CD rates are currently at an all time low. The average 5 year CD rate in Connecticut is 1.08%. (To see local rates, Bankrate.com is a good site to use CLICK FOR BANK RATE SITE ) Locking money up for 5 years at a rate below 2% is almost a guarantee that you will not keep up with inflation which is averaging over 3% per year.
Clients that like the idea of using CD and feel safe being backed by FDIC insurance, should consider using market linked CD’s. Market CD’s work much like a normal CD. They have a set term such as 3, 5 or 7 years and they are FDIC backed. The difference is in how they credit interest. The Market link CD will credit anywhere from 1% to 8% depending on market conditions. In a poor performing market, the CD will never yield less than 1% but in a stronger performing market, the investor can make as much as 8%.
The CD uses a simple formula to determine annual interest. They use a grouping of 8 stocks. Any stock that ends the year the same or at any type of increase credits 1% to the account. If 5 stocks are flat or up to any extent, the investor will get a 5% interest credited. If all 8 are flat or up, they will get 8%. Conversely, if all the stocks are down they will only be credited the base 1% for the year.
At the end of the term, the purchaser can take their money without any penalty. This is a good option for those that are adverse to risk. Using market linked CD’s will at least give them a chance to out pace inflation vs. a fixed CD at 1.5% which is essentially guaranteeing an annual loss vs. inflation.