CD Term Versus CD Fraction

Fractions

Selecting the term of a CD (and as a consequence, selecting the interest rate) makes sense when saving for well-defined needs.  Selecting CDs by their interest rate, by other than the highest yield offered, in my opinion, is gambling with the protection of FDIC insurance.

The entire pot can be managed in another way: dividing the pot into fractions. Then cashing a fraction when the need arises. This is a common savings practice. Is it a good investment practice?

The table combines CD term (and thus interest rate) and penalty, for the year a fraction is cashed, after dividing the pot into one to ten fractions. Cashing a 5-year CD at the end of the first year is not a good investment practice: no interest is paid.

Cashing one of two 5-year CDs cuts the cost (or loss) in half. Three fractions bring the cost down below that of cashing a 1-year CD before maturity.

Comparative Yield

I find it interesting that the cost of cashing immature 1-year CDs levels out after dividing the pot into three factions. The cost of cashing immature 3-year CDs levels out after five fractions. A 5-year CD earns the most, costs the least, after just three fractions.

Comparative Cost

CDs are then designed for secure savings. They work best when held to maturity. They pay less than stocks and bonds.

Rising interest rates can be chased with cash, short term CDs that mature, and long term CDs that are cashed when immature. Do these work better than investing in an indexed fund that averages gains and losses and can be accessed at any time?

The overall answer, a year ago, was an annuity from our house sale that pays a fixed amount each month for ten years (it has been a good deal for year one).

Cash                            The total loss of interest (a 100% cost).

Short term CD            The discounted rate of interest from the 5-year CD (a 35% to 20% cost, in my example, for a matured 1-year and a 3-year CD).

Long term CD            The penalty on a single immature 5-Year CD (year one, 100%; and down to a cost of 20% thereafter on a 5-year CD).

CD Fraction                The cost of cashing an immature 1/5 pot fraction 5-year CD is 20%; which then yields the same rate (80%) that a matured 3-year CD is discounted to from a matured 5-year CD interest rate.

Indexed Fund              A variable cost that is not assessed an average 20% charge, as I have found for the above CDs. A drop in the market of 20% is highly unlikely (approximately what happens when you do not pay your credit card bill in full each month). The rate of return from the fund follows the market up and down.

Annuity                      The ten year contract we bought fixes the rate of return at the average low market value in 2016. It has a potential cost related to any marked increase in interest rates.

In summary, fixed rate CDs will always lag the market. This is very good when interest rates fall as they did in the past decade for economic and political reasons. The lag with rising interest rates, if it happens fast enough, will cost. That cost seems to be small (with a 2% CD interest rate) in relation to the about 20% difference between CDs and an indexed fund even on a stable year.

So, my best judgment is, buy maturing CDs to insure funds needed during the next three or so years. Buy long term CDs with the option of cashing a fraction of the pot before maturity for unexpected needs. 

Buying an annuity to insure funds for the next ten years is now questionable, unless there is a compelling situation (memory care). Learn about indexed funds and how they work today on the Internet for the $10,000 we have in hand from the flood at Provision Living at Columbia.

We can eat in the main dining hall tonight for the first time in three months!

Chasing CD Interest Rates

My previous post, CD Basics, explored the use of CDs as savings and as an investment in a stable normal financial market. Buy a CD to save for an expected expense that occurs well after the maturity date.

The length of the cashing penalty is a good guess if in doubt. Rather than having to cash a 3-year CD at two years with a six-month penalty (1.5 year term), buy a 2-year CD that matures.

But interest rates are now poised to remain stable or increase more than decrease. What increase is needed to justify cashing a CD with penalty to buy a new one at a higher interest rate?

Interest Rate Factors

The table contains the answer in simple interest; just spread out the penalty over the next few years. The table contains four and five year periods that are more investment than savings.

A CD paying 2% interest (our current top rate for a 5-year term) with a 1-year penalty would have to be reinvested in a 4-year CD paying 3% (2% * 1.50 = 3.0% per year) or another 5-year CD paying 2.4% (2% * 1.20 = 2.4% per year) just to break even. We would not be paid any interest for five or six years. That is the simple interest story (rate x time); nice straight lines when in a graph.

