The popular financial press oft notes the 4% "SWR" in retirement. Economists study it. PhD candidates write volumes deriding it. Yet one thing strikes me as odd. To my knowledge, nobody has ever examined the 4% sustainable withdrawal rate (SWR) in the context of a retiree with 50% equities and 50% in a CD ladder. Herewith a challenge to any PhD candidate: crunch the numbers.
Background: Going all the way back to the granddaddy of SWR analyses (the Trinity Study), the underlying assumption was that the fixed-income component of any portfolio would be in bond funds. In a falling-rate environment, which existed from roughly 1980 to just recently, it could reasonably be assumed bond funds would do "OK". In a rising-rate environment, bond funds are problematic, which has led some wags to opine that the 4% SWR is no longer viable. They opine, in effect, that bond funds may well be dead money.
Issue: Is a CD ladder of 5-yr CDs better than a bond fund for calculating SWR, and should academics focus on such a ladder for their analyses?
Analysis: Most economists (aside from those in the White House) forecast roughly 2% growth as far as the eye can see, Trumponomics or not. Dividends are showing a steady and healthy 2% (on average). DA readers are well aware that obtaining 2%+ on a 5-yr CD is not terribly difficult (indeed, it seems to be the "going rate" for some 2-yr CDs). CDs do not have the potential "drag" on yield created by a rising-rate environment. The NAV of a retail CD does not decrease when yields increase, unlike bond funds.
Challenge: OK, all you PhD candidates, go back to your computers and algorithms, and plug in all your assumptions, but make one wildly different assumption. Assume the fixed-income portion of a retiree's portfolio is in a ladder of 5-yr CDs which will never be impacted by an interest-rate rise (other than being beneficial), and that the effective rate is 2%. Throw out all those old, tired, assumptions about bond funds as the only vehicle for fixed-income in a balanced portfolio. Is a person more likely to sustain a 4% withdrawal rate with the afore-mentioned CD ladder, or a bond fund?