Build A CD Step Stool, Not A CD Ladder In A Flattening Yield Curve Environment

When you're young, you spend time accumulating wealth. When you're old, you should spend time protecting wealth. Building a CD step stool to protect a portion of your wealth is a smart way to go. A CD step stool is when you buy CDs or Treasury bonds with only up to two-year durations.

Multi-millionaires go broke all the time because they exposed themselves to too much risk and temptation. Think about all those pro athletes who would still be rich if they had just kept all their money in a bank.

You just never know what type of risk is lurking out there. Nobody would have guessed a coronavirus pandemic would have shutdown the world economy for over three months in 2020.

History OF CD Rates

From 2010 through 2021, money market and CD rates were particularly horrible. Retirees depending on fixed income were forced to take more risk. Thankfully, such risk paid off when the S&P 500 and the real estate market across various parts of the country took off.

Further, many of us were able to refinance our mortgages at all-time low interest rates. Credible is my favorite lending marketplace if you're looking to check rates. They get pre-qualified lenders to compete for your business for free in under three minutes.

Then in 2022, inflation figures were high, the Federal Reserve finally started raising rates, and we saw an upward trend in the 10-year bond yield. As a result, we also started seeing significantly better CD and high-yield savings rates at direct, online-only banks like CIT Bank.

Where the markets and rates will be in 6-months, 1 year, or 5 years, however, is anybody's guess. Let's say we see a flattening yield curve again. What's the best course of action? Financially savvy individuals should optimize their cash and build a CD Step Stool and NOT a CD ladder. The first step is a one-year CD and the second step is a two-year CD at most.

With each expiration of the CD, the strategy is to re-invest the proceeds in another 12 – 24 month CD. Only if the yield curve steepens should you consider building a CD ladder where you're investing in three, four, five, seven, and 10 year CDs.

Let's look at various financial scenarios where building a CD Step Stool may or may not make sense. 

Building A CD Step Stool

2019 Yield Curve vs. 2018 Yield Curve
2019 Yield Curve vs. 2018 Yield Curve

If you are up over 200% on the S&P 500 since 2010 and your real estate equity is up even more due to leverage, your net worth has likely way more than doubled since 2010 when you add savings to the mix. Therefore, at some point, you should start thinking about taking risk off the table when risk-free returns are rising.

With A CD Step Stool, you get the best bang for your CD buck, while never putting yourself in real danger of a liquidity crunch since you're never more than 12 months away from accessing your cash. Further, you can always utilize the monthly CD interest payment or break your short-term CD if things get really bad by giving up usually half the CD duration's worth of interest.

Example #1: Financially Independent Couple In Their 60s

Liquid Net Worth In 2010: $3,000,000

Liquid Net Worth In 2022: $10,000,000

Household Gross Income: $50,000 from part-time consulting and social security

Household Expense: $200,000

Potential Risk-Free Gross Income: $250,000 based off a 2.5% on their $10,000,000

Total Household Gross Income: $300,000

Total Household Net Income (25% effective tax rate): $225,000

Net Worth Analysis

Why would this 60-year old couple risk the majority of their liquid net worth in risk assets that could easily result in a capital loss? Instead, they would probably best be served to invest 90% of their liquid net worth in a risk-free CD yielding 2.5% and speculate on the remaining 10%.

The remaining 10% is still $1,000,000, which could conceivably earn or lose them hundreds of thousands of dollars a year. But even if they lose 100% of this $1,000,000, they'd still be earning $225,000 a year in risk-free gross income to support their lifestyle.

They could either invest a lump sum into a 12-month CD today, or they could create a CD Step Stool since the Fed has telegraphed they will raise rates further. Given money market rates are pretty attractive again, it's probably a good idea to do a combination of both a short-term CD and a money market account.

Point: There is no need to take excessive risk after a tripling of net worth to $10 million. Since they have already won the lottery, it's good to stop gambling and start enjoying life to the maximum.

Historical CD rates - Build A CD Step Stool, Not A CD Ladder With Flat Yield Curve

Example #2: On The Path To Financial Independence, Couple In Their 40s

Liquid Net Worth In 2010: $500,000

Liquid Net Worth In 2022: $2,000,000

Household Gross Income: $180,000

Household Expense: $100,000

Potential Risk-Free Gross Income: $50,000 based of 2.5% of $2,000,000

Total Household Gross Income: $230,000

Total Household Net Income (20% effective tax rate): $184,000

Net Worth Analysis

Thanks to aggressive saving, pay raises, rental real estate appreciation, and great stock performance, this couple was able to 4X their liquid net worth. They could conceivably dump their entire $2,000,000 liquid net worth into a 2.5% yielding 12-month CD to earn $50,000. However, that would leave a ~$60,000 expense hole after paying a 20% tax rate on the CD income.

But what is important to realize is that this couple has now closed the income gap they need to achieve true financial freedom – when passive income covers all expenses. In order for the couple to achieve financial freedom, the interest rate on their risk-free income needs to be closer to 6.2% so they can earn $125,000 in gross income to pay for their $100,000 lifestyle using a 20% effective tax rate.