Interest Rates and Payouts

Compound interest (rate x time x compounding) produces curved lines. They start at the same points as simple interest (3-year, blue; 5-year, red). They then bend with time as the pot increases in size and the interest rate changes; presumably higher.

“A rising tide lifts all boats.” True and false. The company gives everyone an equal raise of 5%. Some pay checks show an increase for the year of $500; others show $50,000.

The same is true for interest rates on CDs. The higher the interest rate you start with (red), the higher the earned interest with an increase in rate.

The chart shows the result of the same an annual 24% increase in the interest rate (from 2% to 5% in five years) applied to CDs with different terms. The 5-year term CD grows faster than the 3-year CD. The actual payout percentage is also different.

The 5-year term CD starts with a higher interest rate than the 3-year term CD. At three years, the 3-year CD matures and is reinvested at an even higher rate. At five years, the 5-year CD matures to be reinvested at an even higher rate, assuming an increase in interest rates from 2% to 5% over the five years.

If you needed the money after three years, a 3-year CD would payout and/or would be ready to be reinvested at a higher rate.  If you would not need to use the money, a 5-year CD would win out in the long run.

You save for short term needs at the current interest rate with no penalties. The sooner you invest, and the more you invest, the higher the payout with compound interest, with no penalties; unless interest rates rise enough and fast enough. My Mom mentioned only one error she made: not cashing her 8% CDs and buying 5-year 18% CDs.

You get the chance to reinvest sooner with short term CDs, BUT you pay for this privilege by accepting lower starting interest rates. The lag in CD payouts, with respect to the compounded interest rate, results in an efficiency of 79% for 3-year and 72% for 5-year CDs, in this example.

The lag [21% and 29% for 3-year and 5-year CDs, the area between payout (solid) and compounded interest (dashed) lines] gets worse the longer and faster interest rates increase. This is the money you potentially lose if you do not cash and reinvest (7% and 6% per year); before also considering the penalty of 1/6 of a 3-year term (16.7%) and 1/5 of a 5-year term (20.0%) of the interest for each CD reinvestment, when chasing interest rates.

The penalty, in this example (interest rates increase from 2% to 5% in five years), is less than the lag one wants to close. With less of an increase in interest rates, they could be the same or less.  Short term security has a cost.

These gains and loses can be obtained daily on the stock market, if you buy or sell the stock or bond; over time, they balance out. But there is no short term guarantee of returns or insurance. Time and indexed funds (Warren Buffett’s ten year challenge to hedge fund managers) are your guarantee in the stock market.

Cashing and reinvesting sounds good, but if I am right on this, it only pays off if you guess right and interest rates rise fast enough. The result may be nothing more than the original payout with a delay of one year for each recycling.

I see holding money in cash, with no interest, until the “right” time a poorer option than investing in a long term CD with the potential of losing just one year of interest when the “right” time arrives. The “right” time may never come.

My Mom’s advice was invest, forget about, and live a long time. That was when banks were secretive and intimidating. The Internet and truth in advertizing laws have swept that away. Small banks pay better than large banks, in general. They are all FDIC insured.

Timing Versus Drugs

My wife woke up under the control of the “worries”. We used to call it that before we heard of “sundowning”. But the worries happen at any time. They produce a stern expression, a determined effort, and a quick slap or strong hit if challenged when in near complete control of my wife.

South View

We needed to leave for her brother Bob’s funeral by 10:30. She moved at double speed in packing everything in the apartment into something. There was no interrupting her in her work. There was no time to get out of her nightgown and into her cloths. At 9:00 I discussed our situation with a caregiver. She was ordered out of the apartment.

The business manager (also a degreed caregiver) stopped by with equal success. Attending the funeral was problematic. “She may have been over stimulated at the family gathering yesterday evening in the (unrefinished) Hearth Room”. (A group of 15 lasting 3 hours from which she left in her usual way about half way, “Time to go.”)

Now several other caregivers considered a calming pill. By now even drawers from my old clothes chest were resting on the sleep number bed next to the bathroom. This has never happened before.

