After a relentless series of 10 interest rate hikes within a span of 15 months, the Federal Reserve’s Open Market Committee is poised to pause or potentially halt the upward trajectory as inflation shows signs of subsiding. As inflation gradually inches closer to the Fed’s target average of 2%, the inevitable outcome looms: a subsequent decline in interest rates
That means that the relatively good times bank savers have been experiencing may already have topped out. A look at average rates for certificates of deposit gives a glimpse of how bankers are seeing the future. According to recent national surveys from Bankrate.com, the average rate on a 1-year CD was yielding 1.68% while 5-year certificates offered yields 1.23%. With short-term rates starting to equal or even trend higher than long-term rates, it’s a signal that bankers are betting on long-term rates declining.
Right now, however, savers can keep their good times rolling by locking in rates on long-term CDs. According to the SmartAsset CD comparison tool, savers can snag a rate of 4.4% on two-year CDs, producing an annual percentage yield (APY) of 4.5%. That’s only slightly below the 12-month rate of 4.88% (5.1% APY).
For help making the right CD choices for yourself, consider working with a financial advisor.
How to Get the Most Out of CD Investments
At TIAA bank, savers can find a 12-month rate producing 4.75% APY but sacrifice just a bit of yield to lock in a 5-year certificate at 3.95% APY. The online Bread Savings (formerly Comenity Direct) offers a similarly yielding 4.25% APY 5-year CD, with the yield trimmed just a bit from the 5.2% APY produced by the banks’ 12-month certificate.
It can seem tempting to grab a higher-rate, shorter-term certificate right now, but the question is where savers will be able to take their money when it comes time to roll over their cash. When a 12-month CD paying 5% now expires a year from today, the only option for reinvesting could be CDs with yields lower than today’s long-term rates. In the year leading up to the pandemic, the average 5-year CD rate was a meager 1.1%.
When it comes to comparing CDs, rates can be listed as the stated interest and as the annual percentage rate (APY), which calculates the compounded yield of the rate after 12 months. In addition to the stated rate, the APY calculation also is based on how frequently interest is compounded. If a CD compounds annually, the stated rate will be the same as its APY. If the APY is higher than the stated rate, compounding takes place more than once a year.
Since 2020, long-term CD rates have gone from averaging 1.14% for 5-year certificates to as little as 0.26% – close to a record low – at the end of 2021 before climbing back up to 1.17% in February. The highest rates recorded in the past several decades occurred during the 1980s, when inflation pushed rates well into double-digits, with six-month CD rates hitting a state rate of 17.98% in August 1981.
The Bottom Line
Certificates of deposit, along with other insured bank products such as savings accounts or bank money market accounts, are good places to safely deposit cash. In most cases, however, those types of accounts won’t provide the growth needed to build a retirement fund that isn’t drained by inflation or produce the earnings required to support a potential 30-year retirement.
- A financial advisor can help you put together a strong investment strategy. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Fidelity recommends that you have 10 times your annual income saved for retirement by age 67. To find out if you’re on track, try SmartAsset’s retirement calculator. This free tool will estimate how much you’ll have when the time comes to retire.
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