Personal Finance
‘Shop around’ for best CD rates — but don’t panic buy as stocks plunge
Alistair Berg | Digitalvision | Getty Images
Investors who park savings in a certificate of deposit may be short-changing themselves with their CD choice.
And that mistake can prove costly for investors who feel an impulse to flee the stock market amid a steep downturn being fueled by President Donald Trump’s tariff policy and fears of an escalating global trade war.
“When it comes to buying CDs, it pays to shop around,” said Winnie Sun, co-founder of Irvine, California-based Sun Group Wealth Partners and a member of CNBC’s Financial Advisor Council.
Why consumers may be ‘shortchanged’
CDs have a set term, ranging from a few months to five or more years. Upon maturity, banks return the depositor’s principal plus interest.
Consumers who want their money early must generally pay a penalty, losing out on months of interest.
However, paying that withdrawal penalty may be worthwhile for savers who adopt the right strategy, according to a recent research paper by Matthias Fleckenstein, associate professor of finance at University of Delaware, and Francis Longstaff, finance professor at the University of California, Los Angeles.
Specifically, consumers can often get a higher financial return by choosing a long-term CD and paying a penalty to pull money out early, relative to simply picking a short-term CD, the researchers found.
Investors who are unaware of the strategy may get “shortchanged” by banks, Fleckenstein told CNBC.
‘The rule rather than the exception’
Here’s an example: If an investor puts $1 in a five-year CD with a 5% interest rate and cashes it out after one year with a penalty equivalent to six months of interest, they would receive about $1.03, which is slightly more than the $1.01 they would get from a one-year CD with a 1% interest rate, despite the penalty incurred for early withdrawal.
Banks frequently price CDs this way, Fleckenstein and Longstaff wrote in their paper, published in October in the National Bureau of Economic Research.
More from Personal Finance:
Avoid ‘dangerous’ investment instincts amid tariff sell-off
What to know before trying to ‘buy the dip’
20 items and goods most exposed to tariff price shocks
The researchers examined weekly CD rates offered by 16,891 banks and branches — ranging from small community banks to big nationwide institutions — from January 2001 to June 2023. Rates were for accounts up to $100,000.
About 52% of CDs offered during that period had such “inconsistencies” in pricing when comparing a given term against a longer-term CD cashed in early, they found.
“It’s the rule rather than the exception,” Fleckenstein said.
“There are banks that do this all the time,” he said, and “there are some that don’t do this at all.”
At banks where this happens, the difference in returns “is not tiny,” Fleckenstein said. In fact, the pricing inconsistency is about 23 basis points, on average, over the roughly two decades they assessed, he said.
Given that disparity, the average investor who invested $50,000 could have gotten an extra $115 of interest by picking a longer-term CD and cashing it in early, their research suggests.
The average size of that pricing difference rose as interest rates began to increase during the Covid-19 pandemic, Fleckenstein said.
CDs often for ‘safety and liquidity’
About 6.5% of households held assets in CDs as of 2022, with an average value of about $99,000, according to the most recent Survey of Consumer Finances.
Certificates of deposit may be a “great fit” for someone looking for a safe yield — whether someone near retirement, already retired, planning a home purchase in the near future or even a younger investor seeking peace of mind. However, consumers shouldn’t “panic-sell” their stocks and move proceeds into CDs, Sun said.
“Selling at dramatic lows and moving into CDs translates into locking in losses that your financial plan may not be able to absorb,” Sun said.
Like any investment, there are pros and cons to CDs.
For example, unlike other relative safe havens like high-yield savings accounts or money market funds, CDs offer a guaranteed return over a set period with no chance of market-based losses. In exchange, however, CDs offer less liquid access to your cash than a savings account and lower long-term returns than the stock market.
“Shop around for the best CD rate across banks, but also look within banks at whether it actually may pay off to accept a longer term but pay an early withdrawal penalty,” Fleckenstein recommended, based on his research findings.
Current market may offer few chances for strategy
The option may not be as prolific in the current market environment, though.
Long-term CDs typically pay a higher interest rate than shorter-term ones, Sun said. But average rates for one-year CDs are currently higher than those for five-year CDs: about 1.9% versus 1.6%, respectively, according to Bankrate data as of March 31.
Households can pursue other CD strategies, Sun said.
For example, instead of putting all savings into a long-term CD, consumers might put a chunk of their money into a long-term CD and with the remaining funds build a “ladder” of shorter-term CDs that mature more quickly. They can then buy more CDs if they’d like once the shorter-term ones come due.
Halfpoint Images | Moment | Getty Images
Under the Biden administration, the U.S. Department of Education made regular announcements that it was forgiving student debt for thousands of people under various relief programs and repayment plans.
That’s changed under President Donald Trump.
