Articles The Strategy of Certificate Laddering

January 13, 2015

Whether you're just starting to save for the future or nearing retirement, certificates may play an important role in your retirement portfolio. A strategy called laddering can help you manage the potential risks and rewards.

The Basics

Certificates are savings instruments with unique features and benefits:

Safety—Certificates in federally insured institutions like Navy Federal are protected from loss for up to $250,000 per depositor, per legal category. To state it simply, your money will be there when you need it.

Predictability—You generally know how much interest you'll earn on a certificate if you hold it to maturity.

Affordability—Certificates usually come with low or no fees. Navy Federal has no fees on certificates.

Early withdrawal penalties—You may be charged a penalty by the financial institution if you withdraw funds from the certificate before the term is up. Navy Federal's penalty structure varies based upon the term of the certificate, but for all penalty withdrawals, you're only penalized on the interest earned on the funds you withdraw. For example, if you have a $5,000 certificate and withdraw $200, you'll only be penalized for the interest earned on the $200. In addition, as with most retirement plan investments, premature withdrawals may be subject to an IRS penalty.1

Security—In exchange for safety, certificates typically don't offer the potential for higher returns that riskier investments such as stocks do. Usually, the longer the certificate term, the higher the interest rate paid.

Certificates may be offered as an option in employer-sponsored retirement plans, such as 401(k)s and Thrift Savings Plans (TSPs), and they're always an option for individual retirement accounts (IRAs). Because of the security of certificates, the return on your investments will be lower. You need to keep this in mind when choosing your diversification and risk tolerance in creating your retirement blend.

So how does laddering work?

With laddering, you invest in a number of certificates with varying maturities (terms), rather than purchasing one certificate for a longer term.

For example, suppose you want to put $20,000 of your retirement money into safe investments. You notice that a five-year certificate offers a 2.10% APY.2 But what happens if interest rates rise over the next several years?3 You've locked into a rate for five years.

Instead, you could consider buying five $4,000 certificates with one-, two-, three-, four- and five-year terms. Generally, rates will be lower on the shorter-term certificates, but you're trading a little return for a lot more flexibility. When the one-year term is up, you roll it into a new five-year certificate, presumably at a higher interest rate. When the two-year term is up, you roll that one into a new five-year certificate, and so on. Eventually, you'll be capturing the higher rates each year when a certificate matures. You can choose shorter or longer “rungs” for your ladder, depending on your needs and the certificate terms offered. See the certificates currently available at Navy Federal and check out how laddering could work for you with our calculator.

1Premature withdrawals from employer-sponsored retirement accounts (before age 59½, or age 55 if separating from service) and IRAs (before age 59½) are subject to a 10 percent IRS penalty. Some exceptions apply.
2APY=Annual Percentage Yield. Rate is for illustration only and is not intended to represent the rate of return on any specific certificate. Your returns will vary.
3Source: The Wall Street Journal, wsj.com, June 18, 2014.

This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.


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Navy Federal Credit Union is federally insured by the National Credit Union Administration.

Nondeposit investment and insurance products are offered through Navy Federal Financial Group, LLC, (NFFG), and through its subsidiaries, Navy Federal Brokerage Services, LLC (NFBS), a member of FINRA/SIPC, and Navy Federal Asset Management, LLC (NFAM), an SEC Registered Investment Advisory Firm. These products are not NCUA/NCUSIF or otherwise federally insured, are not guaranteed or obligations of the credit union, are not offered, recommended, sanctioned, or encouraged by the Federal Government, and may involve investment risk, including possible loss of principal. Products may be offered by an employee who serves both functions of accepting member deposits and selling nondeposit investment and insurance products. 1-877-221-8108.

Investors should carefully consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing. This and other information about municipal fund securities is available in the issuer's official statement which can be obtained directly from the issuer, or if distributed through a broker dealer, may be obtained from a financial adviser, and should be read carefully before investing.

An investor should consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.

If a municipal fund security describes one or more of their investment options as having the characteristics of a money market fund, it is important to know that an investment in the security is not insured or guaranteed by the FDIC or any other government agency (unless such guarantee is specifically provided by or on behalf of such issuer) and, if the security is held out as maintaining a stable net asset value, that although the issuer seeks to preserve the value of the investment at $1.00 per share or such other applicable fixed share price, it is possible to lose money by investing in the security.