Advantages of Using CDs as Part of Your Fixed Income Portfolio

Chief Investment Officer Kevin Grogan shares how we manage individual bonds for our clients and the advantages of owning CDs.


Kevin Grogan: In today’s video, I wanted to spend a little bit of time talking about one specific aspect of how we manage individual bonds for our clients. And there’s other certainly lots of different advantages, we believe, of owning individual bonds relative to owning a bond fund. I want to focus in on one specific area, which is the certificate of deposit or CD market and how that has evolved over the past two or three months.

How Has the CD Market Evolved Over the Past Few Months?

Kevin Grogan: And so, while CDs might seem kind of boring and it doesn’t seem like there is much to talk about there, it’s actually become pretty interesting here over the past two or three months. And so, on this slide that I’ve prepared, you can see that the yield advantage for CDs relative to Treasuries and how that has changed over the past few months. So, if you rewind the clock back to say mid-February, CDs didn’t really provide much of a yield advantage relative to a comparable maturity Treasury. So, you can kind of just observe the slide. But looking at the five-year maturity, back in mid-February, CDs had a slightly higher yield than Treasuries by about 0.23%. If you look at where that moved to by mid-May, CDs were out yielding Treasuries by north of 1%, which is a pretty, pretty big gap between the additional advantage you would pick up in terms of yield relative for CDs, relative to Treasuries. And so now that yield advantage is north of 1%, and that’s largely been driven by some of the issues we’ve seen in the banking sector. But from our perspective, as long as you stay under FDIC insurance limits, owning a CD versus a Treasury is pretty similar, at least from a credit risk perspective. Certainly, Treasuries are likely a little bit more liquid than CDs. But from a credit risk perspective, as long as you stay under FDIC insurance limits, we think owning a CD could provide a significant advantage relative to owning, say, a Treasury, given that the difference in yield now is north of 1%.

Why is this Advantage Unique to Owning Individual Bonds?

Kevin Grogan: And so, the reason this advantage is unique to owning individual bonds is that mutual funds really can’t play in the CD marketplace because, again, FDIC insurance limits are what they are. And if you’re running a mutual fund that has hundreds of millions or billions of dollars, you’re not going to get very far investing $250,000 at a time in CDs. Well, while we’re managing for individual clients and their individual portfolios, we can sometimes build out an entire fixed income portfolio that’s exclusively CDs, again, depending upon the size and pick up that yield advantage.

An Effective Way to Build Out Customized Fixed Income Portfolios

Kevin Grogan: I’d say the other more nuanced thing that we can do is that we can buy different securities depending upon the client’s specific circumstance and based on what’s going on in markets at a certain point in time. So again, going back to the slide, rewinding back to mid-February, if we were buying, say, for the one year rung of a bond ladder, we likely wouldn’t really buy a CD back in mid-February because there wasn’t much of a yield advantage, whereas now there is more of a yield advantage for the CD versus a Treasury. So, we can make those decisions again based both on the client-specific circumstance and based on what’s going on in markets at that specific point in time. If you do have any questions on anything that I’ve covered today, please don’t hesitate to reach out to your advisor.

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Safe Withdrawal Rates


Kevin: One of the more common questions we get from new clients, particularly new clients that are already retired, is how much can I spend in retirement without depleting my assets over the course of my lifetime? And it’s totally understandable that this is a very common question because it is number one, so important but also number two, it’s a pretty difficult question to answer because there are a lot of unknowns that go into determining how much you can spend in retirement. And so, I’ll tackle two of those unknowns today and talk a little bit about some of the rules of thumb that have developed over time, and also talk about how Buckingham addresses that question with our clients.

How much can you spend in retirement without depleting your assets?

Kevin Grogan: First up on our list is that the age at which required minimum distributions is changing yet again. Not too long ago, RMD started for most people at age 70 ½. But as part of the original SECURE Act in 2019, that age was pushed back to age 72. Well, for those who turned 72 after 2022, it’s pushed back yet again; first to age 73, and then in 2033, it will be further pushed back again to age 75. So, in just a few short years, it will go from 70 ½ to 72, from 72 to 73 and ultimately all the way to 75.

Unknown #1: How long will you live?

Kevin Grogan: And so, the first big unknown is you don’t know how long you’re going to live in retirement.

Unknown #2: How will the market perform over the course of your lifetime?

