Bond Ladders - How Many Years?

[misanman]

My past asset allocation has been heavily weighted towards equities. Over the last 2-3 months, I've been taking some profits and have begun to build a bond ladder using target maturity bond etfs.

The proceeds would be used to live on if there was a downturn in our equity investments.

DW and I are both 72. Currently have built the ladder up through December, 2024 (six years).

I'm interested in getting some input on whether six years is enough or not enough. I'm considering going out to ten years but that may be overkill.

So, how big should a bond ladder be to provide some reasonable protection against a downturn?

 

[COcheesehead]

I let the interest rates decide for me. I need to be rewarded for going out more than 5-6 years. I have found only one or two bonds that have paid to go long on. So for me I stay 5 ish years.

 

[GravitySucks]

I have an 8 years ladder covering essential expense, but I'm going to let that go to 5 years of full expenses by bumping the next year up when rebalancing and not buying any more rungs for the next 3 years.
I think I made a mistake going past 5 years.

 

[Totoro]

I started out with an 8 year CD ladder, in euroland however the interest curve is really bad so I kept shortening it.

For you info: 10 years out is typically 1.25%, 5 years 1.05%.

Given the inflation target and expectation of around 2%, no thank you on both. I should get at least 3% to fix it for that long in my view.

 

[Huston55]

My past asset allocation has been heavily weighted towards equities. Over the last 2-3 months, I've been taking some profits and have begun to build a bond ladder using target maturity bond etfs.

The proceeds would be used to live on if there was a downturn in our equity investments.

DW and I are both 72. Currently have built the ladder up through December, 2024 (six years).

I'm interested in getting some input on whether six years is enough or not enough. I'm considering going out to ten years but that may be overkill.

So, how big should a bond ladder be to provide some reasonable protection against a downturn?

Ours is 4-6 yrs (CDs & Bond Fund) and was originally constructed to weather a downturn. However, as time goes by, it’s become more of a “Safety First, guaranteed income filling the gap to age 70” instrument.

IMO, 4-6 yrs annual expenses (or annual expenses gap after other guaranteed income) is plenty to weather a downturn. But, at age 72, you may want to consider the “Safety First” approach through your actuarial survival age as a couple. It just depends on your current risk tolerance.

 

[pb4uski]

One thing to keep in mind with those target maturity bond ETFs... the return in the terminal year is usually poor as the proceeds from maturing bonds are invested in short term paper until the terminal distribution in December... when I owned some my solution was to sell about a year ahead of the terminal distribution. YMMV.

 

[misanman]

Thanks, everyone, for the feedback. Some excellent suggestions on some things for me to consider! I will keep the current six year term for now but will monitor final year rates to possibly sell out a year early.

 

[COcheesehead]

Fidelity is offering an online seminar on using fixed income tools. They have some great resources for do-it-yourselfers.
https://www.fidelity.com/learning-center/events/fixed-income-tools

 

[OldShooter]

... The proceeds would be used to live on if there was a downturn in our equity investments. ...

Essentially this is a bucket strategy, which I happen to like. Of course when you calculate your AA it will be changing as you draw down the bond ladder during a weak equity market. It will also be changing as equities recover. And so what? I don't think you need to care.

Buckets vs fixed AA draws a lot of debate around here, though. Maybe some will come in this thread, but if you're interested some searching here should give you plenty to read.

 

[gcgang]

5

 

[misanman]

Ours is 10 years.

 

[RobbieB]

I don't know. My bond guy does that stuff.

 

[Dash man]

We’re set up for a 3-7 year ladder. Our bond guy recommended not going out any further. Getting around 2.8%.

 

[Montecfo]

Duration is not your friend right now. I would keep durations short and keep at least 5 years of spending in bonds of similar fixed income.

Having said that, right now I would stick to durations under 2 years for new money. You are just not getting paid to take rate risk now.

Credit risk, on the other hand, does make sense in a low rate environment with an improving economy. So corporates, not treasuries.

 

[audreyh1]

I don’t do bond ladders.

But I do keep a duration mix in my fixed income across very short term cash equivalents including CDs and iBonds, short-term bond funds and intermediate term bond funds. Plenty of liquidity in case we have to draw from fixed income for a while.

 

[big-papa]

Along with ibonds, ours is set up by using TIPs funds of differing durations to effect the equivalent of a bond ladder where we reduce the effective duration over time. We have it set up to withdrawing at age 70 as an inflation adjusted supplement to SS and to last for 15 years to provide a lower floor of income which should just about cover basic expenses. When we get close to the end of the ladder, depending on our health and the state of the rest of our portfolio, we'll consider a SPIA to take us the rest of the way.

 

[Golden sunsets]

Our bond ladders are in our IRA's and mirror anticipated RMD's. In theory the ladders are 10 years, with a new rung purchased each year. In theory we aren't worried about fluctuations because we always hold to maturity. But, rates are so low we are loath to buy our 2031 rung. So there's that. The rest of our bond money is in tax exempts, a tax exempt intermediate fund, I bonds, a CD ladder and cash, waiting for rates to increase.