5 year CDs are one of the longer deposit account terms offered by most banks and financial institutions. This length of certificate of deposit is best suited for the “long-range” investor, who wants a guaranteed return with almost zero risk–and will not need to access the funds for several years.
Five year certificate of deposit accounts often command one of the highest interest rates offered by CDs–especially compared to the shorter length accounts. Sometimes, the difference between a 1 or 2 year CD as compared to a 5 year CD can be as much as 1-2 percentage points. This could equate to thousands of dollars of difference of the length of the investment (depending on the principal invested).
How 5 Year CD Accounts Work
5 Year CDs work like any other time deposit account. Investors often research the market to get a handle on the current economic outlook. This enables them to know if the current CD rates are likely to offer a good return on investment. Once this basic research is completed, investors should shop around at online banks and local banks for cd rates.
Then, once a bank is selected with competitive rates and favorable CD terms, the investor opens the deposit account by completing the necessary legal paperwork, and depositing the funds. Funds must be allowed to mature for 5 full years in order to reap the full interest yield the account is offering.
5 Year CDs: Advantages of Opening a 5 Year CD
There are many benefits to opening a 5 year cd account. Some of these include:
- Some of the Highest Interest Rates–5 year CDs are one of the longer length CD terms. Thus, banks and financial institutions often offer the very highest rates for 5 year cds (and longer terms). This could equate to thousands more in interest earnings as compared to lower rate (shorter length) deposit accounts.
- Capture High Rates for Many Years–Investors who research the market regularly can often spot times when recessions are about to hit. Thus, they can quickly invest in high-yield CD accounts before the rates decrease, and they can then enjoy that high rate even when the CD rates fall. This is a great strategy to “lock in” the high rates and earn safe interest for a long term.
- Investment is Secured & Insured–As long as investors meet the FDIC requirements (and the banks are FDIC insured), then the funds will be fully insured during the investment period. This gives the investor peace of mind that their deposit account is safe.
- Guaranteed Return–Investors will know exactly how much interest income they can earn up front. Therefore, this removes the worry of the investment earning a low return, or even no return at all (or even worse-loosing the principal).
- Dividend Payments–Banks offering long-length CDs also sometimes offer dividend payments on interest earnings. This means that every time interest income is compounded, or added to the account, it is dispersed back to the investor in the form of a “dividend payment.” So if you are retiring and want to put a large principal amount in the CD, you can do this, and live off the dividend payments.
While 5 year CDs are a great investment, they may not be right for everyone. There are also a few disadvantages, which may include:
- Minimum Investment Requirements–Some banks may impose a minimal amount of funds to open a 5 year CD account. This could be as high as a few hundred dollars, up to several thousands of dollars. Thus, this amount restriction prohibit smaller investors from investing.
- Capture Low Rates for Long Terms–While saavy investors may be able to lock in high CD rates before they fall, it can go both ways! Some investors may actually invest when the market is low, and be stuck with a low interest return for the entire 5 year length. Thus, it always pays to do market research, and also to make sure CD rates will offer an appropriate return.
- Requires Significant Length of Time–Five years can be a long time. A lot of things can happen in 5 years. You may move, you may change careers, get married, develop health issues, start a family, and on and on. The truth is, some investors may not want to tie up funds for 5 years at a time. In this case, a 5 year CD may not be best for them.
5 Year CDs: Conclusion
5 Year CDs are one of the longer lengths offered by many financial institutions. This is probably best for those wanting a safe (low risk) investment choice, which offers guaranteed returns, in a good market (with competitive rates), and has the funds to spare for at least 5 years. On the other hand, it may not be a good investment during times of economic recession, low CD rates, or when there is uncertainty as to whether or not the funds may be needed before the five year period.
Keep reading to learn more about CD lengths.