Alternatively, they need to accumulate closer to a $5,000,000 in liquid net worth, which may be harder to do over the next twelve years than it was the previous twelve years. Good thing interest rates are expected to go a little higher, and $5,000,000 is probably unnecessary.

Taking Action To Build More Wealth

The solution is to keep on working in order to make their $180,000 gross annual income and take more risk, but not a whole lot of risk. We know that since 1926, a portfolio of 20% stocks / 80% bonds has provided a 7.2% annual rate of return.

But given we are in a rising interest rate environment, it's unlikely that bonds will perform as well as they have. Therefore, the solution is to supplement some of the 80% of bond exposure with risk-free CD income exposure through a CD Step Stool.

open an account today

The couple can see the finish line and don't want to mess things up. With 40% of their household expenses covered ($40,000) through a risk-free short-term CD after-tax, this couple now has more flexibility in their lifestyles.

For example, one spouse now has the option to negotiate a severance to take care of their child full-time now instead of spending $25,000 on daycare. Or, one spouse can decide to start a business.

Point: On the road to financial freedom, identify which expenses your risk-free income can cover to make your life better. If you do so, you will be more motivated to build an ever-increasing passive income portfolio.

Traditional CD Ladder
Avoid a traditional CD ladder in a flattening yield curve environment

Example #3: Far From Financial Independence, 31-year-old Couple

Liquid Net Worth In 2010: $5,000

Liquid Net Worth In 2022: $300,000

Household Gross Income: $70,000

Household Expense: $50,000

Potential Risk-Free Gross Income: $7,500 based on 2.5% of $300,000

Total Household Gross Income: $77,500

Total Household Net Income (15% effective tax rate): $65,875

Despite a 60X increase in liquid net worth since 2010, this 31-year old couple is still not close to financial independence because their liquid net worth can generate only $7,500 a year in risk-free income with a 2.5% yielding CD.

Note, be sure to check out one of my most popular articles on the above average net worth for the above average person.

Action Steps To Take

As a result, the only solutions for this couple are to: 1) make more money, 2) reduce expenses, or 3) take on more risk. Based on history, a 70% equity allocation or higher provides for a 9.1% annual return or higher since 1926. But of course, history cannot predict the future.

Growth retirement portfolios

With a $300,000 liquid net worth and decades of work energy left in this couple, building a CD Step Stool doesn't make much sense. Instead, they should keep roughly six months of household expenses in a high-yielding money market account. But for the remaining $275,000 in liquid net worth, I have no problem with them investing 70% or more of their portfolio in equities. They've got time, energy, and the income to recover any losses.

Here's a risk tolerance barometer to consider. If your annual household net income is not greater than your potential portfolio loss in any given year, you are probably too aggressive in your risk exposure. For this couple, their portfolio loss limit is therefore around 24%.

Point: Without a substantial liquid net worth, investing in risk-free assets beyond your emergency fund doesn't make sense. Take on more risk and focus on increasing your earnings and your savings.

Time To Optimize Your Cash

Build A CD Step Stool, Not A CD Ladder
CD Step Stool, Not CD Ladder

Regardless of your financial situation, everybody should take steps right now to optimize their cash balance in either short-term CDs or money market accounts where there is no holding period.

Short-term treasuries are another investment option. They may pay a lower yield for the same duration depending on rates, but you can avoid state income tax. Therefore, if you are a high-income earner and/or have high state income tax, a short-term treasury bond may have a higher net yield.

It was OK to let your cash sit idle earning 0.1% from 2010 – 2016, but not now. Now you can build a 12-month CD or bond step stool in six-month increments and be competitive with inflation. It's up to you to decide how much liquid cash you feel comfortable having in a high yielding savings account. I personally keep between 2% – 5% of my net worth in cash.

If the yield curve inverts, you should shift a greater percentage of your investable assets into risk-free investments. At this juncture, your goal is to aggressively protect your wealth. Earning 2.5% – 3% guaranteed when the stock market goes down 20% feels just as good if not better than earning 23% when everybody else is only up 3%.

Achieve Financial Freedom With A CD Step Stool

Your ultimate goal is to accumulate enough wealth to live off of your risk-free income and never touch principal. For example, if you can invest only 40% of your investable assets in risk-free investments and live on that income, more power to you. You're free to take all the risk you want with the remaining 60%.

Alternatively, you can look to accumulate wealth up to the estate tax limit and invest 100% of it in risk-free investments. Given the estate tax limit currently is $11 million per person, we're talking about earning $275,000 in risk-free gross income at today's rates.

I'm sure most people can live comfortably off of $275,000 a year without any debt. Further, there's no point accumulating more if the government is just going to take 40% away from you when you die.

Yes, our economy will come to a grinding halt when enough people stop investing and start aggressively saving. But oh well. We're already ahead of the curve at Financial Samurai. Here's to higher rates and risk-free living in the future!

