Frau went to the local bank to roll her IRA into a cd ladder. Nothing complex. But it seemed to tizzy them AND they made a mistake. Arghh!
For the uninitiated, a CD LADDER is nothing more than the name given to an investment program to maximize your return on a fixed income portfolio, while minimizing your exposure to interest rate fluctuations. It attempts to always have money available for other options, get the “best” rate available, and minimize seasonal fluctuation in rates.
A CD LADDER takes a portfolio of say 40k$ and divides it up into 20 units. The idea is to have five different terms of 1, 2, 3, 4, and 5 years during each of the four quarterly periods.
So, 40k$ divided by 20 gives a unit size of 2k$. One buys: a 12 month cd for 1 unit; a 24 month cd for 1 unit; a 36 month cd for 1 unit: a 48 month cd for one unit; and a 60 month cd for one unit.
Then, to prepare for buys in future quarters, one buys: a 90 day cd for 5 units; a 180 day cd for 5 units; and 270 day cd for 5 units. When each of these matures, you take the proceeds and repeat the annual cd strategy.
At the end of a year, you have your 20 cds all setup. Then, at each individual cd’s maturity, you buy the 5 year cd.
Mission accomplished: 5% of your portfolio is available every quarter AND you are always getting the five year rate. It’s not the roller coaster stock market, but it is “widows and orphans” thinking. Hard to cheat anyone of their life savings when they can only get 5% at a time.
Easy to understand?
Not for our local bank.
Their registered representative obviously has NOT only never heard of a ladder, but can’t implemented it. Argh!
Explained it twice, with pictures when we went to have them move the money custodian 2 custodian transfer. (That only took two weeks! Right, in today’s eft climate. Can you say “dragging feet”?)
So yesterday, Frau went and they spent two hours doing it and, “upon further review” I found a mistake. Argh!
Sigh, not very inspiring.
Questions?
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On a technical note, when the total portfolio exceeds the FDIC insurance, one should begin to split the account into two different banks. That can be easily done by a partial custodian to custodian transfer of a maturing cd. So for example, pick one quarter, say Second Quarter, and each year transfer that rolling over cd from Bank#1 to Bank#2. Easy, right? Nah, everyone looks at you like you have two heads. One could do it by Year, in that you have Year 2008 at Bank#2 and all other Years at Bank#1, but I like the Quarter approach. Can’t tell you why, but it appeals to me.
You can split into a third and fourth bank should the size warrent. If you need more than 4 banks (i.e., 400k$), then you probably need a better strategy (i.e., a brokerage account with a fixed income specialist). For the little guys, self-designed ladders are fine imho.
Reinke Faces Life 