The Double-Edged Sword of Bond Ladders: Weighing the Pros and Cons
When it comes to generating fixed income and covering required minimum distributions (RMDs), a two-part bond ladder consisting of three-year Treasurys and 10-year corporates can be an attractive strategy. However, it’s essential to consider the potential downsides of this approach.
The Certainty of Fixed Income Comes at a Cost
Bond ladders are designed to provide predictable cash flow, which can be a valuable asset in uncertain times. However, this certainty comes at the cost of lower expected returns compared to more risky investments. The longer your bond ladder and the more money you invest, the more this tradeoff affects your overall returns. While this may be acceptable for those with sufficient savings, many retirees need some growth potential to ensure their portfolio lasts throughout their golden years.
The Importance of Moderation
To strike a balance between fixed income and growth potential, it’s crucial to ladder only what’s necessary to cover expenses and maintain a long-term, balanced investment focus for the remainder of your savings. This approach allows you to reap the benefits of bond ladders while still pursuing growth opportunities.
Diversification Challenges
Individual investors often struggle to diversify their bond ladders effectively, which can lead to increased risk. Even highly rated bonds carry the risk of default, making it essential to diversify bond holdings just as you would with stocks. Target-maturity bond funds can help mitigate this issue, but finding the right fit for your timeline can be challenging.
Avoiding Default Risks
To minimize the risk of default, it’s essential to avoid putting too much faith in a single bond or fund. By diversifying your bond holdings and exploring alternative sources of fixed income, such as CDs, annuities, Social Security, and workplace pensions, you can create a more resilient retirement income strategy.
Finding the Right Financial Advisor
If you’re considering a bond ladder strategy or need guidance on managing your finances, finding the right financial advisor can make all the difference. Look for an advisor who understands your unique needs and concerns, and don’t be afraid to ask questions before making a decision.
Additional Tips for a Secure Retirement
Remember to maintain an emergency fund to cover unexpected expenses, and consider high-interest savings accounts to earn compound interest. By balancing your investment strategy with a focus on fixed income, growth potential, and risk management, you can create a more secure retirement.
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