With a significant wave of Certificate of Deposit (CD) maturities approaching, now is a critical time for savers to reassess their investment strategies. By October, approximately $950 billion in CDs will come due, marking just the beginning of what industry experts are calling a “maturity tsunami,” with a total of $2.5 trillion in CDs maturing over the next year.
What Happens When Your CD Matures?
When a CD matures, savers face several options: reinvest the funds into a new CD at the current interest rate, transfer the money to a higher-yield CD at another institution, or use the cash for other investments. However, those who locked in 12-month CDs last year may find that the prevailing rates are lower than their previous returns.
Financial experts warn of “reinvestment risk,” the challenge of finding equally attractive rates when a fixed-term investment expires. If you secured a high rate on a 12-month CD last year, current rates might be disappointing in comparison, which could leave you wishing you had chosen a longer-term option.
Choosing the Right CD Now
For savers looking to avoid stock market volatility while seeking a decent return, considering a longer-term CD might be beneficial. However, it’s crucial not to simply roll over your maturing CD into a new one at the same institution, as these accounts often offer lower rates compared to competitive options.
Industry professionals suggest being proactive rather than letting a CD automatically renew. Many major banks, which represent about 25% of the CD market, typically provide lower rates. Negotiating directly with your bank or exploring online banks and credit unions could yield better returns.
Opting for Longer-Term CDs
If you previously held a 12-month CD and are facing a lower rate environment, it may be advantageous to consider longer-term CDs. This strategy can provide a better rate, especially if you don’t need immediate access to the funds. While interest in longer-term CDs is increasing, many savers still prefer the 12-month option, indicating a potential opportunity to secure higher returns with extended maturities.
Exploring Alternative Investments
For those willing to explore other investment vehicles, options like multi-year guaranteed annuities (MYGAs) might offer higher rates than traditional CDs. While MYGAs can provide better returns, they come with higher penalties for early withdrawal and lack FDIC insurance.
Stocks, though potentially lucrative, may not be ideal for funds needed in the short term. Experts recommend aligning investment durations with financial goals—keeping short-term money in short-term investments and long-term money in longer-term options.
Adapting to Changing Needs
As retirement approaches, adjusting your investment strategy becomes increasingly important. For example, if retirement is imminent, it might be wise to lock in gains from investments and ensure liquidity. This approach ensures that funds are available when needed and mitigates the risk of market fluctuations.
With a substantial amount of CD maturities on the horizon, savers should carefully evaluate their options. Whether reinvesting in longer-term CDs, exploring alternative investments, or adjusting their strategy based on retirement goals, being proactive and informed will help navigate this maturity wave effectively.
