Why the 10-Year CD Might Be the Worst Bank Product Ever

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The popularity of certificates of deposit and other fixed-income investments is due to the predictability of their returns. Unlike stock investments, CD returns are guaranteed. Investors put money in very safe but relatively low-yielding long-term investments such as CDs instead of angling for a bigger return by navigating the uncertain waters of the stock market.

However, tying up money for long periods of time in “safe” investments actually poses some risk. The 10-year CD is a case in point. Locking in a CD interest rate for a decade can seem like a route to certainty and security. But doing so also prevents you from taking advantage of interest rates when they finally begin to rise. Many experts expect rates to start ticking upward in 2017.

Right now, 10-year CD rates are lower than rates offered by some savings accounts. For example, a Bank of America 10-year CD with less than a $10,000 deposit amount gets you a 0.15-percent annual percentage yield. Bank of America’s penalty for withdrawing money from that CD before its maturity is equal to 365 days’ worth of interest on the amount withdrawn.

Related: 10 Best Savings Accounts of 2016

By contrast, Ally Bank offers a savings account that pays 1 percent APY on all balances. When savings account rates and CD rates are so closely matched, the wisdom of locking away your money for a decade starts to wane. Depositing $10,000 in a high-yield savings account with no penalty for withdrawing money early is likely going to produce a better result than purchasing a 10-year CD.

Impact of Inflation on a 10-Year CD

Inflation also impacts the value of the 10-year CD yield. Inflation is likely to reduce the purchasing power of any interest you’re paid over the decade. To find out how much you’ll actually earn in interest, you must subtract increases in the Consumer Price Index, or CPI, from the nominal yield. This is the amount you actually have after inflation, and it is appropriately called the “real yield.”

Even if you’re lucky enough to lock into the best CD rates available, your real yield might be lower than you expect if inflation is high. Inflation is a variable that cannot be accurately predicted.

Related: How to Open a CD Account

Alternatives to the 10-Year CD

If you need access to your cash or want a better return, opening a high-yield savings account or investing in the stock market might be better options than purchasing a 10-year CD. And there are other options as well.

CD Laddering

CD laddering is another option if you like the idea of locking in a rate but don’t like the notion of not having access to your money for a decade. With a CD ladder, you purchase short-term, medium-term and long-term CDs. Each CD will mature at a different time.

For example, if you invest in 12-, 24-, and 60-month CDs, the first rung on your ladder — the 12-month CD — matures in one year. Once that happens, you reinvest the proceeds of that CD into a long-term CD and so on, until you have only long-term CDs.

The reason you eventually want to hold just long-term CDs is because their interest rates are typically higher than the rates of CDs with shorter terms. CD laddering makes it easy for people to start slowly without locking up their funds for years and years.

Bump-Up CDs

Bump-up CDs — also known as step-rate CDs, among other names — might be a good option for those who like the security of a guaranteed return, but also want the ability to withdraw some funds without penalty. Some of these CDs allow you to increase the rate on the CD if interest rates rise. Others have built-in, automatic rate increases that kick in over time. Typically, there are limits to how often you can raise the rate.

Wells Fargo offers a 24-month step-rate CD product that allows the customer to withdraw money once every six months without penalty as long as the original investment amount remains in the CD. The CD also has guaranteed rate increases at seven-, 13- and 19-month intervals.


Bonds are another investment alternative. They offer less risk than stocks, but more risk than CDs. In essence, bonds are loans you provide to various entities, from government to private business. In exchange for the loan, the borrower pays you interest.

As with many investments, the riskier the bond you purchase, the higher the return you earn. That means you’re likely to make more money from an entity that is less creditworthy than one that has a proven track record of good credit. But in doing so, you also take on more risk that the borrower will default on its obligation to you.

In short, the 10-year CD is not an ideal option for people who want to maintain liquidity. Also, people who want a greater return will probably benefit from a different type of investment, such as stocks and bonds. Finally, for those who want both security and liquidity, a high-yield savings or checking account is an option to consider.

Related: What Is a Bond and Why Is It a Risky Investment? 

