Learn How to Structure
Interest-Bearing Accounts

How People Build Interest Rate Ladders

A simple approach
to get higher, stable interest income on shorter-term assets

Couple working on their interest rate savings ladder

What do people mean when they discuss "laddering CDs" or "laddering fixed interest products"? They are usually referring to a strategy that people will use to maximize predictable interest income for shorter-term assets but that will still allow some liquidity. A "ladder" typically refers to the purchase of a number of interest-bearing products, like bank CDs or MYGAs of varying durations and interest rates. Generally, products with longer durations pay higher interest rates, but reduce liquidity for the owner. By laddering fixed interest financial vehicles, people can increase their interest income on savings, protect against interest rate volatility, and still build in a measure of liquidity for your money in case of emergency.

The following is for informational purposes only and is not intended to provide any specific financial advice. Carefully review any financial products before making a purchasing decision.

  • 1

    Set aside a small amount for emergencies

    Generally, advisors recommend having 3 to 6 months' worth of savings that can be accessed at any time.*

  • 2

    Decide how long to structure a ladder

    Generally, people structure a laddered interest strategy anywhere from 3 to 7 years. In a normal interest rate environment, a longer planning period will generally allow an individual to earn higher rates. However, it also means that a higher percentage your savings may not be immediately accessible without paying a penalty or sacrificing overall returns. For discussion purposes, we'll assume we're building a 5-year ladder.

  • 3

    Determine the frequency at which each investment in the ladder matures and is reinvested

    Some people, based on total size of their savings and minimum required investments may choose to structure a 5-year ladder at intervals as short as three months. To keep this as simple as possible, let's assume the desired frequency of reinvestment is once a year.

  • 4

    Divide the total assets equally by the number of reinvestment periods

    Suppose a person wants to place $50,000 in short-term savings in a 5-year ladder with an annual reinvestment cycle. This means that the person will put $10,000 in each of five different savings vehicles. The person could hypothetically put $10,000 in each of the following: a 1-year bank CD, a 2-year bank CD, a 3-year bank CD, a 4-year MYGA, & a 5-year MYGA.

  • 5

    As each instrument matures, reinvest at the maximum length of the ladder

    One year later, when the 1-year bank CD matures, the person would reinvest the $10,000 plus interest in a 5-year MYGA. Two years later, when the 2-year bank CD matures, the person would reinvest the funds in a 5-year MYGA. This strategy allows a person to progressively benefit from higher interest rates, to protect against interest rate volatility, and to have the regular opportunity each year to access savings without penalty if personal circumstances change.

*Here's How Much Money You Should Really Save For Your Emergency Fund, Forbes, April 15, 2016

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Important Disclosures

Annuity contracts may be subject to possible loss of principal and earnings, since a surrender charge and market value adjustment may apply to withdrawals or upon surrender of the contract.

Annuities are long-term investment vehicles. Annuities held within qualified plans do not provide any additional tax benefit. With certain exceptions, surrender charges apply to withdrawals taken during the initial guarantee period and a market value adjustment, which may increase or decrease the amount received upon withdrawal, may also apply at any time.

All or a portion of amounts withdrawn are subject to ordinary income tax, and if taken prior to age 59 1⁄2, a 10% IRS penalty may also apply. Nassau does not provide tax, financial or investment advice, or act as a fiduciary in the sale or service of the product. Consult a tax advisor or financial representative about your specific circumstances.

The information above is intended for use by the general public and is not individualized to address any specific investment objective. It is not intended as investment or financial advice. We encourage you to consult with an advisor who can tailor a financial plan to meet your needs.