Check out CIT Bank's Savings Connect account if you're looking for a low-risk way to earn income.

open an account today

Also, check out my best passive income rankings for higher yields.

Build More Income And Wealth Through Real Estate

A CD step stool is a smart way to build income in a flat yield curve environment. However, in a low interest rate and steepening yield curve environment, you may way to reach for yield. The best way to do so is with real estate. When interest rates are down, the value of cash flow is up. Further, the pandemic made working from home commonplace.

Steepening Yield Curve

Take a look at my two favorite real estate crowdfunding platforms. I have personally invested $810,000 in real estate crowdfunding to diversify, earn income passively, and make greater returns.

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds.

Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities.

18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio. 

find out more

Related post: How Much Savings Should I Have Accumulated By Age?

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70 thoughts on “Build A CD Step Stool, Not A CD Ladder In A Flattening Yield Curve Environment”

  1. Nice post. I’ve avoided cds because interest is taxed as ordinary income and not ltcg rate. Doesn’t seem worth the hassle, being in the highest tax bracket.

  2. Dear Sam

    thanks for your great blog first of all!

    A quick question (I apologize if you already answered it in other posts) :

    For the high income family shouldn’t be better to invest the cash in a muni-bond?


  3. I’m trying to figure out what sort of estate planning title and beneficiaries on TD account, without success. I transferred a bunch of paper bonds to TD but seems like I just need to sell and put in brokerage account for easy estate purposes, that’s difficult to find in account. Anyone have any ideas?

  4. J Wynn & Co


    What is your feeling generally about totally digital, online only banks? I’m sure much of your audience is older and perhaps hesitant to park significant assets there. I’ve been doing it for years, but since my recent and egregious experiences with Citizens Access I’ve become hesitant. They offer one of the highest rates around online, but their customer service is atrocious. Have you ever considered, or perhaps already done, an article on online only banks?

  5. OlderAndWiser

    CDBank, 2.60% for 12-month.
    Union Bank of California 2.75% for 18-month.
    Both have a $10K minimum.

    A local bank offered 2.73% for 13-months about a month ago. It didn’t last long. If you blinked you missed it. I’m glad I wasn’t blinking at the time.

    If there are any new bank branches in your area (opened within the last 2 months or so), next time you are driving by stop and walk in and ask if they have any special promos. Limited-area specials are sometimes the best, but you have to be willing to do a little leg work to find them.

    1. Thanks. It’s interesting to see some have minimums while other banks impose maximums as a teaser rate marketing gimmick.

      Yes, don’t blink folks, b/c these outlier rates don’t last long once the bank’s deposit mandate has been filled.

  6. Very timely article for me, thanks for getting me off my a$$ and putting some cash to work. A local bank had one of these “teasers” that I went to go check out yesterday. The only catch was you couldn’t be a current customer and needed to open a checking account an maintain a $10,000 balance. 15 months at 2.75% was good enough for me to drop a couple hundred into, best I’ve seen in a long time. Falling more into example 1 you gave but a lot younger, I still think this makes sense, I have about a 30% exposure to equities currently so although I’m not beating or matching the market, I’m cool because the game has already been won.

  7. Simple Money Man

    I think this makes more sense for the super high liquidity individuals you mentioned in example 1. I’m not at a place where conservation is key, thus putting so much $ into a CD. At the same time, losses would really hurt me too. I’m sort of in the middle I guess. So recently I added a bond index fund to diversify and earn the income.

  8. Great article on short term cd steps. What’s your opinion on going a little bit longer and locking money in but with higher rates using Israel bonds. They are accessible in various money amounts and yields ranging from $36 dollars all the way up to $25,00 before you need to go to a broker purchase. I’m a conservative investor looking for the tortoise beats the hare theory. (Compounding builds wealth) At 38 yrs old I’ve seen two stock market corrections.. Being a real estate agent in central New Jersey I still see people who can’t sell for what they paid for 10 yrs ago, and that’s with a another Bubble is building up, in my opinion. Prices are too rich!! And I’m in what’s considered Merto-NY commuting area. Thanks

  9. Sam,
    I am 69 and will be retiring at year end. Been shifting my portfolio to cover RMD’s and a little bit more. Right now I am 50% in a 1 year CD @ 2.5% that pays interest monthly (broker CD) and 50% in bank preferred stocks that average 6.4% interest. Not exciting, but does what I need it to and I sleep very well at night.

  10. Our mortgage by year’s end will be around 500K and represents our only debt. We currently have about 150K in Series EE and I bonds paying an average of ~3.5%. The remaining interest on our mortgage, if level loaded, would be ~1.8% per year before any tax deduction benefits, with 6 years remaining.

