Build me a 10 year CD/Note/Bond ladder

[scottl73]

Give me your suggestions for the current market rates. I already allocated an amount for index funds. The rest will be for CD's/Bonds/Notes etc.... Because the rates are so good and I want steady income. Assuming you have 650K, give me your ideas on starting a Ladder consisting of CD's, Notes, Bills, and Bonds. I do live in Louisiana and have State income tax so we may want to limit the CD's. I would prefer to get paid monthly but that would consist of many rungs I'm assuming. I would prefer if they would automatically roll over into new rungs but not sure if that is offered. I do have a fidelity account which may make things easier but I know we could buy Bonds and notes straight from the US Treasury. Again, I already invested in index funds and only need ideas for a 10 year ladder. Thanks in advance!

 

[tulak]

73k/year real income using TIPS.

https://www.tipsladder.com/build?in...ap=NearestBond&bondChoiceWithinYear=BestYield

 

[pb4uski]

Easy would be a ladder using target maturity bond ETFs, but you'll give up 25-30 bps for the convenience between premiums paid and expenses.

A ladder of 2024-2033 maturities that is 10% high yield, 20% corporate and 70% Treasury (and 25% corporate and 75% Treasury in a few later years where the high yield product isn't offered) would yield 5.14% and have a weighted average maturity of 5.16 years and have a 31 bp drag, 21 bps from premium and 10 bps expenses.

Alternatively, if the 2024-2033 ladder is solely Treasuries the yield would be 4.67% and have a weighted average maturity of 5.18 years and have a 26 bp drag, 19 bps from premium and 7 bps expenses.

https://www.ishares.com/us/resources/tools/ibonds

Or a plain-vanilla 10-year rolling Treasury ladder with 10 or 20 rungs would also do the trick. Any of the brokerage firm bond desks can recommend one for you.

Don't get hung up about monthly income. Put your annual need into a money market fund and have automatic withdrawals from the MM fund provide the monthly income. Interest coupons and a portion of maturities then replenish the money market fund with the rest of the maturities being reinvested in the next rung of the ladder.

 

[pb4uski]

73k/year real income using TIPS.

https://www.tipsladder.com/build?in...ap=NearestBond&bondChoiceWithinYear=BestYield

But after 10 years your portfolio is gone... what if you still need income after that?

 

[ShokWaveRider]

This post is very interesting to me also, but not sure I can stomach 10 years right now, 7 maybe. That would make me 80 and that is pushing it for my family history.

 

[pb4uski]

I guess I think 10 years makes sense for a rolling 10 year ladder being used for one's fixed income allocation instead of a bond fund. The 5 year weighted average term is a little shorter than an interpediate term bond fund and much shorter than most aggregate bond funds.

 

[COcheesehead]

Learn how to use the fixed income screening tool at Fidelity. It’s like giving a person a fishing pole instead of the fish.
I run it regularly including just today. I found over 360 options paying 6% or more. All A-/A3 so higher investment grade AND non callable. Open duration. So you could pick off X number of bonds per year right from that search alone.

 

[scottl73]

73k/year real income using TIPS.

https://www.tipsladder.com/build?in...ap=NearestBond&bondChoiceWithinYear=BestYield

This looks very promising! I know the interest rates may come down but this here is a 10 year guarantee! I have a friend who is heavy into investing and he likes this a lot. I actually may invest 900K into this. Question; I see you have it all in Tips. Wouldn’t regular Treasury Notes have a better interest rate? I know Tips are inflation adjusted but do they come with lower rates?

 

[tulak]

But after 10 years your portfolio is gone... what if you still need income after that?

Spend less than 73k? Build a longer ladder?

It’s the same problem you’d have building a ladder with CDs/Bonds/Treasuries. OP wasn’t clear on the goal: is this for income to be drawn down over 10 years or is it to deal with SORR for bad equity years?

My worst case guess is that TIPS vs Treasuries will be a wash for a ladder, unless inflation runs higher than expected. In that case you’ll be happy you picked TIPS over Treasuries.

I’m betting that inflation will be harder to tame and will average around 3%, making TIPS slightly more attractive than Treasuries.

