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Retirement savers relying on rising CD rates will have to wait

  • Compared to two years ago, the national average yield for a six-month CD has increased to 0.22 percent from 0.16 percent.
  • For a one-year CD, that number is 0.36 percent, up from 0.27 percent.

For retirees looking for income from high-yielding certificates of deposit, the message is: Keep looking.

Rates on CDs, as they are otherwise known, are improving yet are still nowhere near pre-recession levels.

The national average rate for a six-month CD has increased to 0.22 percent from 0.16 percent two years ago, according to Bankrate.com. For the one-year CD, it's 0.36 percent, up from 0.27 percent.

That number is nothing like the roughly 3 percent offered a decade ago, said Reed Fraasa, a financial planner at Riverdale, New Jersey-based Highland Financial Advisors.

CD rates have been steadily increasing for the past two years

Date
6-mo CD
1-yr CD
3-yr CD
5-yr CD
7/26/2017 0.22% 0.36% 0.63% 0.92%
1/25/2017 0.19% 0.33% 0.60% 0.86%
7/27/2016 0.18% 0.29% 0.55% 0.80%
7/29/2015 0.16% 0.27% 0.56% 0.87
SOURCE: Bankrate.com

Don't expect a sharp uptick anytime soon, either. While borrowers, in many cases, feel the sting from higher interest rates right away, there is usually a delay before savers start to see any benefits.

For some savers, though, CDs are a viable option. Yet a number of planners say doing anything too long-term with them is a bad idea because, at current rates, you may see zero or even negative returns after accounting for inflation and taxes.

One approach given the interest rate climate, according to Fraasa, is to use laddered CDs, or putting your money in CDs with varying terms. This protects against losing out if the Fed should hike interest rates in the near future, which Fraasa puts at more than 50 percent likely.

"CDs are becoming certainly viable alternatives for people who need to keep money liquid over the next one to three years," said Fraasa. "But if you're investing longer than three years out, you should take a little bit of risk."

"What you want to do is search for CDs that have easy early withdrawal penalties and a high-rate yield." -Allan Roth, founder of Wealth Logic

Although yields for CDs have increased over the past few years, continuing low rates means a long-term investment still isn't a good idea for many savers.

"Is it better than it was six months ago? Yes," said Mark LeSpisa of South Barrington, Illinois-based Vermillion Financial Advisors. "Is it allowing risk-averse people to put money in an account and stay ahead of the game? No."

It's also important to be aware of several potential pitfalls when opening a CD, said Ken Tumin of DepositAccounts.com, such as CDs that automatically renew at lower rates. Banks sometimes offer special higher CD rates to entice customers to sign up, but missing the maturity window could mean a renewal at a much lower rate than before.

And terminating a CD before maturity can lead to early withdrawal penalties, Tumin said.

Perhaps the smartest thing to do, according to Wealth Logic founder Allan Roth, in Colorado Springs, Colorado, is to find the best of both worlds: "What you want to do is search for CDs that have easy early withdrawal penalties and a high-rate yield," he said.