    I’m considering moving 350K out of equities into a CD step ladder, (see Sam I’m starting the trend to use your term) of 1-3 year maturities generating between 2.5%-3%. I like the idea that if we had no other income, we’d have the remaining mortgage covered through CDs and Savings Bonds that we could liquidate monthly to cover our only remaining debt rather than have to sell equities during a correction. Since we earn double the effective interest rate of our mortgage, it doesn’t make any financial sense to go ahead and pay it off and gives us some additional liquidity over time in case something unexpected pops up, rather than have it all tied up in our home.

  11. Captain Obvious

    Always optimize my cash. It just used to be a little easier on an after tax, after inflation basis….Hate to see rates not exceed inflation, after tax….as is now the case….

    1. Good. I’m loving the higher interest rates for my lower risk assets.

      I remember in 2000 and in 2008-2009 really enjoying 4.125%+ guaranteed returns in my CDs when the stock market was melting down. It felt so wonderful!

      Once you build a perpetual CD Step Stool, you’re always going to be liquid and optimized.

  12. Captain Obvious

    Are you really (pun intended) better off earning 2.5% from a cd when inflation is 2.5%; versus earning 1% in a CD when inflation was zero (as has been the case for last several years)?

    And just to make sure we get the right answer, let’s consider taxes. Higher interest rates push you up the progressive tax tables. This is actually a bad thing – not a good thing.

    Now independent of this irritating math, I do agree that its a very good time to decrease risk. So your punchline of reducing equity exposure is fine, its just not for the tangental rationale postulated in your article.

    Rather, the reason we should be de-risking right now is simply because markets are VERY expensive. (as reflected by every valuation multiple known to man).

    1. Absolutely. It is much better to earn 2.5% on my money than 0.2% in my Citi money market account.

      Even though my cash holdings is less than 5% of my net worth, it’s still better to earn another thousand dollars+ a month in risk free interest income. I can buy a lot of sashimi dinners with this extra money!

      What are your reasons for not optimizing your cash?

  13. What about step-up bonds in this environment? Well’s Fargo just released a 3.6% Step-Up with FDIC protection and 3yr call protection

    As a more general comment though, you’re not getting much relative return on the long end, but what if we hit bumpy roads in the future. The FED might lower rates again after getting some ammo in their pocket, making your reinvestment risks much higher

  14. Sam,

    Early retired three years ago at 53. I am doing something similar to what you suggest.

    For the last decade my excess cash has been at Ally bank (previously in their online savings account and more recently in their 11-month no penalty CD – which was earning 1.75%). About two months ago I broke all my CD’s and transferred the funds to Fidelity and place all the cash in FZDXX (current 7-day yield 1.97%). I have embarked on a strategy of buying 6-month Treasuries (essentially dividing the cash balance by six and buying that amount of 6-month Treasuries every month).

    I have completed two purchases so far (one in June and one in July). Tax equivalent yield for me on the first purchase was 2.23% and for the second purchase was 2.32%. So not as high as the 2.5% in your example, but less term risk – as my money will free up for reinvestment every six months. Beginning in December I will have Treasuries maturing every month and reinvesting at potentially higher rates (given the Fed’s announced plan to continue raising short-term rates through 2019 at least).

    In the meantime I am earning almost 2% with immediate access to my cash.

    So a similar strategy to what you suggest.

    1. I like this idea. But why not go even shorter duration than 6-month T-Bills step-stool?
      The Auctions in the first week of August (according to Treasurey Direct) were:-

      – 4 week Bills. 1.939%
      – 13 week bills, 2.038%
      – 26 week bills, 2.214%

      If we think interest rates are going higher, then investing every month with 4-week bills might be the best way to go for your cash. You’re never more than 4 weeks away form your cash, and it’s rolled over quickly into higher rates each month – if we assume we’re in a rate rising environment. Safest place to be?


  15. State Bank of Texas is offering a 12 month CD at 2.6% but there is a required minimum deposit of 25K.

  16. Andrews FCU has a 2.75% 9 month CD special going on right now. They have an annoying 5k per day transfer limit but if that doesn’t bother you the rate is the best I’ve seen for short term CDs.

    1. Those are called teaser rates.. like when the auto dealership puts out an ad about a great lease deal seemingly for all its inventory, but it’s really for only one base model car.

      Limiting the amount you can buy limits the bank’s cost. Smoke and mirrors when they set such artificially low limits.

      1. Agree, didn’t read enough of the fine print closely, only allowed one CD per account is annoying. Seems Synchrony bank now has a 13 month CD for 2.65. I don’t have any experience with them though, anyone know if it’s a teaser or a legit rate?

  17. Richard DuBow

    As a financial advisor for the last forty years I would comment that the greatest mistake I have seen clients make is having too much of their investable assets in risk free investments.
    While I certainly agree that CD yields are up the real rate of return overnight inflation is only back to roughly zero.
    Even an investor in their sixties probably has close to another third of their life to go.
    I would agree with your strategy at a time when the real rate of return on the CD’s was higher.
    Your thoughts are appreciated.

    1. With the stock market in real estate market at all time highs, there is no doubt that having most of your assets and risk investments would’ve done best.

