When your focus in life shifts from growth investing and taking risky bets to protecting your wealth and living within your means, you are probably nearing retirement. Most of us start preparing for retirement early in life, and our investment vehicles range from stocks, mutual funds, ETFs, some even pocket in real estate, but bonds remain out of favor till we reach close to the retiring age. As it approaches, we should be looking at managing cash flows and living on fixed income rather than venturing out into equity markets and risking the hard earned retirement money. In this post, I will introduce you to bond laddering strategy which you can effectively utilize to create an income stream that balances your retirement expenses and preserves your accumulated wealth. I bet you can’t find a better way to live on interest income.
If you are concerned about cash flow for your specific needs, buying coupon paying bonds is an ideal way to get started. As is the case with bonds, you get your principal back on maturity along with the accrued interest, in order to build a bond ladder all you need to do is reinvest the cash you don’t need, so that the ladder continue to generate cash flow.
Unlike stocks, bond are less volatile, this means you can rely on them for stable returns. Well, I must caution you here as all bonds are not immune to volatility. Corporate bonds posses higher risks and are much more volatile than those backed by the government. You might want to take advise of a financial advisor for a better understand of which bonds you should invest in. Anyways, you can easily manage your future cash flows with bonds, ideally coupon bonds as there you get the option to create a desired cash flow by choosing between bonds that pay weekly, monthly or as long as 30 years. Creating such cash flows is not at all possible with stocks or mutual funds, as for these instruments you can never be sure how much your investments will be worth at a specified date in future.
When you create a bond ladder, you target different bonds with different maturities, which is a kind of diversification within an asset class. Doing so ensures that your bond portfolio stays less vulnerable to short term market reactions to economic developments. For instance a 30 year bond won’t show much of a reaction to a sudden development in the economic activity though yields on a bond with 1 month maturity might react sharply. So, laddering strategy in bonds works best when you buy bonds with different maturities, and this above all helps you create a desired cash flow.
For obvious reasons you should consult a professional financial advisor for creating a strategy that suits your financial conditions. But, for general information I am suggesting some basics you should follow.