When market volatility and inflation persist, retirees or those who are near retirement might be wondering where to put their money now.
There are a variety of alternatives with a range of risks, so think carefully about where to invest money in these uncertain times. What you choose will depend on your overall financial situation.
If you’ve already stashed away one-to-two years’ worth of expenses in a high-yield savings account, you may be looking for additional relatively low-risk ways to grow your money. If the stock market seems too uncertain, you’ve maxed out on I-bond purchases, and you have money you absolutely know you won’t need for, at least, the next year or two, brokered certificates of deposit (CDs) can be another way to diversify your portfolio.
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Brokered CDs often pay more than traditional CDs
Many banks are paying their highest rates on brokered CDs, which are certificates of deposit that a bank is selling through a brokerage firm. Say a one-year certificate of deposit is paying 2% interest rate but a brokered CD through the same bank is paying more than twice as much at 4.5%. Brokered CDs typically pay a higher yield than traditional CDs because the broker usually has invested a large amount with a bank, and that is an incentive for the bank to pay a higher interest than on a smaller amount that an individual investor will typically invest. The brokered CDs are then sold through the broker, hence the name, brokered CD.
“There are a lot of different ways to invest,” says certified financial planner Andrew Feldman of AJ Feldman Financial. “All products are different.” Brokered CDs are a little bit more market exposed than a money market or a savings account, he says. “There’s a very, very small amount of risk but more than cash.”
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Brokered CDs are sold through a brokerage firm such as Fidelity or Schwab, but are usually Federal Deposit Insurance Corp.-insured up to $250,000 per account owner, per issuing bank, credit union, or other financial institution. The broker is essentially a third party that is able to offer the brokered CD at a higher interest rate. Investors who have brokerage accounts or decide to open a brokerage account are eligible to purchase brokered CDs.
Should retirees buy these brokered CDs to get a better rate, and if so, what kind of financial situation should you be in to purchase a brokered CD? How much in total assets might you need? Or, does it matter?
“CDs are time deposits,” says Greg McBride, chief financial analyst at Bankrate.com. “They are not liquid.” Typically, like traditional CDs, they hold your money for a predetermined period of time such as three months to up to 20 years or longer, and offer a set rate for that period. At that point, the brokered CD has reached maturity, and if you hold it until the maturity date you get back the initial amount you invested plus interest.
Which brokered CD you purchase makes a significant difference. That’s because if the brokered CD you are considering is “callable,” it means the issuer can decide they want it back before the original maturity date. If your brokered CD is called, you get back your initial investment plus interest but for a shorter period of time than if it had reached its maturity date. If, however, the brokered CD is “call-protected,” meaning the issuer cannot call it, you can simply hold it until maturity date, and receive the original amount you invested plus interest. Only 10% to 20% of brokered CDs are “callable,” according to Richard Carter, vice president, fixed income, Fidelity Investments.
Advantages of brokered CDs
Potentially higher yield than traditional CDs. “Rates, in general, on CDs are rising,” says McBride. “It’s important to comparison-shop. Brokered CDs may not stand out nearly as much as top-yielding (traditional) CDs.” If you are fairly certain you won’t need the money before the maturity date, and, therefore, won’t need to sell the brokered CD before that date, the brokered CD can lock in a higher rate.
The way to “shop” for a brokered CD is to sign into your brokerage account or accounts, and check the preset time periods and rates that are offered. For example, if you prefer to invest a particular amount of money for just six months, look for six-month brokered CDs only. If you are willing to invest for 18 months, search brokered CDs with that time period. Read the terms to understand whether the brokered CD is callable or not.
FDIC insured. Brokered CDs are typically FDIC-insured up to $250,000 for both principal and interest for each issuer such as a bank or credit union for each ownership category such as single ownership or joint ownership.
Disadvantages of brokered CDs
If the brokered CD is callable, the yield can be lower than you anticipated. If the issuer calls the brokered CD before its maturity date in accordance with the original terms, you won’t receive as much interest as expected. “Be sure about the terms of the (brokered CD),” says McBride.
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If you decide to sell before the maturity date, you can lose money on the secondary market. If interest is higher on new issue brokered CDs when you sell, your CD may not be worth as much on the secondary market. “You could be subject to a significant hit,” says McBride. For example, if new issue CDs are paying 5% or 6%, and yours pays 4.3%, you “will have to discount (your brokered CD) in order to sell it,” he says.
In addition, says Brett Neiser, founder and CEO of What’s Next with Money, a YouTube program, you’ll lose some of the interest you expected to earn.
Most brokered CDs are sold at a minimum of $1,000 and in increments of $1,000. In late August, Fidelity began to sell “fractional CDs” beginning at a minimum of $100 that can be purchased in increments of $100. For new issues, there is no fee or commission. If purchased on the secondary market, there is a $1 fee. If you sell before the maturity date on the secondary market, the $1 fee applies. If traded with a representative, there is a $19.95 fee.
Check with your brokerage to see if any fees apply.
Here are some specific situations when you might consider shopping for brokered CDs:
Received a lump sum pension. You’ve received part of a pension as a lump sum, and you’re considering what to do with the money.
You can buy more than one brokered CD, each one with a different maturity date such as six months, nine months, a year, 18 months. “You can stagger the maturity dates a little bit,” says Neiser.
You have money in a money market. As interest rates on many options have risen, you may prefer to move some of your money to brokered CDs. For example, if your high-yield savings account is paying 3% APY you can compare that rate to a brokered CD. If the rate is sufficiently higher for a brokered CD, consider which specific time frame suits your situation and risk tolerance.
You have uninvested cash in one or more of your brokerage or retirement accounts. If you haven’t been comfortable buying more stocks or mutual funds with that money, a brokered CD can be an option. Log into your account first, then begin researching the brokered CDs that are available. If the money is in your Roth IRA, for example, the earnings are also tax-free, if you withdraw funds five years after the first tax year during which a contribution was made to a Roth IRA set up for your benefit. Remember, also, if you’ve reached age 59½, you avoid the 10% penalty for early withdrawal. If these funds are in a brokerage account, they are taxed as ordinary income not as capital gains, says Neiser, who also was chair of the consumer advisory board at the Consumer Financial Protection Bureau.
Maxed out on Social Security. If you are still waiting or already delayed claiming your retirement benefits, when you do claim, you may have more expendable income to invest. If so, figure out your budget, and how much you may want to invest in brokered CDs.
Received an inheritance. Whether it be cash or equities, consider whether brokered CDs are an investment choice for some of the funds.
Sold a rental property. Brokered CDs can be a place to invest funds at relatively low risk.
Set aside uninvested cash to pay your required minimum distribution. If you will need to take an RMD next year, and are concerned about stock market volatility, you could invest “a large chunk of money” in a brokered CD for nine months or a year, says Richmond, Va.-based certified financial planner Lauren Zangardi Haynes.