      As I wrote in my conclusion, focusing on optimizing the cash you have right now is a no-brainer in my opinion. I’m no longer going to let 5% of my net worth just sit in my existing bank earning nothing when I can get 2% or 2.5% in short term CDs, short-term bonds, or an online savings bank.

      I’m no longer going to let 5% of my net worth just sit in my existing bank earning nothing when I can get 2% or 2.5% in short term CDs, short-term bonds, or an online savings bank.

      The three examples that I highlighted or hypotheticals. Example one as an extreme to make people question the point of risk if they have already won the game with $10 million.

      Basically, it’s really nice to know you can live off your risk free income if you wanted to. This affords you to take more risk to make even more money.

      1. If you’ve won the game with 10M you’re probably going to be ok even with a 50% market correction. So why not try to also win the game for each one of your three kids?

      2. Even if you have 10 million, living entirely off interest generated by risk free assets will erode your portfolio due to inflation. No matter how much you have, investing everything in risk free assets is actually a risky move (unless you have very little time to live). Better to just hold a diversified portfolio and be able to withdrawal ~3% (with inflation adjustments each year) in perpetuity. This blog (not mine) has an interesting post on the topic:

        (and one of the asset classes you choose to hold in a well diversified portoflio could well be cash equivalents such as the CDs you talk about in your post). Some of the example portfolios in the above blog have 20-25% of their holdings in cash/short term bonds/etc, and still sustain a >3% withdrawal rate even adjusting for inflation each year.

    2. Kondratieff

      Richard, your whole career probably has been in a falling interest rate environment. So may in the finance industry aren’t cognizant of the secular tailwind that has inflated stocks and bonds.

      If Trump is indeed reindustrializing America and turning over the Rules Based Global Order that has been in place for decades then big secular changes are coming that don’t bode well for financial assets.

  18. What are your thoughts on ditching bond funds and TIPS funds at this time, within a Roth, for CDs earning 2.5%?

  19. We are retired and have sufficient pension income to live comfortably and even continue to save some for grandkids education. What type of investment should we have in our roth IRA’s? We don’t plan on using them unless we need to go into retirement/assisted living. They contain mostly stock mutual funds. Agree with your step stool approach and have started to invest in T bills, so as to also avoid CA income taxes. Will start selling a portion of taxable mutual funds each year to invest in T bills.

  20. Doing exactly that for some months even without reading about it….it makes me feel great because it seems I’m getting a nice picture of the current economy cycle even without paying attention to the media

  21. Damn Millennial

    This is some great timing! I did just this with two CDs a 1&2 year expiring in May 19,20. Although I am only 28 I am taking some risk off the table. Income is great and all is going well but I have seen this before!

    I am hoping to reload the CDs next year with bonuses and then the following year look for real estate deals.

    No one knows the future but I think that there are better deals to come in RE as rates & prices move up. Incomes are not going to keep up with major markets and at some point boomers will be looking to unload their homes. My 2cents.

    Right with you on the CDs nice to have the Ally count creep to 1.75% too.

  22. 2.5% is the best rate I’ve seen in a loooong time. My last CD from 7 years ago is coming due in August back when I opened three separate tranches.

    I opened a new 12 mo CD about two weeks ago and am quite happy with it. I didn’t put in a ton of cash but used up what I had available at the time. I may open one more next month when my old one matures.

    Excellent post and topic following your yield curve article! Thanks!

  23. The yield curve being flat (or even inverted ) means that the market is expecting interest rates to revert to a lower level in the future. Of course, we don’t know if the market is right but that is the weighted signal sent by all those players who put their money where their mouth is.

    If the market is right and in two years when your CDs expire CD rates are back down to 1.75% then you are going to wish you had locked in that 3% rate for five years. There’s just no way to avoid the simple fact that when you lock in your money for a longer term you are incurring interest rate risk. That is true whether you buy CDs or bonds, even if you don’t hold those bonds to maturity. With CD’s the risk is lower because if interest rates go up instead then the penalty for bailing out is typically small (typically a few months of interest). And because the risk is low with CDs the return is pathetic, less than 1% above inflation.

    About that financially independent purple in their 60s. What if they have 4kids? Why not try to make them all financially independent at the same level? Most older people derive the most satisfaction in life by seeing their children succeed, not by spending 225k per year.

  24. Great post, Sam. I’ve been doing this recently. It’s so nice to have CDs yielding a bit again. We just sold our house in the Bay Area and bought a house in Salt Lake City. We could pay cash for the house in SLC with the proceeds, but I’m thinking more of paying down most of it, but keeping $200k or so out. Of course the CD doesn’t pay the mortgage rate of 4.375 so perhaps this isn’t the best, and some risk would need to be taken. Or just step ladder and assume that in a few years the yield will surpass the interest. (Or some combination.) What do you think? I have lots more invested in the market (like your scenarios 2) but would like to get defensive with this, or just pay off the mortgage.

