Many investors planning for retirement want the guaranteed returns of a certificate of deposit (CD) but don’t want to lose access to their funds for long periods. A CD ladder fits these needs well, providing consistent access to your money while locking in higher interest rates. But it’s not the only option offering this balance of growth and liquidity. 

Read on to explore how CD laddering works, how to implement this strategy, and alternatives that offer similar benefits. 

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What’s a CD ladder?

A CD is a contract between you and a financial institution, and a CD ladder is a strategy that uses multiple certificates of deposits with staggered maturity dates. With bank CDs, the FDIC or NCUA guarantees the account, making your contribution risk-free up to the guaranteed amount. CDs differ from a savings account because you allow the financial institution to hold your money until maturity. 

There are two significant advantages to a CD ladder over a single long-term CD:

1. Short-term access to your funds: With a CD ladder, you place at least part of your money in CDs with short-term maturity dates. That gives you access to some of your money without paying penalties. Penalties will still occur if you withdraw before the maturity date on the shorter term CDs.
2. Reduced interest rate risk: If rates increase after you purchase your initial set of staggered CDs, you can reallocate the money as it becomes available. 

CD ladders vs. single long-term CDs

If you were to purchase a single CD, you might lock in high returns over the lifetime of the contract, but you lose access to those funds until the maturity date — unless you’re willing to pay the taxes and early withdrawal penalty. A CD ladder allows you to recover a portion of your overall contribution at different intervals. 

CD ladders vs. savings accounts

A savings account gives you free access to your money, but the interest rate is usually far lower than what you typically earn with a CD. That’s because for CDs, the financial institution will pay you a premium to hold your money for extended periods. 

How do CD ladders work? An example

Let’s say you want to contribute $10,000 to CDs. If you place all your funds into a five-year CD yielding 5%, you can’t touch any portion of your money until the end without paying a penalty and facing tax consequences. If CD rates increase, you miss the opportunity to get a better return on your contribution.

$10,000 in one CD

Imagine you place your entire contribution in a five-year CD offering 5% compounded annually and you don’t access your money until maturity. At the end of the fifth year, your CD will be worth $12,763.

Alternatively, you could divide the $10,000 into five separate CD accounts with different maturity dates:

• $2,000 in a 1-year CD at 4%
• $2,000 in a 2-year CD at 4.25%
• $2,000 in a 3-year CD at 4.50%
• $2,000 in a 4-year CD at 4.75%
• $2,000 in a 5-year CD at 5%

With this approach, you can access $2,000 of your contribution every year, withdrawing penalty-free or reallocating it to continue building rungs on the ladder. If you don't need the $2,000 at the end of the first year, you can confidently place it into a five-year CD since you know that another $2,000 will become available after the CD reaches maturity at the end of year two. 

$10,000 CD return rate in one year

Note that the rates are different for each CD account in the ladder. As a general rule, a long-term CD will pay a better rate than a short-term CD. At the end of the first year, the $10,000 CD would have earned $500 in interest ($10,000 x 5%). At the end of five years, the CD will earn $12,763.

You can calculate the earnings of the CD ladder by totaling the individual returns:

• 1-year CD: $80
• 2-year CD: $85
• 3-year CD: $90
• 4-year CD: $95
• 5-year CD: $100

The total yield after one year is $450. At the end of five years, without reinvestment, the CD ladder will earn $12,463 — $300 less than the single CD. 

This may seem like a deterrent, but five years can be a relatively long time frame when it comes to a financial product . The CD ladder allows you to examine your contribution strategy at the end of each year and decide whether you should reallocate your funds, explore other options (like bonds, annuities, or index funds), or wait until interest rates are more favorable. 

Benefits of laddering CDs

If you have a long-term financial strategy for retirement, you might be tempted to place all of your savings into a five-year or ten-year CD instead of employing a CD ladder strategy. Here are a few reasons you may want to reconsider.

Access to funds at regular intervals

Life changes rapidly, and many people are uncomfortable with losing access to their money over long periods. With a CD ladder, you can always withdraw — you can structure your CD ladder with quarterly, semi-annual, or annual maturity dates, and then withdraw when they come due.

