Client Conversations: What’s the Real Return on 12-Month CDs?

Client Conversations: What’s the Real Return on 12-Month CDs?

by ericnager on Feb 19, 2019

When you factor in taxes and inflation, 12-month CDs haven’t offered a positive real return for a decade.

Low interest rates make life difficult for people who save their money or rely on their investments for income. Twelve-month CD rates have been below 2% since 2008, and they were just 1.29% at the end of 2018. When you factor in taxes and inflation, 12-month CDs have provided negative real returns 15 out of the last 20 years and haven’t offered a positive real return since 2008.  


How Inflation and Taxes Have Affected CD Return Rates

Data Sources: Bloomberg FactSet and Hartford Funds, 1/19.

Past performance does not guarantee future results.


Certificates of Deposit (CDs) are short-term investments that pay fixed principal and interest, are insured by the FDIC up to $250,000, and are subject to changing renewal rates and early withdrawal penalties. The chart uses the highest marginal federal income tax rate based on $100,000 of taxable income for a married couple filing jointly for each calendar year. The tax rate is not representative of the experience of every investor. A lower tax rate would have a favorable effect on the real return. 


Are CDs the Right Choice for You?

Although there are benefits to investing in CDs, there are also risks. Because of the inherent safety and short-term nature of CDs, the interest rate is usually lower than investments with higher risk. In addition, CDs sold prior to maturity may be subject to early withdrawal penalties. Investors should also consider the impact of inflation on CD returns. CD income in the illustration below is calculated using the 12-month annualized average monthly CD rate.


Inflation Eroded 97% of the Return of CDs Over the Past 20 Years

This chart illustrates the growth of a hypothetical $10,000 investment in 12-month CDs before and after inflation from December 31, 1999 to December 31, 2018. Inflation consumed 97% of the return that CDs provided over this period. (Inflation is measured by the Consumer Price Index.)3

Data Source: Bloomberg FactSet and Hartford Funds, 1/19. From 12/31/99-12/31/18, the average annual return for 12-month CDs was 2.28%; the average annual return for Inflation (Consumer Price Index) was 2.18%.


Talk to your financial advisor today about investments 
with the potential to outpace taxes and inflation


Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.

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1 CD rates are proxied by’s 12-month CD national average.


Inflation rates are based on the Consumer Price Index (CPI), a measure of change in consumer prices as determined by the US Bureau of Labor Statistics. 

Investing involves risk, including the possible loss of principal.

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