West View

I continued without forcing her to get changed or to leave things in place. I did put many things back only to have them migrate again. And then at 9:30 she sat down to rest. No order, of removing or dressing, one would normally use had worked.

“We need to get dressed to go to church.” “Oh!”, in that soft voice of recognition and understanding. The calming pill was ordered. I held out her pants. She put them on. “Lets wait on the pill.” Socks. Shoes. She put them on. The worry spell was over.

There was no taking off her nightgown. No putting on her brassier. I next held out her blouse. Off came the nightgown. On went the brassier followed by the blouse. I have to get things in the right order in her world.

When we stood to sing a hymn, she saw two of the picture books her younger brother and his wife have made of Bob’s life, in the pew before us. One has a high school picture and the other a collage picture on the cover. She again showed for a few seconds the same reaction as when I was finally able to tell her that Bob was gone.

I showed her Bob’s picture on the TV that was posted on Facebook yesterday, by a family member, and then asked her if she knew who that was. “Yes, Bob”. “Now read what is beside the picture.” Obituary . . . .

The service seemed uneventful for her. The slide show afterword did connect. Between about the third and fifth showing she watched intently and responded to many of the slides that are in the family reunion picture books that have been made for us. (These picture books tell a story as will as bind a collection of pictures that appear to be able to withstand a lot of use by her and for sharing with all the residents.) [They are perfect for memory care.]

She responded well to a large number of people we knew well. I have been told several times that this may just be an act. It may be, in part, but she never asked to leave the service.

The dinner after the service was a second crowd. We stood still looking for seating. A complete plate was placed on the table in front of us and my wife was directed to that chair. And this time, it happened by some one other than our caregiver from Home Instead (who attended the funeral). My wife never asked to leave.

We ate supper in memory care while other family members visited restaurants. She was content visiting with our two sons afterwards and with their departure for the airport. Everyone seemed in good spirits.

This is then another time in which my wife has gone from “highly agitated and over stimulated” to normal behavior solely in response to not forcing her to perform by the clock. At no time did she jump up, “It’s time to go”, or forcefully signed, “No. I am not doing that. Out.”

Good Morning - Welcome Home

She has spent almost three hours playing with her keepsakes this evening. At 9:00 pm she is still not ready to let a caregiver help her into bed. She is now busy putting a few things right in the apartment rather than randomizing them. (I know this happens in the night at times, but have never seen her do it.)

This was a most unusual day made possible by a number of family, friends, and caregivers. A thank you to each one.

This day presented the interplay between caregivers at all levels and my wife’s behavior at any one time. A significant time period can be as little as two seconds. The same behavior can support many stories; all of which may be wrong and all of which may be true for a moment.

The Last Flight

What is she telling us? This last balloon, from the 3rd of January, that I found tethered in the bathroom this Sunday morning, can no longer fly even with the ribbon clipped. Maggie is still with us. What is your story?

CD Basics

The perfect CD is government insured, has a high interest rate, and is easy to cash and to change interest rates. If you get the first requirement, you cannot get the other requirements. They are found on the stock market were you average out returns over 10 or more years and expect that average value to grow about 10% a year.

Capital One 360 is now offering an FDIC insured 5-year term CD for 2% per year. I am using this and the discounted values (1.8%, 1.6%, 1.45% and 1.3%) for shorter term CDs in this post.

I have found four ways to manipulate CDs beyond investing $10,000 in one 5-year term CD ($10,000 * 2% * 5 year = $1,041 with compound interest). [Provision Living at Columbia credited our bill for the two months we were refugees.] 

Divide the pot into five $2,000 CDs, which can be manipulated in several comparable ways. The table shows how to build a ladder up from low to high rates. Replace these rates for the other ways to manipulate CDs. For example, delete the values for reinvesting (CDs 6-9) and the table turns into a savings mode.

1.    Building up a ladder of CDs that mature at different dates using different terms. In this case, five CDs ranging from one year to five years. The rate of return increases with the increased term from 1.3% to 2%.

This is touted on the Internet as a way of increasing our earnings. In a normal market, it does average out the earnings. This yields $959 or costs $82 ($1,041 - $959 = $82 or 8%) to build the ladder over a period of five years.

