Variable-Rate CDs

Variable-rate certificates of deposit (CDs) are low-risk, interest-bearing investment products with fixed maturity terms. But as its name suggests, the interest rate doesn’t necessarily remain stable over the life of the investment. If interest rates increase during the term of your deposit, you can earn a higher rate of return.

CDs are safe and reliable investments for retirees looking to protect their principal. However, when locked into a CD, your money doesn’t have the same opportunity to grow as it might with other investment products. Variable-rate CDs offer you a chance to improve your annual percentage yield (APY) if interest rates rise over the term of your CD. But beware that interest rates can also decline.

The exact term lengths, APYs and minimum deposits required for your investment depend on who issues the CD. Variable-rate CDs can be complex and not all banks and credit unions offer them. Research options that best suit your investment needs.

A regular CD returns the same interest rate throughout the entire term. With a variable-rate CD, the interest rate can go up or down, depending on how the CD’s rate is structured. If interest rates rise, you earn more money. If they decline, you earn less.

Variable-rate CDs usually offer a range of interest rates over one rate. For instance, if your variable-rate CD has an interest range of 1.5% to 3%, your CD can earn anywhere between those rates, depending on how interest rates act during your term.

But not all variable-rate CDs work the same way. Sometimes the interest range represents the floor and ceiling of your earnings. In the previous example, that would mean you could not earn less than 1.5% or more than 3% during the term of your CD. Other variable-rate CDs might come with pre-set schedules, in which interest would increase or decrease at set points along the way to maturity. The details of each variable-rate CD depend on the financial institution and its portfolio of investment products.

Variable-rate CDs can be an attractive investment option when interest rates are low, because they have the potential to rise during your investment. While a regular CD would be locked into the same lower interest rate, the interest on a variable-rate CD could climb. Conversely, if interest rates are already high at the time of purchase, they could fall during your term, which means a variable-rate CD might not be the best choice.

Like all investment products, variable CD rates have advantages and disadvantages.

If you’re looking for a reliable and secure investment that will protect your principal while allowing for the possibility of growth, variable CDs might be right for you. Consult your financial advisor before making any investment purchases.

As with most investment products, there’s no single best choice of a variable-rate CD. Consider the pros and cons and research the terms and rates at your favorite financial institutions before deciding if variable-rate CDs are right for your retirement savings plan.