Kevin Grogan: And so that’s obviously a huge factor in determining how much you can spend in retirement. And then the second kind of big unknown is that you don’t know what the returns of the market and the returns of your portfolio will be over the course of your retirement.

Actuarial data provides an estimate of a person’s lifespan.

Kevin Grogan: So, tackling that first unknown, we can actually look at some population level data on that question and look to see how long people actually live. So, looking at the slide I have pulled up for this video, it looks at actuarial level data for a 65-year-old person or 65-year-old couple, and so I know there’s lots of numbers on the slide. So, feel free to pause the video if you want to really dive into the different numbers, but these are the odds of someone who is 65-years-old and the odds that they will live to a particular age. And so, there’s three bars for each age. The first one is for a female, second for a male and then the third is for a married male/female couple with the odds that at least one member of that couple will live to that age. And so, where I’d really focus your attention is the age 90 and 95-year sections of the chart and I think this is often surprising to folks. When I work with clients, very often they somewhat underestimate the odds that at least one member of the couple will live into their 90s and the odds are I think higher than most people think. So, if you look at say age 90, there’s roughly a 50/50 shot that if you’re a healthy 65-year-old couple that at least one of you will live to your 90s; it’s a one in five chance that at least one of you will live to age 95.

How long should you plan for your portfolio to last?

Kevin Grogan: So, in terms of thinking about how long to plan for in retirement, we would say you want to plan until at least 90, maybe age 95, for your retirement. So, plan on the portfolio lasting a very long time is the main message I would share because of the wonderful advances we’ve seen in medicine over the last several years.

How much will your portfolio return?

Kevin Grogan: And so that’s the first unknown, and the second unknown is what will the portfolio return. And the way academics have tried to tackle this question is by looking at what’s called safe withdrawal rates. So, a safe withdrawal rate is looking for an amount that that retiree can pull from their portfolio without depleting it and really the first big study in this area was done by some professors at Trinity University. So, this is often referred to as the Trinity Study and essentially what they did is they looked back through time at the worst possible year to retire from a return point of view, and looked at what was the most a retiree could withdraw in the worst year to retire. And so, it turns out the worst year for retirement was in the mid 1960s, around 1965, and the most a retiree could pull from their portfolio was about 4%.

The 4% rule of thumb.

Kevin Grogan: And so, kind of the way to interpret that is if you had said a $1 million portfolio and retirement, you could withdraw $40,000 in year one and then adjust that each year for inflation going from there. So, it’s not a static $40,000 every year, it adjusts for inflation each year. And that was what is referred to, and still referred to today, as the 4% rule; that’s a reasonably safe amount that you can withdraw from your portfolio and still be okay in retirement.

How does Buckingham build upon that industry standard?

Kevin Grogan: And so, I think that this rule of thumb is as good as it goes, but for clients that work with Buckingham, we do dive a little bit deeper and go beyond kind of a simple rule of thumb, along a couple of different dimensions. First, in our experience in working with clients, we know that withdrawal rates really aren’t static throughout time. So, what we observe with our client base is really sort of three phases of retirement so that the first phase – and again the ages here will be different for each person – but through roughly age 75 we think of as the more active section of retirement where there’s a lot more travel happening, a lot more discretionary expense. Spending will tend to be higher in the earlier years of retirement than it will be later. And then you kind of move into a second phase call it from age 76 through 85, which we’re kind of calling here a transition phase where there’s less travel, people aren’t as healthy. They just don’t really want to travel as much as they did and kind of thinking back to those longevity slides a lot of times; the couple likes to travel together. But if one spouse gets into poor health or unfortunately passes away, then the surviving spouse normally doesn’t want to travel as much as they did prior, so all these things are what we observe. And then the last phase is what I’m calling here the kind of passive phase where you see sort of spending start to tick back up again near the end of life due to health expenses. And you can see this in not just in sort of anecdotal experience with our clients, but in sort of consumer survey data that you can look at across the whole population. You tend to see a greater percentage of spending go towards health care near the end of someone’s life, which is intuitive. It makes sense that would be the case. And so, when we’re doing planning for clients, we’ll take these things into account. We won’t assume necessarily a consistent, constant spending rate over the course of their retirement. And then we’ll also on the return side of the equation not just look back at historical returns. We’ll try to simulate out potential future returns based on where prices are today. So, we’ll try to dive a bit deeper than the rules of thumb, but I do think the rules of thumb are decent if you’re just kind of looking for a rough guide or sanity check in terms of what you’re spending in retirement. If you do have any questions on anything I’ve covered, please don’t hesitate to reach out to your advisor.

