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The current interest rate climate has created some uncertainty for investors. Interest rates have been higher than average over the past several years, meaning that those depositing money in interest-bearing accounts can get a decent return from high-yield savings accounts and other savings tools. But while savers can benefit from today’s high-rate landscape, borrowers have been anxiously awaiting another rate decrease by the Federal Reserve. And while this would make borrowing cheaper, it would also lower your return on many popular savings products.
If you’re worried about how future Fed rate cuts might affect your savings, opting for a long-term certificate of deposit (CD) could help ease your worries. By taking this route, you get a fixed rate, allowing you to lock in today’s higher rates — and then continue earning at that same great rate, even if rates fall over time. And while many banks and credit unions only offer CD terms as long as five years, some financial institutions also offer 10-year CDs, giving you a much longer guaranteed rate of return.
However, 10-year CDs aren’t right for every saver or every situation. To help you determine whether they’re right for you, we spoke to financial experts about when these long-term CDs might be a good option and when it may be better to consider another strategy.
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Is a 10-year CD ever worth it? Here’s what savings experts say.
Long-term CDs (including 10-year CDs) have historically offered higher interest rates because an extended CD term means the bank is holding your money longer, according to Phillip Battin, a wealth management advisor with Ambassador Wealth Management. But in certain economic climates, the rate advantage that comes with long-term CDs simply isn’t there, Battin says.
“Sometimes, especially during uncertain economic periods, the yield curve flattens or inverts,” says Battin. “That means shorter-term CDs might offer equal or better rates than long-term ones, thereby removing the reward for locking in your money for a longer period.”
In today’s rate climate, many of the 10-year CD options on the market aren’t keeping pace with shorter-term options. The real benefit, then, comes from locking in your rate for a long period in case interest rates fall significantly. But when exactly should you consider this type of longer-term CD and when is it not worth it?
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When to consider a 10-year CD
A 10-year CD may be worth considering if you’re saving for a long-term goal and you want that money to be more protected than it might be in stocks or other, more volatile investments. And, they’re an especially good option for people who are risk-averse since they don’t present a risk of loss, according to Krisstin Petersmarck, a financial advisor and the founder of New Horizon Retirement Solutions.
“The key is to make sure you will not need access to the funds in a long-term CD, you are comfortable with the duration of a long-term CD, and you accept the lower rate of return for a safe position,” says Petersmarck.
For example, maybe you’re saving for your child’s college education and don’t want to risk losing any of your hard-earned savings in the stock market. In that case, a 10-year CD may be worth considering.
When a 10-year CD may not be worth it
While there are benefits to 10-year CDs, these products also have a few downsides that may give you pause. First, almost all CDs require you to lock up your savings in exchange for the promised interest rate. If you withdraw your money early, you’ll face financial penalties that could wipe out a significant amount of your interest, so if you open a 10-year CD, you’ll need to be comfortable with either paying the early withdrawal penalty or leaving your money in the bank for a full decade.
And, CDs generally don’t provide as hefty a return as some other investments, like stocks or bonds, do. So, when you combine the possible downsides, you’re left with the prospect of locking in a lower return for a full decade and paying the opportunity cost for what you could have earned elsewhere.
“You may be missing out on better yields from alternatives like Treasuries, I-bonds or high-yield savings,” says Battin.”Over a decade, inflation can erode the real value of your returns unless the rate is significantly above inflation. If your cash reserve is not sufficient to withstand an unexpected crunch, withdrawing early often incurs months or even years of loss of interest due to penalties.”
If you want your savings to outpace inflation and earn a higher return, a 10-year CD probably isn’t what you’re looking for. This is especially the case if you have a higher risk tolerance and can handle a bit more volatility in exchange for a higher potential reward.
10-year CD alternatives to consider
If a 10-year CD is more of a commitment than you’re interested in, there are plenty of alternatives to consider. First, if you want to keep at least some of your savings in FDIC-insured accounts, it may benefit you to consider high-yield savings accounts or money market accounts.
While these products don’t allow you to lock in your rate the same way a CD does, they do provide a competitive return. While you run the risk of your rate going down if the economy changes, you’ll also benefit from potential rate increases. Just make sure to shop around for the best rates and account features.
For goals that are a decade or more away, it’s also worth exploring some higher-risk options, according to certified financial planner Andrew Latham.
“If your timeline is long and your risk tolerance is higher, a well-diversified stock portfolio will likely outperform all of these options,” says Latham.
Common financial advice states that you should consider low-risk, high-liquidity savings tools for money you expect to need within the next few years. But for longer-term goals, especially with money you won’t need for five years or more, it may be better to diversify more, putting at least some of your savings into diversified stock funds.
If stocks feel too high-risk to you, Latham recommends a government bond ETF as an alternative for your long-term goals. It may provide a higher return than a CD, high-yield savings account or money market account without the volatility of a stock fund. Of course, there’s no one right savings tool for everyone. Your own financial goals and risk tolerance can help guide you when choosing the best product (or combination of products) for your unique situation.
The bottom line
A 10-year CD may be worth considering for money you know you won’t need within the next decade, especially if you’re risk-averse and aren’t comfortable with stock investments. That said, the long lock-up period and low long-term returns could be a deterrent for many savers. Make sure to consider your financial goals, time horizon and risk tolerance to help you choose the best savings tool for your situation.