  • First, yes there is interest rate risk if rates go up, but there isn’t principal risk. When investing in the stock market, your principal is at risk. Depending on your horizon for the need of the funds, a large drop may not be able to be made up.

    Second, if you are smart about which 10-year CDs you are buying, you can gain a slight hedge by using long-term CDs that don’t have excessive early withdrawal penalties. Yes, there is the risk of a bank not allowing you to close the CD early or even changing the penalty, but that risk is quite small.

    Third, you need to compare apples-to-apples. You can’t average the inflation over the last 10-years and use that to demonstrate why a 2.45% over the next 10-years is bad. In 2007, you could have had a 10-year CD for near 6.00%. Currently that would look pretty good.

    You don’t know the future. Do the best with what today has for you. Sometimes that is a 10-year CD.

    • valsvet

      I agree with you 100%. The author, while making a remark about the stock market risk, should not in my opinion even compare CDs to equities. FDIC insured CDs are the best tools for capital preservation and income stream. I am 63, planning to work full time till 68. I just bought $200k worth of 10 year CDs at Fidelity yielding 3.30%. I also refinanced (in Feb 2013) my $120k mortgage at 2.75% (10 year). The rest of the money is in equities, junk bonds, short and med term bonds and 5% in gold and energy, $500k all together including CDs. Here is the way I see it: in 10 years I will have $266,000 guaranteed + whatever the rest of my money makes or loses + whatever I manage to save while still working (401-k). Should work for me.

    • gman

      I agree 100%…back in 08 when everything flew apart and I had a 7% CD with Capital One I wish I had my whole portfolio in Cap One CDs…My avg would be about the same or better with the CDs plus I would have gotten a lot more sleep.

    • gman

      Also would like to comment that all this diversification talk is confusing…it seems to me you should either stay all in cash and bonds or all in stocks as if you put 50% in each when one goes up the other goes down…negating the returns anyway.

      • Mike Daniel

        You really don’t understand diversification.

  • Joe Fox

    What about money market? Is that preferable to a CD or a savings account?

    • Bea Marino

      I don’t know of any money market account that is going to give you 2%. The good thing about the MM is that you won’t have an early withdrawal penalty. I think MMs are good for storing money you might need for emergencies etc. In these terrible interest rate times, I would not want to have to go any lower than 2% for a CD and hopefully not as long out as 10 years. These are really bad days for savers who need to be risk-free.

  • timmy

    I just bought a 10 year CD that pays 3.3 percent for 10 years. With this investment, I’ll earn about $6700 on my $20000 investment over the next 10 years vs. zero in cash. Listen, I’m 54 years old and I will tell you that the last 10 years went by pretty fast and I think that I will really enjoy that $6700 when I’m 64. Of course, I will hopefully also make money on the dividend paying stocks that I own, but this comes without risk. You seem to be assuming that rates are on the rise. If you look at the history of rates and inflation, you will see that they move slow. I’ll take the 3.3% FDIC insured.

    • Cosmo Kramer

      I agree a million percent. It’s going to be a long long time before we see 5 percent interest rates. A 10 year CD is not a bad investment currently, it’s an excellent place to put your non-risk investments.

  • atl9pdnp

    all fine and dandy – nice math… but if you were invested in a 10 yr CD in 2000 or 2009 vs having your money in the stock market – you would have made money and preserved principle vs losing your shirt and praying that the market would return… and yes it did over a period of several years. If you are older, the advice in this article is very bad. If you are in your 20’s or 30’s and don’t have to worry about paying or your kids college or getting laid off then go for it… btw never put all your eggs in one basket – a mix is best in any situation.

  • Mom Prom

    Discover offers 2.10 for 5 years and 2.30 for 10 years. Better to invest for 5 years and then after that choose to do another 5 years or choose to do something else. Only way 10 years makes sense is if its at 4%.

  • Gary C

    10 yr isn’t as bad as you think…there are places you can get 2.75-3.00% The rates on short term will go up but its a matter of when…go for the 3% now and if rates rise significantly the take the penalty and pull out of the 10 yr and go short term…at least your making 3 times the best 1 yr rate in the interim.