The usual example replaces matured CDs with the maximum rate (2% for 5-year CDs). The build is slow and the adjustment of the resulting 5-year term to current markets is also slow (which is good when interest rates fall as they did in the past decade). Interest rates are now at an historic low. Expectations are from continuing low rates to increased CD rates.

2.    Building down a ladder of CDs from the maximum rates by cashing one each year and buying a new one. That would cost $172 ($1,041 - $869 = $172 or 17% (a current credit card rate) in this example given no change in interest rates.

3.    Maintaining the range of rates (replacing each maturing CD with the same term) in the ladder would cost an estimated $199 or 19% over the five years and about $40/year (2%) thereafter.

4.    Treating the funds as a saving account with the expectation of removing 1/5 of the pot each year.

Interest on $10,000 over Five Years	Savings with Withdrawal	Reinvestment
Ladder
Build Up (Selecting Rates)	$535 (zero balance)	$959
Build Down (From Maximum Rate)	$447 (zero balance)	$869
Fractional (Cashing Each CD With a	One Year Penalty)
One CD Cashed during 1–5 Years	$825-$954 ($8,000+ bal)	$1,041
Second CD	$615-$741 ($6,000+ bal)	$741
Third CD	$406-$531 ($4,000+ bal)	$531
One 5-year $10,000 CD		$1,041

Fractional investment yields the same thing as a single CD ($1,041) if no funds are withdrawn. Withdrawing funds turns the account into savings that far exceed up built laddering when used as savings; until you cash the last two CDs when the overall cost is again $200 to have maximum anytime access to the remaining funds instead of waiting for CDs to mature as in the above option.. Borrowing from one's self (less than 2%) is less expensive than using a credit card (16%).

Laddering makes sense in a calm market. The finer the total pot is fractionated, the more control you have in managing interest rates. if they do go up and fast enough to make a difference. As each long term (5-year) CD matures you have the option to cash or to reinvest with no penalty for that CD. The remaining CDs will be slow to adjust to any rapid change in interest rates.

You can manage interest rates by limiting the term of each CD or by buying the maximum return for the day and cashing in for a higher rate later. But when do you cash in an immature CD to take advantage of a higher interest rate? Does it make sense to buy short term, low rate, CDs that at maturity are replaced with long term higher rates; that are then again slow to respond to rapid changes in interest rates? What seems like a solution, short term, looks like it just recreates the original problem in the long term in un-calm markets.

Is this something to be concerned about given our short five-ten year horizon in which our cash flow far exceeds our finances? We will then be 90 and 97, which is highly unlikely. I still feel we need to adjust to going broke gracefully while currently enjoying a best buy in memory care for the two of us. Our two month stay in assisted nursing at South Hampton Place gave us a preview.

Two Weeks and Holding

It is 4:20 am. The door handle wiggled a bit for the third or fourth time tonight. My wife keeps it locked now that it can be locked and unlocked with a key again.

A bowel of soup has been added to many meals to get us all back to our pre-flood weights. I topped out at five pounds overweight; down one yesterday.

Our one big family is now divided into assisted living west floor 1, 2, 3 and east floor 2. Memory care is now memory care 1 and 2. The food service is now the kitchen (floor 1) and dining (floor 3) plus secondary kitchens in memory care 1 and 2. All food must be delivered by elevator to the third floor lobby and served in the former theater or wheeled in warming carts to memory care.

It has been nearly three months since eggs could be ordered for breakfast in a dozen different ways. We now have a choice: a serving from a huge pan over two warmer burners of delicious scrambled eggs.

At first I ordered eggs, oatmeal, orange juice and milk; unless there was a special. Now, after a couple of weeks, I just walk in, sit down, read the morning paper (the Columbia Tribune is now a morning paper, seven days a week), fold up the sheet with Sudoku, and my “usual” arrives shortly after the food cart comes out of the elevator. Waffles are warmed small prefabricated things.

About half the number of places are available as in the main dining hall. The chairs with supporting wooden armrests disappeared over the last few days. Their heavier replacements have a curved bar that dives from the back to the seat providing little support. A lady behind me stumbled and fell back. Her hand searched for the armrest as she landed on the edge of the chair. This is not called a fall as she did not hit the floor.