  25. Thanks for this Sam! I’ve been putting money that we could stash away for a while in CDs although the rates are low but since they started to hit the 2% mark I started to look more into putting more money to stash away. If they start rising to 3%-4%, more people will start opening CDs because of it’s risk free features. But we will see.

  26. PennyRoller

    Sam, Thank you for your reply and good point on not having tax drag when rebalancing in retirement accounts. That said, let’s assume this couple in their 40s does prefer to stop working before age 55 (maybe 45-50). If the couple has $600k in taxable accounts and the remaining net worth in retirements accounts, is there a way this couple can generate enough annual income from an 80% bond and cash portfolio before reaching age 55, without taking penalized distributions from their retirement accounts? If there are means to achieve this goal without getting penalized then I benefits of moving to an 80% bond and cash position in the retirement accounts. If not, then it’s seems like the retirement accounts are still on a longer 10-15 year investment horizon and then I wonder if it makes sense to accept a little more risk (ie. 50/50 stock to bonds) in the retirement account? Or maybe the couple should cut back on contributions to retirement accounts over the next several years and divert those funds to the taxable account, but then there is the loss of a tax deduction? Any additional thoughts or insights you have are very much appreciated as I even question my own thoughts on this matter.

    1. You’ve got a smell the fear and do it anyway if that’s what you really want. I’m assuming you’re talking about yourself and throwing up multiple different scenarios for your situation.

      Earlier you retire, the less fear you will have about running out of money because you have more energy and desire to work that matters to you.

      No early retireee does nothing after work. They fill their time with enriching activity, which often pay something to make up for any gaps.


  27. PennyRoller

    Sam, For the example with the couple in their 40s above, would you still recommend moving to an 80% position in bonds and cash if approximately 65-70% of the couple’s net worth is housed in retirement accounts (ie. 401k, Roth)? Specifically, the funds in these retirement accounts cannot be accessed penalty free until ages 55-59.5, so given the potential 15-20 year time horizon left on these retirements accounts to qualify for distributions penalty free, would it be premature to move these accounts to an 80% bond and cash position? Your thoughts are very much appreciated.

    1. I probably would, once the yield curve goes completely flat or inverted. But before then, I would be gradually getting more defensive. It all depends on how much more in returns the couple gets before the yield curve inverts. I wouldn’t have a position beyond 50% stocks once the inversion happens.

      Your 401k/Roth money is still real money after all. Going from $500K to $2M in 8-9 years is a big win. You can smell the finish line, so it’s important not to f it up.

      If they’re willing to work 15-20, then being more conservative with a step stool approach after yield curve inversion is absolutely fine IMO. You can trade your 401k/IRA without any tax consequences or filing each year, so there’s less friction to rebalance.

  28. One of those examples describes us pretty closely so this got my attention. Sorry, Sam, I’m going to have to disagree some on this one.

    Bear in mind the current rate of inflation (using math and figures that always gives a questionably low number) is 2.9%. So at a 2.5% percent return your principal is actually decreasing at a rate of .4%. If you are then taking all of it to live on, your principal is decreasing at a rate of 2.9%. That lone million dollars the first couple might have invested is going to have to get over 18% just to offset inflation on the principal. CDs do have their uses, but it is not as a primary investment for your life savings.

    Over time, the market always recovers, usually in no more than twice the time of the bear market, which itself tends to average about 15 months. Also, over time, the market averages a pretty good return, even assuming you aren’t in something a bit better than index funds.

    That couple in their 60s is not going to need all of that money out before the market comes back up (unless we are REALLY in trouble). The only reason to be holding cash, unless you really know the exact dates of the next crunch, is to avoid selling assets to get needed cash while the market is down. If you are betting it is never going to recover, then go ahead and get all your money out, but maybe you’d better use it to buy canned goods and firearms.

    So what’s the goal here? If you are trying to get rich from selling dearly before the next correction/recession and then buying it back when it hits bottom, good luck.

    I’m going to quote Peter Lynch again, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.”

    1. My thoughts are the same (from the silent generation). Is the next move cashing out CD’s with penalties to buy equities and hope to avoid value traps? I do understand the value of CD’s for some situations and even agree with the examples for some people. And the stepstool is advisable versus ladder. In fact I would focus on step 1, short as possible. Same as with mortgage terms when rates are insanely high as back in early 80’s. Those were the days I never locked in to long-term CD’s unless they were over 10% and mortgages unless the rate was under 10%. These are the days to have debt, not CDs. For my situation I am not paying down debt as I want to maximize cash flow, the debt interest is deductible, and assets will appreciate a lot and gains will be more with leverage.

      1. It’s all about cash maximization with the cash you would hold anyway, and waiting for opportunity.

        From 2010 until 2016, a lot of my cash was just sitting in a money market account earning nothing. I actively refinanced my debt lower, and bided my time to purchase risk investments.

        If you set up your CD step stool, and have a consistent amount of cash flow, you’ll never have to sell your CDs early.