In his first few months in office, Trump — who has long been critical of education debt cancellation — signed an executive order aimed at limiting eligibility for the popular Public Service Loan Forgiveness program, and his Education Department revised some student loan repayment plans to no longer conclude in debt erasure.
“You have the administration trying to limit PSLF credits, and clear attacks on the income-based repayment with forgiveness options,” said Malissa Giles, a consumer bankruptcy attorney in Virginia.
The White House did not respond to CNBC’s request for comment.
Here’s what to know about the current status of federal student loan forgiveness opportunities.
Forgiveness chances narrow on repayment plans
The Biden administration’s new student loan repayment plan, Saving on a Valuable Education, or SAVE, isn’t expected to survive under Trump, experts say. A U.S. appeals court already blocked the plan in February after a GOP-led challenge to the program.
SAVE came with two key provisions that lawsuits targeted: It had lower monthly payments than any other federal student loan repayment plan, and it led to quicker debt erasure for those with small balances.
“I personally think you will see SAVE dismantled through the courts or the administration,” Giles said.
But the Education Department under Trump is now arguing that the ruling by the 8th U.S. Circuit Court of Appeals required it to end the loan forgiveness under repayment plans beyond SAVE. As a result, the Pay As You Earn and Income-Contingent Repayment options no longer wipe debt away after a certain number of years.
More from Personal Finance:
Nearing retirement? These strategies can protect from tariff volatility
Experts see higher stagflation risks. Here’s what it means for your money
Should investors dump U.S. stocks for international equities? What experts think
There’s some good news: At least one repayment plan still leads to debt erasure, said higher education expert Mark Kantrowitz. That plan is called Income-Based Repayment.
If a borrower enrolled in ICR or PAYE eventually switches to IBR, their previous payments made under the other plans will count toward loan forgiveness under IBR, as long as they meet the IBR’s other requirements, Kantrowitz said. (Some borrowers may opt to take that strategy if they have a lower monthly bill under ICR or PAYE than they would on IBR.)
Public Service Loan Forgiveness remains
Despite Trump‘s executive order in March aimed at limiting eligibility for Public Service Loan Forgiveness, the program remains intact. Any changes to the program would likely take months or longer to materialize, and may even need congressional approval, experts say.
PSLF, which President George W. Bush signed into law in 2007, allows many not-for-profit and government employees to have their federal student loans canceled after 10 years of payments.
What’s more, any changes to PSLF can’t be retroactive, consumer advocates say. That means that if you are currently working for or previously worked for an organization that the Trump administration later excludes from the program, you’ll still get credit for that time — at least up until when the changes go into effect.
For now, the language in the president’s executive order was fairly vague. As a result, it remains unclear exactly which organizations will no longer be considered a qualifying employer under PSLF, experts said.
However, in his first few months in office, Trump has targeted immigrants, transgender and nonbinary people and those who work to increase diversity across the private and public sector. Many nonprofits work in these spaces, providing legal support or doing advocacy and education work.
For now, those pursuing PSLF should print out a copy of their payment history on StudentAid.gov or request one from their loan servicer. They should keep a record of the number of qualifying payments they’ve made so far, said Jessica Thompson, senior vice president of The Institute for College Access & Success.
“We urge borrowers to save all documentation of their payments, payment counts, and employer certifications to ensure they have any information that might be useful in the future,” Thompson said.
Other loan cancellation opportunities to consider
Federal student loan borrowers also remain entitled to a number of other student loan forgiveness opportunities.
The Teacher Loan Forgiveness program offers up to $17,500 in loan cancellation to those who’ve worked full time for “complete and consecutive academic years in a low-income school or educational service agency,” among other requirements, according to the Education Department.
(One thing to note: This program can’t be combined with PSLF, and so borrowers should decide which avenue makes the most sense for them.)
In less common circumstances, you may be eligible for a full discharge of your federal student loans under Borrower Defense if your school closed while you were enrolled or if you were misled by your school or didn’t receive a quality education.
Borrowers may qualify for a Total and Permanent Disability discharge if they suffer from a mental or physical disability that is severe and permanent and prevents them from working. Proof of the disability can come from a doctor, the Social Security Administration or the Department of Veterans Affairs.
With the federal government rolling back student loan forgiveness measures, experts also recommend that borrowers explore the many state-level relief programs available. The Institute of Student Loan Advisors has a database of student loan forgiveness programs by state.
M Swiet Productions | Getty Images
Many Americans are worried they’ll run out of money in retirement.
In fact, a new survey from Allianz Life finds that 64% Americans worry more about running out of money than they do about dying. Among the reasons cited for those fears include high inflation, Social Security benefits not providing enough support and high taxes.
