The Best Argument Ever Made For Laddered CDs In Retirement

Bozo | Oct 6, 2016 | 1,375 posts since 2011

Dr. William Bernstein is noted in some circles as a "contrarian". His principle: "once you have won the game, why keep playing?" is derided by some who view investing in laddered CDs as effectively "dead money". Bernstein's logic, supported by Zvi Bodie, is analyzed in this easy-to-read article appearing a while back.

Avoiding the Worst Retirement Investing Mistake - Go To Retirement

Bottom line: once you have amassed an income stream sufficient for your projected retirement needs, adjusting for expected inflation, there is no logical reason to keep "playing the game" in the stock market. I would also add the bond market.

Harvest your gains and principal to enable you to meet obligations you project for retirement. Invest those in a ladder of CDs (preferably a ladder of five-year CDs). Invest what's left over in the market, as you see fit. Keep a healthy contingency fund for emergencies. Should advanced age deal you a bad deck, fall back on your contingency fund and/or market investments.

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Bozo | Oct 6, 2016 | 1,375 posts since 2011

My PS was eliminated when I tried to edit. Suffice it to say the purported loss of purchasing power when one invests in a CD ladder is a bit of an urban myth. I have never lost a penny of purchasing power to inflation in over a decade of investing in a CD ladder. Never.

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cumulus | Oct 7, 2016 | 1,266 posts since 2010

Excellent post Bozo; thank you.

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Inflation_Hawk | Oct 7, 2016 | 107 posts since 2016

Basically, I agree with Bernstein's approach. Once you stop working, it's impossible to make-up stock market losses (until the market recovers). So, if you've got enough money to last your projected life expectancy, the risk/reward ratio of stocks just isn't worth the bother.

Zvie Bodie's approach to retirement solely based upon TIPS has taken a bit of a beating recently. The TIPS that I own have performed poorly over the last several years. During the deflationary period we had last year some of them saw the principle value decline.

Of course, if you purchase them below par and hold them to maturity, you're guaranteed to receive your principle back. But, it's not much fun watching your TIPS get outperformed by a savings account getting 1%. TIPS value is for protecting you from unexpected inflation, not deflation.

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Bozo | Oct 8, 2016 | 1,375 posts since 2011

Jimbeau, I gave up on TIPS long ago. The era of "unexpected inflation" (as in the early 80's and Paul Volcker) is so far in the rear-view mirror as to be unimaginable to most investors. Sold my Vanguard TIPS fund so long ago it no longer registers on my history. The irony is, smarty-pants PhDs deride Dr. Bernstein as a dinosaur. I do not dispute; over a very, very, very long period of time, 100% stocks will out-perform "cash in the bank". I also know, over a very, very, very long period of time, we will all be dead.

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CapitalClimate | Oct 9, 2016 | 143 posts since 2011

This is somewhat beyond the scope of DepositAccounts, but those who are interested in an alternate strategy might want to consider some new analysis by Dr. James Cloonan, founder of AAII (American Association of Individual Investors).
http://www.aaii.com/level3/interview

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Bozo | Oct 10, 2016 | 1,375 posts since 2011

I so agree with Cloonan, and he so agrees with Dr. Bernstein. We all agree with each other.

It's not beyond the scope of Ken's blog. It goes to the essence of Ken's blog. Do we "make money" on the finite resources we have, or just knuckle under and say "please".

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