        In 2014, a long-term CD yielding 4.125% came do, and I used $250,000 of the proceeds to buy a house. Four years later, the house has done quite well in appreciation. You just never know, which is why it’s always good to have a cascade of liquidity that you know has always been optimized.

        1. I some situations it is a perfect strategy. I just don’t think everyone should get out of equities and into CD’s and then back into equities, trying to time the market. In lots of situations it makes sense though. When you have so much money it is okay to lose some to inflation for the sake of stability and certainty. When you are planning to buy a house. When you are very old, have a very small nest egg, and just want peace of mind. Like you say, a source of cash for another investment on maturity. But you could have made way more money in equities and then just taken profits to buy the house. But, I get it that the CD’s are providing you with long term security and certain income. Like my pensions. Even though not very large, they are the equivalent of $1.5 in a 2.5% CD. And I think your strategy is right on, especially going short-term, and maybe 1 and 2 years so you have something maturing every year.

        2. If all your money was sitting in a money market from 2010-2016 you missed one of the biggest bull markets in stock history. You are not qualified to give financial advice. SORRY!!

          1. It’s totally OK. I always have between 2% – 5% of my net worth in cash for liquidity reasons and to take advantage of investment opportunities. That’s my comfort level. Others have more, some have less.

            Where are you getting the idea that my entire net worth sat in cash from 2010-2016? The conclusion of this post makes it clear to encourage people to optimize their cash now that rates have ticked up.

            Even portions of my intro highlight how much we’ve made since 2010:

            “If you are up over 150% on the S&P 500 since 2010 and your real estate equity is up even more due to leverage, your net worth has likely way more than doubled since 2010 when you add savings to the mix. Therefore, at some point, you should start thinking about taking risk off the table when risk-free returns are rising.”

            Do you recommend I simplify my writing so more folks can comprehend?

            Hare are my Investment posts.

  29. Independence Engineered

    I’m confused as to the CD ladder graphic? The graphic portrays a tradition ladder, no?

    With that said, shouldn’t a more accurate graphic based on what you are writing have staggered start points? i.e. today: 1 year cd, 6 months from now: 1 year cd, 1 year from now: 1 year cd and etc.?


  30. FIRE walk with me


    You write, “short-term treasuries will pay a lower yield for the same duration, but you won’t have to pay state income tax.”

    Just wondering why you aren’t recommending municipal bonds or bond funds, which are tax-free at both the state and federal levels. Some muni bond funds also have higher yields than short-term CDs, and are more liquid.

    1. I’ve written about municipal bonds in so many posts, I thought I’d focus on short-term CDs for current cash balances.

      Further, municipal bonds are on the long end. I’m focused on the short-end in this post with a flat yield curve.

      1. FIRE walk with me

        Fair point, but I guess my question is, for the couple in Example #1, wouldn’t it make more sense for them to put 90% in a muni bond fund such as BCHYX? This has a tax-free yield of 3% after expenses, and is even more liquid CDs.

        1. There’s definitely a case for including muni bonds. Just know there is no yield to maturity for bond funds, so there is still principal risk.

          Is your financial scenario like example one? If so, how do you invest and what is your motivation Once you’ve won the race?

          1. Retired and Invested

            For me, the answer is to buy individual bonds maturing within the next 12 to 18 months – either municipal bonds or investment grade corporates. Depending on your tax situation, either of these will beat CD rates (depending on the issue) and you can build a stool with specific monthly maturities. Granted, there is a bit more credit risk than CDs or treasuries, but the risk is minimal with the short maturity. And no “yield to maturity/principal risk” as in bond funds.

        2. With bonds you have interest rate sensitivity because with bonds you are essentially buying a long term contract. You can sell that contract before maturity but if interest rates rise the penalty is high. (i.e. you can only sell your bond at significant discount). With CDs the seller sells you a long term contract (unless it’s a callable CD) but the buyer (you) does not really buy a long term commitment since you can bail out of the CD with a (typically) modest interest loss penalty. Because of this asymmetry CD interest rates are typically much lower than bond rates, including taxable equivalent muni rates. As usual, there’s no free lunch. Markets have come to a risk/reward equilibrium.

  31. Great article as usual Sam! I’ve been watching CD rates as well, but I have an even better risk free vehicle – paying down the mortgage. Even though I refinanced it down to 2 7/8 a few years ago, now that the interest is no longer tax deductible for me, it’s time to pay it off.

    Any extra cash goes towards the mortgage and I’ve got a HELOC open for $100k in case I get in a cash crunch. What do you think?

    Now if CD rates go over 3.625% or so, that’s another discussion…

    1. I agree with this approach. I’m doing the same thing for the same reasons, paying down the mortgage with every extra $. I’m also doing the CD step ladder. I have invested in 12 month CD’s so 1/4th of my invested money is mature every 3 months. This is 75% of my cash reserves. It keeps up with inflation and I have cash available every 90 days should I need it.