The fear of running out of money was most prominent for Gen Xers who are approaching retirement. However, a majority of millennials and baby boomers also said they worry about their money lasting, according to the online survey of 1,000 individuals conducted between January and February.
Separately, a new Employee Benefit Research Institute report finds most retirees say they are living the lifestyle they envisioned and are able to spend money within reason. Yet more than half of those surveyed agreed at least somewhat that they spend less because of worries they will run out of money, according to the survey of more than 2,700 individuals conducted between January and February.
More from Personal Finance:
Nearing retirement? These strategies can protect from tariff volatility
Experts see higher stagflation risks. Here’s what it means for your money
Should investors dump U.S. stocks for international equities? What experts think
Meanwhile, a Northwestern Mutual survey reported that 51% of Americans think it’s “somewhat or very likely” they will outlive their savings. The survey polled 4,626 U.S. adults aged 18 and older in January.
Since those studies were conducted, new tariff policies have caused disturbance in the stock markets and prompted speculation that inflation may increase. Meanwhile, new leadership at the Social Security Administration has prompted fears about the continuity of benefits. Those headlines may negatively affect retirement confidence, experts say.
With employers now providing a 401(k) plan and other savings plans versus pensions, it is largely up to workers to manage how much they save heading into retirement and how much they spend once they reach that life stage. That responsibility can also lead to worries of running out of money in the future, experts say.
How to manage the ‘fear of outliving your resources’
Because of the unique risks every individual or couple faces when planning for retirement, the best approach is typically to transfer some of that burden to a third party, said David Blanchett, head of retirement research at PGIM DC Solutions.
Creating a guaranteed lifetime income stream that covers essential expenses can help reduce the financial impact of any events that require retirees to cut back on spending, Blanchett explained.
That should first start with delaying Social Security benefits, he said. While eligible retirees can claim benefits as early as 62, holding off up until age 70 can provide the biggest monthly benefits. Social Security is also unique in that it provides annual adjustments for inflation.
Next, retirees may want to consider buying a lifetime income annuity that can help amplify the monthly income they can expect. Admittedly, those products can be complicated to understand. Therefore Blanchett recommends starting out by comparing very basic products like single premium immediate annuities that are easier to compare.
“Unless you do those things, you just can’t get rid of that fear of outliving your resources,” Blanchett said.
Without a guaranteed income stream, retirees bear all of the financial risk themselves, he said.
“Retirement could last 10 years; it could last 40 years,” Blanchett said. “You just don’t know how long it’s going to be.”
Among retirees, there has been some hesitation to buy annuities, said Craig Copeland, EBRI’s director of wealth benefits research. Such a purchase requires parting with a lump sum of money in exchange for the promise of a guaranteed income stream.
“We see great increase in interest, but we aren’t seeing upticks in take up yet,” Copeland said. “I do think that’s going to start to change.”
What can help boost retirement confidence
To effectively plan for retirement, it helps to seek professional financial assistance, experts say.
Meanwhile, few people have a plan of their own for how they may live on the assets they’ve worked hard to accumulate, according to Kelly LaVigne, vice president of consumer insights at Allianz Life.
“This is something that you should not plan on doing on your own,” LaVigne said.
While the survey from Northwestern Mutual separately found individuals think they need $1.26 million to retire comfortably, the real number individuals need is based on their personal situation, said Kyle Menke, founder and wealth management advisor at Menke Financial, a Northwestern Mutual company.
In thinking about how life will look in 30 years, there are a variety of things to consider, Menke said. This includes stock market returns, taxes, inflation and medical expenses, he said.
Even people who have enough money for retirement often don’t feel confident in their ability to manage all of those factors on their own, he said. Financial advisors have the ability to run different simulations and stress test a plan, which can help give retirees and aspiring retirees the confidence they’re lacking.
“I think that’s where the biggest gap is,” said Menke, referring to the confidence Americans are lacking without a plan.
German fiscal boost won’t outweigh tariff drag for euro zone: IMF
Chinese factories stop production, eye new markets as U.S. tariffs hit
Water sommeliers say the simplest drink is the future of luxury
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
The Essential Practice of Bank and Credit Card Statement Reconciliation
Are American progressives making themselves sad?
-
Economics1 week ago‘He should bring them down’
-
Economics1 week agoTrump’s approval rating on economy at lowest of presidential career
-
Blog Post1 week agoDocumenting Bookkeeping Processes and Procedures
-
Economics1 week agoDonald Trump wants a certain kind of immigrant: the uber-rich
-
Economics1 week agoTrump tariffs could cause summer economic slump: Chicago Fed president
-
Economics1 week agoChecks and Balance newsletter: The Democrats’ future is up for grabs
-
Personal Finance6 days agoConsumers are making different financial choices in response to tariffs
-
Personal Finance1 week agoExperts see higher stagflation risks. Here’s what it means for your money