Higher returns when compared to a savings account

Financial institutions expect to pay a higher rate for long-term access to your money. CDs typically have better yields than savings accounts — sometimes, two or three times as high. The factors that affect the CD rates include the size of the contribution, the maturity period, and the market at the time of contribution. 

Reduced risk during fluctuating interest rates

If you’re keeping your money on the sidelines waiting for rates to rise, your money might lose value due to inflation. However, if you place $50,000 into a five-year CD yielding 4% and the same product offers 5.25% the next year, you’d still be locked in at the lower CD rate for four years. 

On the other hand, if you contributed your $50,000 across CDs with staggered maturity dates a year apart, you can reallocate the one-year CD when it matures. If rates remain high, you can repeat this action every year. 

Note, we cannot predict the interest rate environment, and this is known as interest rate risk. 

How to build a CD ladder: 4 steps

Here’s a four-step guide on structuring a CD ladder that may be right for you — if needed, reach out to your financial advisor for further guidance relevant to their offering. 

1. Consider your personal preferences

Decide your comfort level when it comes to maturity dates. For example, many people stagger their CDs with annual maturity dates, but you may be more comfortable with your CDs maturing every six months. Just be aware that the shorter the term, the lower your return tends to be.

2. Divide your contributions into equal portions

Most people choose to portion their contributions equally. In our previous example, we divided $10,000 into five equal portions. However, some strategies call for depositing different amounts into each CD account.

3. Open CDs with staggered terms

Identify CD accounts with different maturity dates by speaking to your financial institution. The dates should follow a cadence — three months apart, six months apart, every year, etc.

4. Reallocate matured funds into new long-term CDs

When a CD matures, you can reallocate all or part of the funds to continue the ladder or withdraw the money without penalty. Consider the scenario below:

• You have $50,000 to contribute and determine that you’re comfortable with annual maturity dates.
• Your strategy calls for allocating $10,000 in five staggered CDs. 
• On the same day, you open five CD accounts with maturity dates of one to five years. 
• At the end of the first year, you reallocate the money from your one-year CD into a new five-year CD, maintaining the five-year ladder. 

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Alternatives to standard CD ladders

There are other savings options that can act as an alternative to standard CD ladders. Here are a few examples.

Mini CD ladder

This is a CD ladder for those with short-term goals. Instead of staggering the CDs across long-term maturity dates (or longer-term maturity dates), a mini CD ladder uses shorter intervals. Three-month, six-month, nine-month, and 12-month maturities are common options for a mini CD ladder. 

Bullet CD ladder

With a bullet CD ladder, all contributions mature on the same date, and you can buy in at different intervals or purchase multiple CDs simultaneously. This contribution strategy may appeal to you if you’re saving for a specific target, like a home purchase or college tuition.

High-yield savings account

If you’re uncomfortable locking your money into a CD ladder, you could try a high-yield savings account. The interest rates are typically lower than CD rates, but you have unrestricted access to your funds. 

CD ladders vs. annuity ladders

An annuity ladder works similarly to a CD ladder, but instead of using staggered CDs, it employs annuities with staggered maturity dates. Many savers prefer annuities for several reasons:

• Rate of return: Annuities usually offer higher interest rates — often guaranteed.
• Lifetime income: When annuities mature, depending on the contract, individuals may reallocate the funds, take a lump sum settlement, or accept periodic payments. Some annuities offer lifetime income riders that pay a stipend until death. 
• Retirement planning: With CDs, it’s possible to outlive your savings. However, you can select annuities that provide lifetime income no matter how long you live. 

This communication / article is for informational / educational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes.

Shannon Reynolds, is an annuity specialist at Gainbridge^®

Individual licensed agents associated with Gainbridge^® are available to provide customer assistance related to the application process and provide factual information on the annuity contracts, but in keeping with the self-directed nature of the Gainbridge^® Digital Platform, the Gainbridge^® agents will not provide insurance or investment advice.