How to Create the Ultimate CD Ladder

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Last updated on August 9, 2020 Comments: 17

The low interest rates offered by even the highest-yield savings and money market accounts are disappointing for savers. Even as the Fed starts to raise rates, savings account yields haven’t budged. So, do we just give up the idea of earning anything on our savings?

Well, not necessarily. One alternative is to create what’s called a CD Ladder.

If you don’t want to tie your short-term cash in a riskier investment, you can consider certificates of deposit (CDs). Typically, CDs carry penalties if you withdraw your cash before they mature. In other words, you will want to invest in a CD designated with a length of time that represents when you would like to get your money back (plus interest). If you need to liquidate the CD early, a bank may take away some or all of the interest that has accrued since the time of the deposit.

In addition, the longer the CD is held, the higher the interest rate you’ll earn. A 5-year CD, for example, will pay a much higher yield than a 12-month CD. The downside, of course, is that you are much more likely to liquidate a 5-year CD in an emergency, losing money to the penalty most banks charge for early withdrawals.

By using a CD ladder, however, you can get the higher rates that accompany longer terms, while also reducing the risk that you’ll need to liquidate a CD before it matures.

How Does a CD Ladder work?

The strategy is simple. You will initially buy a number of CDs, all with staggered maturity dates. Every few months, one of the CDs will mature and you can then roll that cash into a new CD (or use the cash for your short-term expense needs). Eventually, you will only need to buy CDs with the longest maturities, but the constant maturation of certificates will continue. This provides you with a rolling source of interest and/or principal, which you can use or reinvest depending on your finances at the time.

The process consists of two phases. For this example, we’ll use the latest rates from online banks, which often do not have a minimum balance requirement.

Setting up the CD Ladder

These are the CD products and interest rates we will be dealing with. These are example rates, so check with your bank to determine the interest you’ll earn.

3 Month0.30%
6 Month0.60%
9 Month0.64%
12 Month1.05%
2 Year1.30%
3 Year1.50%
4 Year1.40%
5 Year1.65%

We can use this combination of maturities to create a ladder that provides us with a roll-over, or a chance to withdraw part of the cash, every three months. During Phase 1, this will require a combination. By Phase 2, though, all CDs will be of the 5-year maturity, which usually offers the highest interest rates. Remember that five years is as long as you want to go with the CD ladder. If you have funds that you can afford to part with for more than five years, you should look at investing them in a slightly riskier (and more lucrative) investment.

A $10,000 Example

Alright, let’s get started. Assume that we have $10,000 that we’d like to begin rolling into certificates of deposit. Since the longest we want to go is five years, we can split this evenly over time at $2,000 per year. Our shortest maturity is three months, so we can tackle this in terms of $500 a quarter.

In the first phase, start on day zero by buying CDs with the following maturities:

  • $500 in the 3 month CD
  • $500 in the 6 month CD
  • $500 in the 9 month CD
  • $2,000 in the 12 month CD
  • $2,000 in the 2 year CD
  • $2,000 in the 3 year CD
  • $2,000 in the 4 year CD
  • $500 in the 5 year CD

At the end of the each of the first three quarters, withdraw each quarter’s $500 plus interest and use the funds to buy new 5 year CDs. For the sake of the example, we’ll withdraw the interest and place it in another bank account to use as income. To make more of your money, you should “reinvest” your interest each quarter.

Automatic Renewals

Watch out for automatic renewal. At Ally Bank, for example, CDs are automatically renewed for the same duration when they mature. During this stage, you will need to be proactive to withdraw the funds at maturity and use them to buy the next appropriate CD.

After one year of doing the above, this is what we have:

  • $2,000 maturing today (original 12 month CD)
  • $2,000 maturing in one year (original 2 year CD)
  • $2,000 maturing in two years
  • $2,000 maturing in three years
  • $500 maturing in four years
  • $500 maturing in four years, three months
  • $500 maturing in four years, six months
  • $500 maturing in four years, nine months

With the $2,000 maturing today, buy:

  • $500 in the 3 month CD
  • $500 in the 6 month CD
  • $500 in the 9 month CD
  • $500 in the 5 year CD

Do the same with the $2,000 that matures each year until you have a total of 20 CDs, each maturing every quarter for the next five years. Once this process is complete, you can allow the automatic renewals to take effect, except for when you need to withdraw your money.

CD Ladder Calculator

Drawbacks of the CD ladder

As long as rates for long-term CDs remain higher than short-term CDs — as they do most of the time — you may notice something. This method, in fact, results in earning less than simply investing your entire $10,000 in a 5 year CD. So, why would you go this route?

It’s because the CD ladder provides you some protection against losing interest if you need to withdraw your funds early. At Ally Bank, the penalty is not significant. This bank will charge you the amount of three months’ interest if you withdraw a CD with a maturity of 12 months or less. They’ll also charge 6 months’ interest if you withdraw a CD with a maturity of longer than 12 months.

Another possibility to consider is that you might earn more interest in a high-yield savings account than you would in a short-term CD. When this is the case, use a specially designated savings account rather than the short-term CDs.

We could have made this process easier by setting up a ladder that results in a turnover of $2,000 once a year rather than $500 every quarter. However, this method allows you to better decrease the possibility of losing interest. This is because you will always be able to access a portion of your investment within three months.

In combination with a savings account, which is liquid at all times, you can earn consistently higher interest rates with less risk than using five-year CDs that mature only once a year.

