Bond & CD Ladder Strategies

[Huston55]

Dirk Cotton's "Retirement Cafe" blog had a recent article advocating an ~10 yr bond ladder (the same strategy could be applied with CDs) as a solution to providing guaranteed 'floor income.' Although he doesn't use the term "sequence of returns risk", it seems that's what he's addressing, at least for the early retiree. He discuses the 60yo - 70yo retiree and the 65yo -74yo retiree.

My current plan is a ~4 yr ladder for the same reason; floor income and sequence of returns risk protection early in retirement. But, this made me wonder whether I should lengthen my ladder to provide more sequence of returns risk mitigation (10 yrs seems like almost a guarantee of being able to ride out a big bear), especially early in retirement.

Would like to hear others' thoughts, pros/cons and strategies. The link and an excerpt are below.

The Retirement Cafe

I like a 10-year ladder with the capital for future rungs held in stocks until needed. That way I avoid the worst interest rate risk and lower risk-adjusted return of long bonds and add some upside potential from the stocks. I keep cash to cover the first year of the ladder and use high-quality, short-term bond funds for years 2 and 3.

There are any number of ways to create a rolling bond ladder, or a single long ladder, or a combination of a ladder and fixed annuity, depending on your resources and your attitude toward risk.

But this is how I roll.

 

[SteveL]

Holding actual TIPS bond might be ok if you do it in your Tax Deferred account. I hold a number of TIPS in mine. If they are in your taxable account, any increase in value due to inflation is taxable and would have to be paid with funds outside your ladder.
I used to have a CD ladder when CD rates were 5% or so. I made this work for seven years, and then came the recession, and zero interest rates. My last CD's matured in 2013. When I couldn't find any CD's to buy, I began putting $ into Vanguard Intermediate and Vanguard Total Bond funds. Then, concerned with future interest increases, I moved into short term bond funds.

Every year since 2007, my taxable interest income has declined, to the point where it is one fifth of what it was when I had the ladder, on more current dollars.

So, ten years of future spending is assured because the funds are not in the stock market. However, the price of this safety is basically little or no income on the money.

 

[Mr._Graybeard]

We cashed out a lot of company stock this spring and summer. After agonizing about where to put the money, we went with a muni bond ladder with the longest maturities at about 8 years. Most of them have early call provisions, so I expect that many of the bonds will not reach their final maturity date. I tried to avoid bonds with call dates before 2015.

Most of our bonds yield 4%-5%. I tried to limit the cost to approximately par plus yield -- that is, 104% for 4% bonds, 105% for 5% bonds, etc. (a goal not always achieved). I googled each municipality before purchasing to see what local newspapers were reporting on their financial condition, and of course examined rating reports, disclosure documents, etc. I avoided issues with S&P ratings below AA- or Moody's ratings below A3. A lot of the Moody's ratings seem tied to the insurer's creditworthiness rather than that of the municipality itself.

I looked at corporate issues but dollar for dollar, munis seemed like a better deal with the added tax advantage. I also like the relative transparency of municipal finances -- if a city or state has a big pension shortfall, for instance, someone is bound to have reported on it.