Retirement Planning Advice and Financial Related Education by Barry Unterbrink, Chartered Retirement Planning Counselor

Monday, June 27, 2011

Market-Linked CD's : A Retirement Income Option

A Certficate of Deposit on Steriods
(originally posted 6/2/11; updated to current 6/27/11)
Another safe-money income option gaining favor to 'beef up" your retirement money is a Market Linked Certificate of Deposit (MLCD). This is an F.D.I.C. insured CD issued by a bank, which protects your principal if held to maturity. The different twist here is that your annual interest is not guaranteed, but is based on the performance of a 'basket' of stocks. A cap rate is set on the upside of roughly 7-9% per year for the MLCD term (that's the maximum per year you can earn); the cap is locked in for the MLCD's term. The bet here is that the stocks will perform positively up to that cap and that the final value will outperform the traditional CD's fixed interest. The floor is zero percent if the stock basket declines in value. You cannot lose principal with a MLCD. Five, six and 7 year MLCD's are offered each month, and the June offering that closed last week included the stocks: Bristol Myers, General Mills, Campbell Soup, Newmont Mining, Sprint-Nextel, and Cablevision. With 5 year traditional CD's paying around 2.4% today, I would make the market-linked CD bet with a portion of my safe money. See me for details.


If you have rolled over or bought a CD in the past couple months, beware of the newer penalites that the banks are imposing and including in their disclosures. Apparantly, from recent reports I have read, major banks are now assessing a percentage fee if you redeem or "bust" your Certificate of Deposit before maturity. The former rules charged you a period of interest, such as 90 days, if you broke the CD early. One such fee charge would be two tiered; a $25 flat fee, and then a 1-3% charge against the amount withdrawn, depending on the maturity of the CD. What this means with today's low interest rates? You could lose PRINCIPAL as the fee may eat into your original deposit. Not good. Check with your bank to see if they charge these fees; if so, walk, er - run away. By the way, MLCD's can be sold prior to maturity without any penalties. Your principal is not guaranteed if sold prior to maturity, so you may lose or gain on the sale depending upon where current interest rates are, similar to how a bond is priced when you sell it.

Call Barry Unterbrink for more information and details: (954) 719-1151

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