Are Bond Ladders A Good Choice For Retirement Income?

Do you have investments in the stock market, but would like to supplement your social security income with less volatile, fixed income securities?  One strategy involves using bonds or CD's to help ensure that you have the money you need at fixed intervals throughout retirement. This bond ladder strategy involves purchasing a portfolio of multiple bonds that mature at different times, typically investing equal amounts that match up with forecasted expenses.

If you anticipated needing $250,000 over the next five years of retirement, you could purchase $50,000 in bonds that mature over each of the next five years.  Since bonds are typically less volatile than stocks, this would be a safer way to ensure that you would have the money you need, available when you need it.  Despite the advantage of being a less risky investment, bonds have not performed as well as the stock market, so those who need to grow their money during retirement are giving up some potential return on their investment and are paying for the certainty that bond ladders provide. If you use traditional bonds for a bond ladder, market price changes can result in a loss of principal if you try to get your money early.  Some people like to use CD's instead of traditional bonds to eliminate the market risk, but you can end up paying a penalty for early withdrawal that forfeits interest that the CD had accumulated.

Bond ladders can be useful for replacing income needed above and beyond social security.  They do not have the same return as the stock market, but they do offer some peace of mind that the income will be there when you need it.