Article comments

Tom says:

Anybody out there?? I’m just putting some feelers out there to see if there’s anyone interested in making a pretty substantial amount of cash in a short amount of time. Only thing this requires is that you have an active bank account or credit card in the US. No cash is required up front to start. Which means your account can be on a zero balance and that’s completely fine. +1(314) 856 1730, lets talk about the next deal

Diana says:

It is usually a simple process to put up a basic CD ladder. You can start with deciding the total amount you’d like to deposit into a CD ladder. Banks typically have a minimum deposit requirement for CDs to earn the advertised annual percentage yield (APY). Money in your CD will automatically earn interest – but only if you avoid withdrawing from it before it matures. The other thing that you need to figure out is how to divide your money for the ladder. You could divide your money equally into a 1-year, 2-year, 3-year, 4-year and a 5-year CD. This way you’ll have some liquidity on a yearly basis, and still have some money in higher-earning, long term CDs.

Anonymous says:

I have been considering building a IRA CD bond ladder with 5 5-year CDs to grab the higher yield and pay the early termination fee(s), if it makes sense. I was looking into Synchrony’s 5-year CD which currently pays 2.25%, however, it has a 180 day early termination fee. Thoughts?

Anonymous says:

Ally also offers bump-up CDs which they call “Raise Your Rate” with 2- and 4-year maturities. The 2-year allows you to bump your rate once, and the 4-year twice. You can build a ladder using just bump-up CDs, although the setup is a bit more complicated, but it will give you a hedge against interest rate risk.

Anonymous says:


How would you set up a ladder using just the bump-up cd’s? Can you please explain how you would do that – how often and how many cd’s?

Thank you.

Anonymous says:

Psst…you forgot that Ally adds a 0.25% bonus on top of the current interest rate when you roll the CD over.. You can change the term if you want

Anonymous says:

I am switching over to Ally and bought a few CDs. But, I think they’ve changed their early withdrawal fees:

“We will only charge a penalty if you make a withdrawal before the CD matures. For all CDs, the early withdrawal penalty equals 60 days’ interest. This penalty does not apply to No Penalty CDs.”

Looks good to me!

With that kind of no-big-deal penalty, I’m wondering if I could buy a few 5-year CDs. Maybe $500 a piece? If I have to get the money, it’s a smaller loss than if it were all in one (and I really don’t think I’ll need that money). Right now, I have some in a 12m and some in a 5y and I’m still deciding on what to do with the rest.

Anonymous says:

I’d take the penalty, too, like BobbyC said.
Just have to be extra careful on finding the right bank and fully knowing and understanding their requirements and penalty for early withdrawal.
If you really need the money right away / emergency, you won’t be so worried about what the penalty is.
However, if it’s a significant rise in rates, you’d have to compare the amount you’d lose via the penalty versus how much you might gain with the new rates, or at least how long it would take a new cd with higher rates to make up the difference. Too small of a rise in rates might not be enough to offset the penalty at all.

Anonymous says:

I have thought like bobby c for some time now but I’m glad to see there is another who thinks the same way. bob c

Anonymous says:

Currently Ally only applies a penalty of 60 days of interest on early withdrawal. Why wouldn’t you always want to get the 5 year CD at 2.4% even if you plan on taking the money out in 1 year. In this case, if you are 3 years into a 5 year CD and a compellingly higher rate is available you can withdraw the funds and open a new 5 year CD with only a 2 month penalty. If you invest $100,000 at 2.4% you’ll be earning around $200 a month. After 3 years you’ll have earned almost $7500 and it will cost you around $ 236 penalty to take all of the money out and fund a new CD or just because you need the cash. Most of the 5 year CDs I have researched have a 180 day penalty and worthy of more consideration.
With $100,000 in a 5 year CD at 2.4% after 1 year you’ll have earned around $2426 and it will cost you around $ 217 penalty so you’ll have an after penalty gain of $2209. If instead you invested in a 1 year CD at 1.24% you’ll have a gain of around $1247 at maturity. So I’ll take the penalty any time. Is my logic wrong? Somebody straighten me out if I am.

Anonymous says:

As a really conservative investor, I’d like to create one of these. Thanks for the excellent information.

Anonymous says:

Thanks for the excellent advice. Ally Bank seems to be a good place to start looking for a long term CD with good rates and limited early withdrawal penalty, if required.

Anonymous says:

I'd agree with KC, I've been buying 1 yr CDs. Rates can't get lower from here, and there are better opps in the TIP etf and/or I Bonds right now. I've done this with half my emergency fund, with the other half available to cover the interim.

Anonymous says:

I'd agree with KC, I've been buying 1 yr CDs. Rates can't get lower from here, and there are better opps in the TIP etf and/or I Bonds right now. I've done this with half my emergency fund, with the other half available to cover the interim.

Anonymous says:

I’d agree with KC, I’ve been buying 1 yr CDs. Rates can’t get lower from here, and there are better opps in the TIP etf and/or I Bonds right now. I’ve done this with half my emergency fund, with the other half available to cover the interim.

Anonymous says:

I’d agree with KC, I’ve been buying 1 yr CDs. Rates can’t get lower from here, and there are better opps in the TIP etf and/or I Bonds right now. I’ve done this with half my emergency fund, with the other half available to cover the interim.

Anonymous says:

My only concern right now locking into a 5 yr CD rate is that at some point rates have to go higher. You could be stuck at year 3 in a 5 yr CD with a rate that is equivalent to what a 1 yr CD is paying out currently. I guess the simplest solution to this would be to stop at 1 year CDs until the field improves a little. It would also solve the problem of tying up too much money too soon.

But I am a big fan of CDs. I think of them as my conservative investing. I have a large emergency fund, but it currently only gets 2% in the bank. I also have investments (retirement and long term savings). But I need something in-between and CDs are a good place.