Our fitness instructors constantly stress balance and fall prevention; how to stand up and sit down without needing to use any part of the chair; if you are able of course. I will not try to describe these lessons as it takes many people several sessions to get the hang of it all, correctly; and do it outside the classroom.

It occurs to me as I am writing this that every one should be required to take part in these lessons in the same manner as fire drills or building evacuation drills: Position, breathing, and execution within each person’s limits. I guess how long the training would be effective makes this problematic.

Last week a man stood up by my table and immediately fell on his bottom and over on the back of his head in two horrible thumps that were easily heard and recognized by the front desk two floors below. The attendant waited for the order to call 911 that brought an ambulance in about three to four minutes. He was back in the afternoon. While we were gone, a lady was not so lucky. She suffered a broken neck falling over backward.

“Well isn’t that something!!” A lady wanted water in her glass. The server was pouring water, table by table. We found that we were at the last table; that was next to the first table. “I want lots of ice.” But the same one layer of ice was delivered to all of our glasses. “I use the ice to cool my coffee, whenever it gets here.” She then took her spoon and “borrowed” the ice in my glass.

The contrast in frustration is evident between memory care and assisted living. The people in assisted living missed out on being on “vacation” in a motel a few days and being refugees in skill nursing for over two months to be followed by, “We are home again!!!!” Their wounded boat never left the dock. They stayed in port as noisy repairs were made over and around them.

The staffing has also changed. A number of new people have arrived. Work assignments are still being experimented with. I find little difference between the needs of many residents on either side of the “door”, except the habit of wandering. Most prefer the same caregivers, “I finally got that new girl to … properly.” What a new caregiver may see as a curious quirk may be a serious matter for the comfort and well being of the resident.

My wife does very well with the few caregivers with whom she has bonded. “I have some ice cream for you”, is now often used for her pills. If all else fails, they call me, if I am not in the room already, to use a number of ways we have found work for me as the pill deliverer. Calming medication has again been replaced by appropriate memory care.

Overtime was accepted during our two-month outing. It is now a problem getting back to normal hours. Just as memory care residents have special needs, so do caregivers who have family needs or a desire to not work beyond an agreed number of hours a week.

So, in summary, I now continue to eat breakfast in the third floor area with my former “early bunch” and the other two meals in memory care; who are a happier bunch. They are home in more properly designed quarters designed in part by the people working and living here. Thank you for taking advantage of the flood.

A Double Car Ride

After the evening meal Friday, my wife was again agitated. Something was not right. “I want to go home.” I suggested a ride in the car like we used to do before moving to Provision Living at Columbia. “Yes.” She waited in the activity area as I got our founding member coats.

She insisted on going directly to the car instead of going a bit farther east and coming to the car from the back end. So up a dry grass 40-degree bank we went.

At the entrance to the street I paused. “I don’t know where to go.” We followed Chapel Hill Road west out of town a couple of miles and then turned right to Interstate 70. This brought us back into town by the west Wal-Mart and Hy-Vee. No response. Then down Scott past our old subdivision. No response.   

At Chapel Hill Road we turned east to Provision Living. She had no problem getting out of the car and walking into the lobby. Then that look again appeared on her face. “I want to go home.” It was now dusk.

I first drove back to South Hampton Place. Was that home? No, she hurried me out of the parking area before the entrance. There was no response to the building equipment outside our former skill-nursing room. A few days before we left we had watched a killdeer couple build a nest on the barren ground between our window and the construction site.

We headed east on the new outer road on the south side of Columbia. It was now fully dark. She commented on the south Wal-Mart. Then it hit me. She responds to the lights. At Interstate 63, I turned north two miles to Broadway. Again she responded to the lights.

Half way to the former Boone County Hospital, where are two boys were born, she read out load, “Boone Hospital Center.” She responded to the familiar buildings along Broadway until I again turned south by the west Hy-Vee. “Turn here!”

With no traffic at this time, I made not the best right turn to the store. “I cannot get inside. I have no way to get in.” I said, “We can park and go in.” “Oh.”

