A bond ladder is a portfolio of individual bonds with staggered maturity dates. Each year, one bond matures; the proceeds become spending money or get reinvested. Predictable; controllable; insulated from rate movements in a way bond funds aren't.
For retirees wanting income certainty, bond ladders are a real tool.
Build a ladder of, say, 10 years:
Total: $500K across 10 rungs.
Each year, one rung matures. The cash funds that year's spending (or some portion). The principal isn't subject to market price changes in the meantime — you receive face value at maturity.
For a multi-year ladder, this provides predictable income for the ladder duration.
Hold many bonds; trade them; aggregate value moves with rates. When rates rise, bond fund NAV drops; when rates fall, NAV rises.
For a retiree withdrawing periodically: market-value-driven sales lock in losses if rates rose since purchase.
Hold individual bonds to maturity. The bond pays face value when it matures, regardless of intervening rate movements.
For predictable income, this matters. A 5-year ladder with $50K rungs delivers $50K in year 1, $50K in year 2, etc., regardless of rate changes.
Bond funds: liquid; diversified; subject to mark-to-market. Ladders: less liquid (selling pre-maturity may incur loss); per-bond credit risk; immune to mark-to-market if held.
For retirement income, ladders make sense for a portion of the bond allocation.
Risk-free (in nominal terms). Low yields but no credit risk. State-tax-free.
For most retirement ladders, Treasuries are the right base.
Inflation-adjusted. Principal grows with CPI. For real-purchasing-power preservation.
Best in tax-deferred accounts due to phantom income. See IBondsAndTreasuries.
FDIC-insured. Often higher rates than Treasuries.
For shorter ladders (under 5 years), brokered CDs ladder well.
Higher yields; credit risk. For meaningful exposure, diversification matters (don't ladder one issuer).
Tax-free in some cases. For high-tax-bracket retirees, the tax-equivalent yield can beat Treasuries.
5 years? 10 years? 20 years?
Longer ladders provide more predictability; tie up money longer; expose you to inflation if not TIPS-based.
A common pattern: 5-7 year nominal Treasury ladder for the income needed in those years; supplement with TIPS or stocks for longer-term inflation protection.
Annual rungs are typical. Some ladders have semi-annual or quarterly rungs for more frequent maturity.
The ladder should cover essential expenses for the ladder duration, ideally combined with other guaranteed income (Social Security, pensions).
If essential expenses are $50K/year and Social Security is $25K, the ladder covers the $25K gap. A 10-year ladder of $250K provides this.
Buy individual bonds via a broker (Fidelity, Schwab, Vanguard) or TreasuryDirect for Treasuries. The interface is dated but workable.
Some brokers have ladder construction tools that buy across many maturities at once.
When a rung matures, you have choices:
Use the cash for that year's expenses. The ladder shrinks each year.
For a "spend down" ladder, this is the plan.
Buy a new long-end rung. The ladder maintains its length.
For an indefinite ladder, this is the pattern.
If rates have risen, longer-end rungs are more attractive to buy. If fallen, maybe shorter or different mix.
You retire at 62; want to delay Social Security to 70 for higher benefits. A ladder covers years 62-70 of expenses. At 70, Social Security covers most; smaller portfolio remains.
Highly effective if you can afford to delay claiming.
A pure-TIPS ladder of, say, 30 years provides inflation-adjusted income for life. Each year a rung matures; the principal has grown with inflation.
This is a "do it yourself annuity" — provides similar function (inflation-protected lifetime income) without the insurance company.
For retirees who don't want annuities but want lifetime inflation-adjusted income: a TIPS ladder is a real alternative.
3-5 year ladder for the "cash bucket" of retirement spending. Equity portfolio for longer-term growth.
Below ~$200K, the per-rung amounts are small; transaction costs and minimums are awkward. Bond funds are simpler.
If you're confident rates will move in a specific direction, individual bonds and ladders constrain your flexibility. Bond funds are more flexible (and more risky).
If you want to manage duration, credit, sector — bond funds give that flexibility. Ladders are passive once built.
For Treasury and TIPS ladders, holding in tax-deferred accounts (IRAs, 401(k)s) is fine. The phantom-income issue with TIPS is sheltered.
Treasuries are state-tax-free. For high-state-tax states, this matters.
Municipal bonds for high federal-tax brackets in taxable accounts.
TIPS in taxable accounts have phantom-income issues; manage carefully.
For typical retirees:
The ladder is one tool in the income toolkit, not the whole solution.