If you are not one to play the risky stock market with your retirement savings and you just want to keep what you have and maybe grow it a little to keep pace, then a bond ladder may be for you.
Say you have done a good job saving for retirement and may have enough if you can just keep it, then a bond a ladder my appeal to you.
Even if you are a stock investor and follow the asset allocation model many advisers suggest for retirees, you probably have some of your savings in bonds as part of your larger portfolio. A bond ladder could help in that case too.
A bond ladder is a great sleep well at night investment approach.
I say bond ladder, but it could be a CD ladder as well or a mixture of both. Fixed income ladder maybe is a better word, but I will use bond ladder in this discussion.
What is a Bond Ladder?
As an example, say you have $100,000 that you can invest to build your bond ladder with and you want to build a 5 year bond ladder. You would buy five bonds, one expiring five years from now for $20,000, another bond expiring four years from now for $20,000 and so on down to one year from now.
So now your bond ladder would look like this:
Expiration Date Amount
End on year one $20,000
End of year two $20,000
End on year Three $20,000
End on year four $20,000
End on year five $20,000
This is a five rung bond ladder. You may make as many rungs as you want. Many who have sufficient funds build a 10 year bond ladder.
You may have a million dollars and want to have a 10 year bond ladder with $100,000 of bonds expiring every year for the next 10 years. How nice would that be!
How A Bond Ladder Works
You collect interest from all the bonds in the bond ladder. Usually most bonds pay interest twice a year but it could be more often. When the bonds in year one expire, the principal will show up in your account. Then you buy a new bond expiring five years from then. Every year as bonds expire, you purchase a new replacement bond five years out. This way you get the best interest rate on bond purchases and you always have bonds expiring for the next five years.
Once you have your bond ladder built, this takes the guess work out (and worry) about what interest rates will do in the future. If interest rates go up after you have your bond ladder, then great you will get a higher return when you buy the next replacement bond.
What Kind of Bonds Are Good For Retirement Savings Bond Ladder
US Treasury Bonds, Municipal Bonds, US Government Agency Bonds, Investment Grade US Corporate Bonds, TIPS and even CDs (Certificates of Deposit). A great source of current rates of bonds of all types is Bondsonline.com.
What’s Good About Bond Ladders
- Bond Ladders are one of the safest investment strategies. It takes the worry out and let’s you sleep well at night (SWAT).
- You always have money coming in with bond interest payments coming in and also bonds expiring every year.
- It takes the guessing out. No one knows what either the stock market or interest rates will do. Don’t try to guess, just invest in a bond ladder.
- A Bond Ladder can offer steady income, stability of principal, and diversification
- A bond ladder can be used to help preserve retirement savings and generate income with less interest-rate risk if rates change.
Things to Be Aware of With A Bond Ladder
- In this article, we are talking about buying individual bonds or CDs not buying a bond fund. There is a difference you need to research. Here is some info individual bonds vs bond funds.
- The market value of the bonds in your ladder will go down if interest rates go up, but if you hold the bond to maturity, which is our plan, then you get all your principal back and don’t loose anything. So build your bond ladder with funds you can leave in the bond until it expires.
How to Get Started Building a Bond Ladder
Do your research first. There are plenty of on line resources about building bond ladders. Read Charles Schwab’s article about Building Bond Ladders for Income.
Bond Ladder Resources
Bondsonline – Your source for fixed income investing.
Individual Bonds vs Bond Funds
Bondsquawk – This site is not being kept current but still has a lot of good info
TIPSwatch – all about Treasury Inflation Protection Securities
TreasuryDirect – Photo for Learn About U.S. Treasury Auctions