Private Equity and the Fear of Missing Out

Some investors are wondering if private equity would be a good addition to their portfolio. Here’s a breakdown of this evolving asset class.

For reality TV fans, one might argue that the private equity world truly took off last year: Celebrity Kim Kardashian launched her own private equity firm. There is now over $4 trillion invested in private equity, more than double the amount 10 years ago. As these investments get more media attention, some investors are wondering if this would be a good addition to their portfolio. Although Buckingham’s Investment Policy Committee (IPC) continues to evaluate this evolving space, the high valuations give us concern on whether this is the time to add private equity to our portfolios.

What is private equity?

Private equity involves investing in companies that are not publicly traded. Most commonly, a private equity firm, known as the general partner, will supplement cash from outside investors with debt to purchase existing public companies, or portions of companies, and take them private through a leveraged buyout. The general partner will set up a new fund every few years, and the group of investors, known as limited partners, commit to staying invested over the fund’s life, usually 10 years or longer. Over that time, the general partner uses the capital to buy companies, increase their value and then sell them for a return.

What are the possible benefits?

  • Private equity allows access to an area of the market that is otherwise inaccessible to individual investors – companies not on a public stock exchange.
  • Private equity appears to have high, stable returns for individual investors as well.

What are the possible risks?

  • Private equity general partners determine the value of held companies, and research shows that their price adjustments tend to lag those of public stock markets. In other words, the price stability is mostly contrived.
  • The returns for both public and private companies are driven by a similar set of underlying risks, and the returns for an individual investor will be highly dependent upon when they start investing and the general partner they choose.
  • Competition has intensified over the last decade, leading to higher valuations and lower estimates of future returns for investors. One study found that private equity deals made in 2021 were done at a 10% premium to the S&P 500, more than double the value of deals done in 2010.
  • Private equity investments are highly illiquid, meaning investors are generally unable to sell their holdings for the full value before the end of the fund’s life (if they can sell at all).
  • Research shows that once you adjust private equity returns for risks, most private equity funds have not provided higher risk-adjusted returns. Rather, the returns look like that of a levered investment in small, inexpensive companies with high debt.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third-party data and is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third-party data may become outdated or otherwise superseded without notice. Investing in private equity presents unique risks and individuals should speak with their qualified professional based on their own circumstances. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-23-5234

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Daniel Campbell

Senior Investment Strategist

As a Senior Investment Strategist at Buckingham, Dan spends his days helping clients and advisors understand and implement an evidence-driven investment strategy. As a CFA Charterholder, Dan has a demonstrated ability to understand complex investment topics, but he gets the most energy from conversations with individuals and families in pursuit of financial freedom. When he’s not working, you can find Dan camping with his wife and three young kids or exploring the trails of Colorado.

An Update on the U.S. Government Debt Ceiling


I wanted to jump on today and give an update as we sit here in very early May on the latest related to the U.S. government debt ceiling dynamic. What I’m going to do today is do a recap just kind of where things stood prior to the last week or so. Then get into the latest and then get into some expectations on a go forward basis of how we might see this play out.

When did the U.S. Officially Hit the Debt Ceiling This Year?

So, recap. The U.S. Treasury, U.S. government had already hit the debt ceiling earlier this year, so hitting the ceiling is not a new thing. That’s been something that’s been known for a good number of months here. The debt ceiling was set at $31 trillion of debt outstanding. We’ve now hit that level, so the U.S. government is at the debt ceiling and that, of course, is what brought on everything that we’re going to be talking about today.

How Long Can the Government Operate Before Raising the Debt Ceiling?

The most recent projections is that without Congress authorizing an increase in the debt ceiling, that the government would be able to use what are known as extraordinary measures to be able to fund the government and finance the debt currently outstanding through somewhere between June, which is next month, and September. The projections from the government are pretty wide range of months at this point in terms of how far down the road they’re going to be able to get the running of the government from an expenditure point of view short of Congress increasing the debt ceiling.

