Bond Laddering: Generating Income From Your Portfolio

For many retired investors, a key objective of portfolio management is creating a stable stream of income while preserving investment principal. Bond laddering is a strategy that may address both aspects of this need.

What Is Laddering?

A bond ladder is a portfolio of bonds with maturity dates that are evenly staggered so that a constant proportion of the bonds can be redeemed at par value each year. Many retirees construct bond ladders with a specific end point that is based on the amount of time they want the bond ladder to generate income. Laddering for a fixed term can be accomplished with a zero-coupon bond that pays all of its interest at maturity. Generally speaking, the further in the future that one expects to receive the redemption value, the less one needs to spend today for the bond. The balance of the original $250,000 could be allocated to equities for growth potential, creating a portfolio that still holds almost 30% equities. The core income of $10,000 would be stable, and the value of the equity portfolio should be available to help augment income as needed to compensate for inflation or provide extra latitude for spending. Equity value could also be available to extend the term of the plan if needed. Planning horizons of greater than 20 years can also be addressed at the outset, albeit at somewhat greater cost. Note also that bonds in the ladder will have value during the course of the plan, even though their value may be subject to fluctuations caused by interest rate volatility.

Work With a Professional

An investment portfolio that has some of its assets allocated to bonds may produce stronger cash flow with less volatility than a portfolio allocated solely to equity investments such as common stock shares. As such, a bond ladder offers investors a formula for allocating their fixed-income holdings to potentially reduce the unique risks to bond holdings and to achieve the results they seek from their bond investments. Your financial advisor can help you determine whether bond laddering is an efficient solution for your needs.

About the author

Robert Schmansky, CFP®

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