For 20 years H.Craig Rappaport has been helping individuals with retirement income planning. The author of Live Long Live Rich—Creating Your Retirement Paycheck, Rappaport has appeared in the Wall Street Journal, Fox News, CNN Headline News, and The Dow Jones News Service, among other news outlets. He can be heard daily in the Northeast on KYW News Radio 1060 AM. 

H. Craig Rappaport--

Well, perhaps not new but for many unfamiliar. There are CD’s that are available that enable investors to capture higher interest rates than just buying a plain vanilla CD and at a time when rates are down, these structures can prove to be a best of breed when it comes to income and safety.

C.D.'s are time deposits, i.e. you agree to put your funds on deposit with a bank for a stated period of time, during which your funds earn interest at an agreed upon rate. In general, the longer you are willing to leave your money in a C.D., the higher the rate of interest you will receive.

C.D.’s purchased directly from banks are secured by FDIC insurance in amounts up to $100,000 per investor, 250,000 for retirement plans. They typically pay a stated interest rate until maturity. An investor wishing to withdrawal the deposit before maturity will usually be subject to a penalty.

Many securities firms also offer C.D.’s in the form of brokered C.D.’s. They are similar to C.D. s issued directly by banks, in that they carry FDIC insurance of $100,000 per investor and are available in a variety of maturities. They differ because they can be bought and sold prior to maturity which makes them more liquid. The price will fluctuate and could be more or less than what you paid or the maturity value.

Another benefit to brokered C.D.’s is that they usually include a “survivor’s option” which is very important to consider. Although restrictions on this provision may exist, it usually provides for redemption of the C.D. at the maturity value upon the death of the owner, even if this happens well before maturity. This can be an important estate planning tool especially for an older individual who wishes to capture the higher rates associated with longer term C.D.’s but not tie up the money for his/her heirs in their estate. Most of my older clients love this structure and I do too.

Step Up C.D.’s

Step-up CDs feature interest rates that increase or step up to a pre-determined level on a specific time schedule as they approach maturity. The interest rate on these CDs is usually fixed for a period of time, which is followed by a step up to another fixed rate. These steps may occur more than once before a CD reaches maturity.

Let’s look at an example:

Consider a 10 year CD. The first two years it pays a 4 percent interest rate. The next two a five percent interest rate, the next two a six percent interest rate and so on.

Years 1 and 2              4%

Years 3 and 4              5%

Years 5 and 6              6%

Years 7 and 8              7%

Years 9 and 10            8%

This structure usually pays a higher rate that on a short term security and steps up at a moderate rate as the CD moves towards maturity. The downside is that most of these issues are callable on the date of the first step-up. At that point if the bank does not want to pay the higher stepped-up rate it can redeem the bond. It still remains however an attractive structure for those looking for income.

As you can see, CD’s have various structures that offer a higher income stream while still retaining the FDIC insurance and the safety factor many investors seek in their investments. The next time you look to invest, check out the rates on Step-Up and Brokered CD’s. The rates are usually competitive and the safety factor many seek.

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Reuters!