The Latest Developments Surrounding the Debt Ceiling

Now getting into the latest, one of the first things that we know is that relatively soon we’re expecting the U.S. government to update that timeline. The timeline again being how far out into this year they think the government will be able to go without the debt ceiling being increased by use of these extraordinary measures. So we could see that that news in the next week or so potentially, and that could change that June through September timeline, tighten it up short in a number of different ways that that could go. So that’ll be probably one of the near-term notable news items that we’ll see.

House Republicans Pass a Bill to Raise the Debt Ceiling

The other thing that happened last week, we did see the House Republicans essentially pass a bill, very slim margin that did, though, authorize an increase in the debt ceiling by $1.5 trillion or by March 31st of next year. So technically, we did have an increase there, notably, though, which will segway into my next point, that increase was tied to budget decreases, essentially spending related cuts. So that means it has no chance whatsoever of passing the Senate.

As we stand here today, as we’ve seen, the Senate Democrats, Democrats in general and Biden say basically we’re looking for a clean increase of the debt ceiling. No strings attached. That’s not what got passed in the House so don’t expect that to move forward in any meaningful form. But it was at least a notable development that the House Republicans at least were able to agree on some type of framework with slim margins there.

What Can We Expect Going Forward?

So, expectations. I do see we got, again, this timeline change that’s sitting out there. Do expect whatever that timeline shows, that unfortunately we’re probably going to see this go to the very, very last moment. The U.S. government has been through this a couple of times in the past in 2011 and 2013. I think we’re far more polarized politically at this point than those times were. So expect this to go to the very, very last moment and to be likely, one of the most notable storylines, probably going to see daily reporting on this going forward kind of right there with what’s going on in the banking channel.

So, all that said, do not, though, expect that we’re actually going to see a Treasury default. Both sides, both Republicans and the Democrats, that of course, that’s not what any of us want to happen. We would all hope that would go without saying, but at least they have said that. But I do think that said, the risks here are, again, far higher than we’ve seen in past periods, even though I still expect we will see the debt ceiling get increased in advance of the actual, you know, default related events happening.

How Will the Debt Ceiling Impact My Financial Plan?

Probably goes without saying, but would not encourage any type of portfolio changes in advance of this. Again, we just don’t know how this is going to play out. There’s really no adjustments that makes sense not knowing where things are going to go. But we’ll learn a lot, I think, over the next month or so. But do expect this to be a very notable headline. A lot of reporting on the debt ceiling related issues.

So hopefully that’s some helpful context of kind of where things stand in early May here. If you have additional questions you’d like for us to tackle, feel free to reach out to your advisor and suggest those or click the link below and submit questions that way.

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Jared Kizer, CFA

Head of Investment Research

Jared Kizer evaluates findings from academic research and applies that learning to develop investment strategy recommendations. Jared collaborates daily with advisors and clients, helping investors better understand the complicated concepts that can have a tangible effect on their financial lives. Jared holds a master’s degree in finance from Washington University in St. Louis.

Buckingham Connects Quarterly Webinar: April 2023

With the second quarter underway, our thought leaders share their views on the market performance to date, where interest rates are headed and what tax legislation changes could mean for your financial plan.

Our Quarterly Connects Webinar features Buckingham thought leaders’ perspectives on U.S. and global market performance, tax planning considerations, and other developments on the horizon that may have an impact on your financial plan. During this recorded webinar, our professionals shared an update on what drove the market last quarter and what we’re keeping an eye on for the coming quarters. They also shared updates on big tax changes coming in 2025 and why now is a good time to review your tax strategies with your advisor to prepare for those changes.

Key Takeaways:

  • Markets have performed well so far this year – a rebound from 2022. Stock and fixed income indexes were both up for the first quarter, as well as some alternative investment strategies.
  • Developments related to the debt ceiling may lead to market volatility over the coming months. As always, a diversified portfolio is the best defense against unpredictable market swings.
  • Higher interest rates present an opportunity to fine tune financial plans, including for homebuyers and sellers or those looking to tap into equity to make home improvements.
  • Taxpayers face big changes in the coming years as many provisions in the 2017 Tax Cuts and Jobs Act (TCJA) will sunset in 2025. The changes will have an impact on income tax brackets and estate planning. We explained why the best strategy is to start planning now.
  • Questions are still circulating on financial institution stability and FDIC coverage limits. For more information on bank safety and deposit insurance, view our recent webinar on this topic.

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