Benefiting From the Rise in Rates

By Kathy M. Kristof

June 5, 2005 12 AM PT

Times Staff Writer

As he gets closer to retirement, Joe Bock has been pulling money out of stocks and putting it in certificates of deposit. That’s turned the 62-year-old electrical engineer from Los Angeles into an avid rate-shopper, willing to send his money to banks in Texas or Virginia to grab an extra tenth of a percentage point in yield.

“Why not?” he asked. “It adds up over the years. Even a 0.1% difference is $500 over a five-year period” on a $100,000 investment.

For savers such as Bock, there’s good news. After years of languishing at historic lows, deposit rates have been climbing for the last year as the Federal Reserve boosted its benchmark short-term interest rate.

Today’s yields on certificates of deposit are the highest they’ve been since 2001, said Greg McBride, an analyst at Bankrate.com, a research firm.

A year ago, the average one-year certificate of deposit was paying a paltry 1.36%, according to Bankrate.com. Today, that same CD pays 2.72%. On a $100,000 deposit, that difference adds up to $1,360 annually -- or $113 per month.

Meanwhile, many banks have launched new types of savings accounts that adjust rates periodically or allow consumers to add and subtract from accounts that were once far less flexible.

Some banks are so anxious for business that they’re giving away goodies. Citibank, for example, recently completed a promotion in which it gave away a $99 iPod Shuffle -- Apple Computer Inc.’s music player -- to those who opened online checking accounts with at least $1,500 and kept the account for at least a year. That’s the equivalent of getting 6.6% annually on the $1,500 balance.

ING Direct, a Wilmington, Del.-based savings bank, is offering checks of as much as $25 to get customers to open savings accounts. “There is a lot more competition for the savings dollar than there was a year ago,” said Jim Kelly, executive vice president of ING.

Careful savers have many opportunities right now. How can consumers best exploit their options? Experts offer a few tips.

Consider timing: The first thing savers should consider is how long they want to lock up their money, said Rande Spiegelman, vice president of financial planning at the Schwab Center for Investment Research in San Francisco.

One key factor is what the money is being saved for. If it is for emergencies and would be needed at a moment’s notice, it would be foolish to put it in a five-year CD that would impose a significant penalty if you had to withdraw early. On the other hand, if it’s money for a down payment on a house to be purchased several years from now, the saver might want a longer-term account that pays more.

Savers should also look at how much extra return they could get for locking their money up for longer periods, McBride said. In today’s market, the most attractive CDs are short-term -- one and two-year accounts, he said. Savers simply don’t get enough extra return for locking their money up for longer periods. The average yield on a two-year CD, for example, is 3.17% compared with 3.79% for a five-year account.

Because interest rates may rise further over the coming months, the extra 0.62% yield probably doesn’t compensate for the potential lost opportunity to reinvest the money three years sooner at a potentially higher rate, McBride said.

Shop around: The difference between the average yield and the highest yields offered on savings accounts is vast, McBride said. Money market accounts, for example, pay an average of 0.66% right now, about $660 a year on a $100,000 deposit. But the highest-yielding money market accounts offered by UFB Direct and Western Financial Bank, which are both headquartered in Irvine, yield 3.3% -- $3,300 on the same deposit. Savers may have to bank by mail to get the highest yields, but that’s a small inconvenience for a substantially better return, McBride said.

Negotiate: Those who want to bank at home may be able to get their favorite institution to offer them a special deal, said Randy Rosen, manager of deposit research at Informa Research in Calabasas. “Banks have the ability to negotiate rates,” he said. “You might say, ‘Hey, this Internet bank is offering 3% on a money market account. What can you give me?’ Many banks will offer something more to their customers to keep them where they are.”

Climb the ladder: Many experts believe that interest rates will continue to rise over the coming months, so savers would be wise to vary the maturities on their accounts, a practice known as “laddering.” That simply means that savers get accounts of different durations -- perhaps holding some money in money market accounts, which can be accessed at a moment’s notice; some in three-month CDs; some in six-month; some in one-year and some in 18-month. That way, a portion of the investor’s money regularly becomes available to reinvest. That pays off if rates do rise and gives the investor more flexibility if they don’t.

Weigh new options: Traditional certificates of deposit impose penalties on those who take their money out early. However, a number of banks are offering new types of accounts that allow savers to add money, or withdraw some of it, without penalty, Rosen said. Others, such as Citibank, are offering tiered accounts that pay more to those with bigger deposits.

These accounts can provide a viable alternative for those who want flexibility, he said, without having to give up the higher returns that are available for longer-term deposits.

Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For previous columns, visit latimes.com/kristof.

(BEGIN TEXT OF INFOBOX)

Higher yields

Average interest rates on savings deposits

Money market accounts

Today: 0.66%

Year ago: 0.45%

Six-month CD

Today: 2.33%

Year ago: 1.00%

One-year CD

Today: 2.72%

Year ago: 1.36%