Create a strategy for maturing CDs

Published 1:58 pm Friday, March 6, 2009

Some things, like fine wines, get better with age.

But a certificate of deposit (CD) is not one of them.

If you have a maturing CD, you need to decide what to do with it—and the earlier you make this decision, the better off you’ll be. So if you’ve got one or more CDs coming due in the next few months, start planning now.

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Of course, if you had a specific goal for a maturing CD—such as a college tuition payment—your decision has already been made. But if you’ve purchased a CD for another reason, you’ll have to choose whether to renew it or invest the proceeds elsewhere.

If you bought the CD for the income it provides, you may want to renew it. If prevailing interest rates are the same, or higher, than the rate on your maturing CD, you can purchase a new CD without worrying about reducing your income stream.

But if rates have fallen, you may have a dilemma: How can you reproduce the income you received from your now-matured CD?

Here are a fewalternatives to consider:

• Purchase a bond that pays a higher rate. Instead of buying another CD, you could possibly purchase another fixed-income instrument, such as a bond, that pays a higher interest rate. Be aware, though, that if you find a bond that pays a higher rate, you may be taking on more risk, so make sure any bond you purchase is considered “investment grade quality” by the independent rating agencies.

• Buy a longer-term CD. Generally speaking, you can get a higher interest rate when you purchase a longer-term CD. Your money will be locked up for a longer period of time, but it will help provide you with a more stable income stream over time.

• Create a fixed-income “ladder.” To combat interest-rate concerns, you might want to build a fixed-income “ladder” by buying several CDs or bonds with varying maturities—short-term, intermediate-term and long-term. When market rates are low, you’ll still have your longer-term vehicles earning higher interest rates. And when market interest rates are high, you can reinvest the maturing short-term bonds and CDs at the higher rates.

Thus far, we’ve talked about replacing a maturing CD to protect your income stream. But if you bought a CD for another purpose—such as removing some of your money from a volatile stock market—then the CD’s maturity gives you a chance to re-evaluate your investment strategy.

As you know, 2008 was a tough year for the stock market, so, at the time, diverting some of your money to a CD might have seemed smart. But history tells us that even the worst bear markets don’t last forever, and that the biggest gains in a rally often occur at the early stages.

Consequently, you may want to take this opportunity to “rebalance” your portfolio, and, if appropriate for your individual situation, look for ways to invest the proceeds of your CD into quality equities or other securities. By planning ahead, you won’t feel rushed to make a hasty decision when your CD matures or, even worse, be tempted to spend the money and have little to show for it. Your maturing CD can help you achieve your financial goals—if you give it a chance.