  32. Ally has a 2-year “Raise Your Rate” CD at 2.5% APY. It found a place in my CD step stool.

    On a slightly related note, I am two years in to a 5/1 ARM 30-year mortgage at 2.25% on my primary home. I plan on staying here between 3-8 more years. With rising rates, wondering if I should refinance now or wait another three years.

    1. I’d rather have a 1-year CD at 2.5% and then step stool up. You can get a 2-year CD for 2.8% or so.

      I wouldn’t refinance a 2.25% loan b/c you would refinance to 3%+ with a 5-year ARM again.

  33. Also, don’t forget to max out on i-bonds each year ($10K per person) via Treasury Direct. No state taxes, only fed taxes when cashed out.

    1. Pretty interesting why the limit is only $10,000 for i-bonds. Why do you think that is?


      Savings Bonds
      Different purchase limits apply for electronic savings bonds and paper savings bonds.

      Electronic (TreasuryDirect)

      Through your TreasuryDirect account – which is established using your name and social security number, bank information, driver’s license and e–mail address – you can invest in electronic savings bonds (also referred to as book–entry savings bonds) each calendar year by purchasing as much as:

      $10,000 in Series EE bonds, and
      $10,000 in Series I bonds.

      Paper Series I savings bonds may be purchased only with your IRS tax refund. For these bonds, the purchase limit per calendar year is:

      Exceptions: Savings bonds purchased as gifts aren’t included in your annual limit. Also, the purchase amount of electronic savings bonds you transfer, deliver as gifts, or de-link to another TreasuryDirect account holder is applied to the receiver’s annual purchase limit in the year the transaction occurs, and not to your own limit.

      Note: The three purchase limits above apply separately. That is, in a single calendar year you could buy $10,000 in electronic Series EE bonds, $10,000 in electronic Series I bonds, and $5,000 in paper Series I bonds.

      Marketable Securities — Bills, Notes, Bonds, Floating Rate Notes, and TIPS
      The most important thing to remember about purchasing marketable bills, notes, bonds, Floating Rate Notes, or TIPS is that the limits are set for each auction, not by year. The limit for noncompetitive purchases is $5 million for each security type and term, for each auction. This limit applies regardless of whether you’re buying a bill, note, bond, Floating Rate Note, or TIPS, and regardless of what method you use to make the purchase (TreasuryDirect, broker, or dealer).

      In other words, you could invest as much as $5 million in each security listed below — in every auction offering — without violating the purchase limit. For example, you can purchase:

      $5 million each in 4-, 13-, 26-, and 52-week Treasury bills,
      $5 million each in 2-, 3-, 5-, 7-, and 10-year Treasury notes,
      $5 million in 30-year Treasury bonds,
      $5 million in 2-year Floating Rate Notes, and
      $5 million each in 5-, 10-, and 30-year Treasury TIPS.
      Besides the maximum noncompetitive bid limit, we also have a household limit. This limit applies to a person, spouse and children under the age of 21 having a common address. These individuals within a household need to total their bids to make sure that their bids do not exceed the noncompetitive bid limits for each auction as stated above.

      For example, in a Treasury bill auction, a husband, wife, an 18 year-old living at home and a 21 year-old living at home each placed a bid in the auction. The husband, wife and 18 year-old would not be allowed in total to bid over the maximum limit of $5 million. But, the 21 year-old living at home would be allowed to bid separately up to the maximum bid of $5 million.

    2. Independence Engineered

      With buying I bonds don’t you need to keep them for a min. of 5 years in this case as to not lose the last 3 months worth of interest after cashing in the bond?

      1. Yes, you can’t access the bonds for 12 months after purchase, and you forgo 3 months of interest if redeemed within 5 years; however, in my opinion it is worth the “risk” if you know you have a large purchase in the future (car replacement, house down payment). Also, a great way to invest your kids’ birthday gifts from grandma and grandpa.

        1. Independence Engineered

          How is it worth the risk if you have a large purchase in the future? Wouldn’t you want liquidity for that purchase? Perhaps better to put the money in a money market account so you can access it quicker?

          Genuinely curious here. Perhaps I’m just having a hard time seeing what you are saying.

          1. Retired and Invested

            I think Greg was implying that you would match the maturity of the bond with the anticipated spending.

  34. Great post Sam, nice data and graphs. I’ve been researching CD’s heavily since they hit 2%. Very true that the Feds have telegraphed more rate increases, but that doesn’t guarantee them. As they say in the military, no plan survives first contact, and a war or any number of other distasters could derail that plan.

    I will definitely not be buying anything longer than a one year CD if I do dive in. But right now I think it’s a wise move.

  35. I’ve been deploying this strategy since CD rates hit 2%, I have 2, 2.1, 2.2, 2.25, 2.4% CDs I’ve opened the whole way up , all 12 month ones. I figure rates go up another 2 years – then I will start rolling into some longer ones, but not until the fed’s telegraphed rate hikes are implemented.

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