We got into the store in a hurry. The wind was cold. I got a cart for her to push, and for me to hold on to when my back gets to bothering. Her selections were a large orange, a dozen small chocolate pecan cookies, and a loaf of white bread. We cruised most of the store. [We are slowly eating the yummy cookies. The loaf of bread is a contribution to the memory care kitchen.]

She was satisfied when we got back to our apartment. We had reviewed her old stomping grounds. I think she has “gone home”.

Much of her responses are similar to those over a year ago, but more limited. I am also not a full disinterested observer. I tend to see, and report, on the more positive events. I commented on how one resident looked as if being a two-month refugee had improved her health. Her close relative, who visits almost every day, turned to me and softly said, “But she no longer recognizes me.”

Today my wife is up and making her bed. She has her cloths all on by 10:30 instead of by noon for the past five days.

I need to clear out some space in the two-drawer lockable file cabinet for stuff we need to keep ready to use. I miss the magnetic drawer locks we had at South Hampton Place. It is easy to go buy something else to solve a problem, when in reality, we just need to clear out our current living space.

Lock up the small stuff. Reduce room search time for everything else to less than five minutes. Then we can both live in our two different worlds in the same space as we did at South Hampton Place.

Back One Week

The fugitives from South Hampton Place (skilled-nursing) are back home in our newly appointed memory care quarters. But our good ship Provincial Living at Columbia is still a work in progress: painting, carpeting, and a new waffle maker.

We can look across the barriers, through the empty dinning hall, and out the windows to see trees budding out. Spring has come three weeks early. It will be another three weeks before the dining hall will fill with over a 110 people (less those in memory care).

Adjusting to our return has been interesting. One of the first things the caregivers noticed was that after a week, clothes began to fit properly. Part of the weight lost over “two months, one week, and one day” has been regained.

My wife seemed thrilled to be back and especially to see her favorite caretakers; those individuals she had bonded with over the past year. Her time of getting everything together in the morning continued to migrate later in the day. Now it is noon.

Two days ago I got to see for the first time something I have been told about several times but have never seen myself. Up at noon. Out the door; without having to check, and recheck, a dozen things. Down the hall to the activity area to a “Home Instead” greeting. The smile. The grin. And the teasing. This repeated that evening at bedtime; including a real laugh with well-spoken words and sentences.

The planned switch of project and eating areas was made in memory care. This makes the eating area much larger with an enlarged second-kitchen area. There is now room for the 4-5 servers to work and exit from either end of an island counter that extends almost the full length of the west wall. There is ample space for residents using walkers and wheelchairs when 24 residents are here again.

I was surprised to learn that the number of residents had expanded from 90 to over 110 in our two-month absence. The building is quiet, very quiet. This is not the “happy place” at South Hampton Place where music, whistling, laughter and singing ring through the building. This is an apartment building with a noisy activity area that we are too far from to hear in our apartment.

It is so quiet that I did not hear the tornado siren that is about an unobstructed block away. I did hear the warning on my iPhone. It was louder than a lost child alert. I went back to sleep. A loud knock on the door at 11:30 woke us both up, “Tornado Warning.”

We pushed our two office chairs out into the hall. Everyone else in first floor memory care was already there sitting in chairs. Rain and hail were pounding on the window in our room as we left.

Our caregivers comforted individuals who were having problems with this event. “We are safe here.” “We are in Columbia.”

And, again the details. Do people seek shelter in their bathrooms where the door opens to the outside window in the room, or in the hallway, or the stairwells that are constructed of solid, tornado proof, concrete? In memory care, only a grouped area provides the environment needed for caretakers to function properly; in my opinion.

We spent much of the next 30 minutes discussing how to warn people in memory care. I had gone back to sleep. Many did not hear anything until a familiar voice said, “Time to get up.” [Please note that no reason need be given nor the time of day. Details just confuse.]

So what do we prepare for next: another flood, tornado, or a Madrid Fault earthquake? [The building rests on the sloping bank of settling clay soil on the east side valley wall of the County (Poor) House Branch of the Hinkson Creek. The footings therefore must extend to porous limestone.]

We all had our cell phones on. No radios or TVs.