

Let’s say Samantha has $10,000 she wants to invest into CDs. She could build a five-year ladder by opening five CDs with $2,000 each.

After each CD reaches its maturity, Samantha will get her initial deposit and the interest she has earned back. She can continue to grow her retirement nest egg by reinvesting each CD into a five-year term instead of pocketing her earnings.

By laddering CDs, you reap the benefits of having easier access to your funds with the shorter CDs and high interest rates from the longer-term CDs.

To start building your CD ladder, you can purchase your CDs from a bank, credit union or broker. You should also determine how much you want to invest into your CDs.

Most CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per bank. The National Credit Union Administration (NCUA) insures CDs from credit unions up to the same amount. While most brokered CDs are FDIC-insured, it isn’t always guaranteed.

To ensure each of your laddered CDs are 100% FDIC-insured, make sure the amount in each CD doesn’t go over the $250,000 limit. However, there is a way to get around the FDIC limit. You can ladder your CD at different banks, so you are protected by the $250,000 coverage limit at each bank.

For example, say Keisha has $400,000 she wants to invest in laddering CDs. If she buys four $100,000 CDs all at the same bank, then only $250,000 of her $400,000 is insured by the FDIC.

Instead, she can open two CDs at one bank with $200,000 and open the other two CDs with her remaining funds at a different bank. This way, each bank’s deposit amount doesn’t surpass the $250,000 limit, and all of Keisha’s money is protected.

Once your CDs are purchased methodically — your CD ladder is built. However, you shouldn’t just purchase your CDs and leave them be. You should track your earnings and keep up with each CD’s maturity date.

There isn’t one best method to laddering CDs. There are different strategies to consider, such as the long-term CD ladder, mini-CD ladder and uneven split. The strategy that will suit you best varies depending on how much you want to invest.

If you have a small amount of savings to invest, then you may want to consider a mini-CD ladder and other retirement investment opportunities. If you have millions of dollars you want to grow, a long-term CD ladder and stocks could benefit your retirement plan.

“For example, if you want to preserve your wealth and supplement your retirement income with an extra $50,000 a year, ignoring taxes, you could build a five-year CD ladder that is yielding 4% in interest. This would require $1.25 million to invest in the CDs. You could have enough money to accomplish this, but you shouldn’t tie up your entire nest egg in CDs either.” — Cameron Valadez, CFP®, CPFA, AWMA®, Co-Founder of Planable Wealth.

A breakdown of the strategies below can help you determine which CD ladder method fits your needs.

With a long-term CD ladder, you’re in for the long haul. The strategy is for those who won’t need to access their funds for years to come. Laddering jumbo CDs could work best for this strategy, since you’d have a large deposit with a higher-than-average interest rate.

Long-term CD ladders are staggered in year increments. After each CD reaches its maturity date, they’re typically reinvested for another five years, and then auto renewed.

Mini CD ladders present the option for shorter term CDs, which are typically a few months long each. With this option, you could purchase a three-month, six-month, nine-month and one-year CD. The idea is the same as a long-term CD ladder, but you’ll be able to access your money in quicker intervals.

However, keep in mind that interest rates for shorter-term CDs are much lower. This can be misleading because some issuers will present a six-month CD with a 3% annual interest rate, but since the interest rate is annual and your CD is only six-months, you’d actually only be getting a 1.5% interest rate.

Uneven splits mean placing different amounts of money into different CDs to maximize growth potential. But you may want to consider hiring a financial planner to help you determine the amounts to pair with each CD’s interest rate.

If you can, secure a considerable chunk of your money into a long-term CD with a high interest rate. Since rates fluctuate regularly, you’ll benefit for years to come if you can lock in a lump sum at a high interest rate.

The main benefits of laddering CDs are the security that CDs provide and increased liquidity.

“Laddering CDs can be a great way to reduce interest rate risk and maintain a consistent cash flow in retirement,” Valadez told RetireGuide.

The biggest drawback is juggling multiple CDs. If you miss a maturity date, your CD could auto invest at a lower rate. You’ll need to keep track of all your CDs and compare interest rates at different banks before reinvesting your funds. While this can be manageable on your own, you can also consider hiring a financial advisor to oversee your CDs performance.

To maximize your CD ladder, consider reinvesting your money into another CD after your original CD reaches maturity. Remember to compare interest rates before reinvesting your CD, since the interest rates have likely changed. Issuers may also offer promotional CD rates that offer a higher interest rate for a limited time.

O’Neill offered a tip on the best time to invest in CDs. “As each CD matures, you take your proceeds and reinvest. With the ladder, you’re supposed to reinvest your money at the longest time intervals so you’re always maintaining the same sequence of maturity dates over time. It’s a good strategy since you’re hedging your bets.”

While CDs offer safe, guaranteed returns, the interest rate still may not keep up with inflation. For example, as of April 3, 2023, a one-year CD from Ally bank offers a 4.50% interest rate. Ally bank’s rate is high compared to some competitors, but it still doesn’t keep up with inflation. In 2023, inflation is at 6.4%, according to the U.S. Inflation Calculator.

If you want your investments to have a better chance of keeping up with inflation, you’ll have to consider higher risk options with chances of higher return. This also doesn’t mean you shouldn’t consider CDs at all during high inflation. Instead, you should diversify your portfolio with a mix of safe and riskier investments.