 

[tulak]

This looks very promising! I know the interest rates may come down but this here is a 10 year guarantee! I have a friend who is heavy into investing and he likes this a lot. I actually may invest 900K into this. Question; I see you have it all in Tips. Wouldn’t regular Treasury Notes have a better interest rate? I know Tips are inflation adjusted but do they come with lower rates?

I would recommend you read up on how TIPS work. tipswatch.com is a good site and has an overview on TIPS.

As I mentioned in the previous post, I suspect the worst case is that TIPS and Treasuries will return about the same, +/- .5% is my guess. If inflation is higher than expected, then TIPS will do better, but if lower than expected, then worse. I’ve chosen TIPS over Treasuries as insurance against inflation.

The amounts you see on tipsladder is the real return, not nominal, so it looks worse than Treasuries or CDs/Bonds. You need to factor in the inflation index to get the nominal yield, at which point it’s an equal comparison to Treasuries.

The hard part with TIPS is the inflation index changes daily for the lifetime of the TIPS, so you won’t know your nominal yield until maturity (unless you sell on the secondary market). With Treasuries, you know exactly what you’ll get when you buy.

 

[pb4uski]

While the OP wasn't specific, I think they meant a rolling ladder, which could also be done with TIPS if inflation is a concern.

 

[Chuckanut]

This post is very interesting to me also, but not sure I can stomach 10 years right now, 7 maybe. That would make me 80 and that is pushing it for my family history.

Most of my ladder is one to five years.

FWIW, the few bonds I have that mature out towards 10 years are TIPS. They were recently bought in the past 4-6 months. I like TIPS for some of the longer steps in a ladder. Like many, I have a fear of inflation having lived through the high inflation debacle of the late 1970s and early 1980s. My 2¢. YMMV.

 

[COcheesehead]

Most of my ladder is one to five years.



FWIW, the few bonds I have that mature out towards 10 years are TIPS. They were recently bought in the past 4-6 months. I like TIPS for some of the longer steps in a ladder. Like many, I have a fear of inflation having lived through the high inflation debacle of the late 1970s and early 1980s.

Trying to manage the unforeseen is inherent in a ladder strategy. You’ll always have fresh cash to reinvest or if rates/inflation drop, you have funds on the longer end that will benefit and you get paid interest in cash to wait things out.

 

[Chuckanut]

Trying to manage the unforeseen is inherent in a ladder strategy. You’ll always have fresh cash to reinvest or if rates/inflation drop, you have funds on the longer end that will benefit and you get paid interest in cash to wait things out.

A lot of the longer end is callable which I don't care for. The last time I checked TIPS are not callable. We'll see what happens.

 

[pb4uski]

You can find loads of longer non-callables... it is just that the rates are lower.

I just ran a screen of agency bonds maturing the second half of 2028 on Schwab. The top 5 callables had a YTM of 6.226-6.350% and YTW of 3.670-6.044%. If I modify the search to non-callables then the top 5 are 4.633-4.723%

 

[COcheesehead]

A lot of the longer end is callable which I don't care for. The last time I checked TIPS are not callable. We'll see what happens.

There are also a ton of corporate, taxable muni and tax free munis, if that is a need for you, with long call windows. Non callable is a search parameter within many bond screen tools.
I did a search the other day and found a few hundred yielding over 6%.

 

[scottl73]

This is all great advice. I don’t foresee us needing more than 30K at most to supplement our current income. So we will have about half of the income to invest elsewhere. I will continue a rolling ladder if interest rates are still attractive. I’m learning these terms as I go and definitely would want non callable bonds/notes. What else do I need to be aware of when choosing Notes/Bonds? How do I know if they have fees? Anything I need to stay away from? Thank you!!

 

[COcheesehead]

This is all great advice. I don’t foresee us needing more than 30K at most to supplement our current income. So we will have about half of the income to invest elsewhere. I will continue a rolling ladder if interest rates are still attractive. I’m learning these terms as I go and definitely would want non callable bonds/notes. What else do I need to be aware of when choosing Notes/Bonds? How do I know if they have fees? Anything I need to stay away from? Thank you!!

Loaded question. Start by learning as much as you can. Here is a good place to start.
https://www.fidelity.com/learning-c...cts/fixed-income-bonds/fixed-income-bonds-cds

 

[scottl73]

Much watch video if you're thinking about investing into Treasury notes or bonds!