Does a CD Ladder Still Make Sense?

A Certificate of Deposit (CD) ladder is a financial strategy that involves staggering the maturity dates of multiple Certificates of Deposit. This approach aims to balance liquidity with potentially higher interest rates, offering a predictable income stream and capital preservation. Evaluating its effectiveness in evolving economic conditions is important for your financial goals.

Understanding CD Ladders

A Certificate of Deposit (CD) is a savings account that holds a fixed amount of money for a specified period, earning interest. Unlike a standard savings account, CD funds are typically locked in for the chosen term, which can range from a few months to several years. This commitment allows financial institutions to offer a fixed interest rate for the entire duration.

A CD ladder builds upon this concept by dividing a larger sum of money into several CDs with staggered maturity dates. For example, an individual might invest in five CDs with terms of one, two, three, four, and five years. As each shorter-term CD matures, the funds can be reinvested into a new long-term CD at the end of the ladder, such as a new five-year CD.

This approach offers a balance between maintaining some access to funds and benefiting from the higher interest rates associated with longer-term CDs. With a portion of the investment maturing regularly, usually annually, the strategy provides periodic liquidity. It also allows for the reinvestment of maturing funds into new, longer-term CDs, effectively keeping the ladder going and potentially capturing higher rates if the interest rate environment improves.

Evaluating CD Ladders in Today’s Market

The attractiveness of a CD ladder is influenced by the prevailing interest rate environment. In a period of rising interest rates, maturing CDs can be reinvested at higher rates, allowing the investor to benefit from the upward trend. Conversely, in a falling rate environment, locking in rates with longer-term CDs can preserve a higher yield than new, lower-rate offerings. As of mid-2025, CD rates have generally seen a decline since late 2024, with some stability observed more recently.

Inflation also plays a significant role in the real return of fixed-rate investments like CDs. When inflation is high, the purchasing power of the fixed interest earned on a CD can diminish, eroding the real value of the investment. For instance, if a CD yields 4% but inflation is 5%, the real return is negative, meaning your money buys less than it did before.

Considering the opportunity cost is also important. While CDs offer a low-risk profile and predictable returns, alternative investment opportunities might offer higher potential returns, albeit with greater risk. The decision to lock funds into a CD ladder involves balancing stability and guaranteed returns against the potential for higher growth elsewhere. The assured return and federal deposit insurance of CDs differentiate them from more volatile investment vehicles.

Alternatives for Savings and Income

Several options exist for those seeking alternatives to CD ladders for savings and income generation, each with distinct characteristics regarding liquidity, interest rates, and risk. High-yield savings accounts (HYSAs) offer competitive interest rates, with some accounts providing annual percentage yields (APYs) in the range of 4% to 5%. These accounts provide immediate access to funds without penalties, making them highly liquid. However, their interest rates are variable and can fluctuate with market conditions.

Money market accounts (MMAs) share similarities with HYSAs, offering competitive variable interest rates, often ranging from 0.01% to over 4% APY. MMAs frequently include limited check-writing privileges and debit card access, providing more transactional flexibility than standard savings accounts. Like HYSAs, their rates are not fixed, meaning the income stream can change over time.

Short-term bond funds or individual bonds represent another alternative. These can potentially offer higher returns than CDs but come with different risk profiles. While individual bonds held to maturity return the principal, bond funds are subject to market fluctuations and interest rate risk. Unlike CDs, bonds and bond funds are generally not insured by the Federal Deposit Insurance Corporation (FDIC), exposing the principal to market volatility.

Constructing a CD Ladder

Building a CD ladder begins with determining the total amount of money you intend to allocate. This sum should be money you do not anticipate needing for immediate expenses, as early withdrawals from CDs typically incur penalties that can significantly reduce the interest earned.

Next, decide on the length of your ladder and the intervals between each CD’s maturity. A common approach is a five-year ladder with one-year intervals, meaning you purchase CDs maturing in one, two, three, four, and five years. Other options include shorter or longer ladders, with intervals that suit your desired liquidity.

Once the total investment and ladder structure are determined, divide your funds into equal portions for each rung. For instance, with a $50,000 investment and a five-year, one-year interval ladder, you would purchase five $10,000 CDs with staggered maturities. You can open these Certificates of Deposit with various financial institutions or through a single bank offering competitive rates across different terms.

As each CD matures, you can withdraw the funds or, to maintain the ladder, reinvest the principal and any accrued interest into a new CD at the longest available term. This effectively replaces the rung that just matured and ensures a CD comes due each year. The interest earned on CDs is generally considered ordinary income for tax purposes. All deposits in FDIC-insured banks are protected up to $250,000 per depositor, per FDIC-insured bank, and per ownership category, providing a layer of security for your principal.