Investing in CD’s can be a great way to go for the conservative investor, especially if the he or she builds a CD ladder. However, they can often run into the problem of having too much at one institution, and going over their $250,000 FDIC limit. It is not entirely a bad problem to have, since it means the investor has enough money that they need to keep it conservative and protected. There is no guarantee though that money held even at a large institution will not be safe if not federally protected. So if you’re looking to invest more than $250,000, and keep it all in one easy place, investing in CDAR’s is the way to go.
The Certificate of Deposit Account Registry Service or CDAR’s (pronounced cedars) provides a way for people to deposit money in a single location, over the $250,000 FDIC coverage limit, and have it all still be protected. To do so the money is actually divided up amongst several institutions, each one able to accept up to the FDIC limit, but it is housed in one location. It can basically be thought of as a mutual fund for CD’s, the issuing company takes multiple different CD’s and packages them under their own brand. The benefit to the investor is they can have all their money in one place, but still have the protection as though they are utilizing multiple banks. The downside is that CDAR’s often will reduce the interest earned due to the management expenses incurred by the institution.
There are more people than one would think that use CDAR’s. Those approaching, or in, retirement look for ways to have their money in extra safe places. They cannot afford to lose anything during a market downturn, or worse a bank collapse. Since it is basically impossible to retire on less than $250,000 the only choice these people had before CDARS was to set up multiple bank accounts. This resulted in running all over town every time a CD matured, and was quite the inconvenience. In order to streamline things, get their investments consolidated, and have the peace of mind that their money is safe, they sacrifice a small percentage of the interest they could possibly earn.
While this product is great for some people, it is not for everyone. Most people need to take at least a little bit of risk in order to see good market returns. For those who are younger than or even as close as 10 years from retirement, this is probably not the product to be looking at. For those who fit the criteria, CDAR’s can be a great time saver. The first step is to check with your bank to see if they participate in the CDAR’s program.