Considering a Bond Ladder. Your opinion?

[pb4uski]

More information about the goal is required.

We have established that 3.5% (14k/400k) is within the possible range of bond returns. Individual bonds, fixed duration bond ETF, fixed maturity (bullet) and credit risk (Treasury, Corp, Hi Yield) are all open questions / variables.

As OP indicated he was entering retirement, I'll suggest that bullet shares are not appropriate as maturity is too near term (< 10y).

The Gugenheim data does suggest that if we want to establish 3% as a lower yield boundary and also minimize Bond ETF duration (as interest rates are expected to rise), and use Corporate bonds (not Treasuries or Hi Yield), then you can establish a rough duration of 7-8 years.

OP will need to decide if a 3% coupon on individual bonds is preferred over bond ETF. Google can find many sources comparing individual bonds to bond funds. The most important of which is that the bond ETF will attempt to maintain a roughly constant duration.

In considering individual bonds, I'd compare them to something like Vanguard Intermediate-Term Corporate Bond ETF, Duration 6.5 years, yield 3%. Individual bonds may have a longer duration matched to OP's needs.

I will also note that long term individual bonds will create a significant interest rate risk if the bonds need to be sold before maturity with longer duration.

If the OP is looking to match the bond duration to retirement duration and that is more than 10 years, then individual bonds may fit this requirement better than an ETF with a constant duration. Bullet's would work but only for short duration.

If the amounts of money are small, the ETF may provide a better vehicle for diversification of risk than individual bonds including the ability to mix Treasuries and Hi Yield to hit the target yield.

Also consider inflation, 2.5% inflation over 30 years will half the purchasing value of the bond at maturity. Or your 400K will be worth 200K in 2047 with 2.5 annual inflation.

I don't think the OP is looking for a bond ladder for his entire retirement since this is just 1/3 of his portfolio... most CDs and target maturity bond funds have maturities of less than 10 years and I think that is what the OP is looking for.

In order to get 3.5% as the OP suggests, one needs to either go long or concede some credit risk.... I suspect that the OP assuming some credit risk rather than going long but it is hard to tell from the OP.

While conventional bond funds/ETFs try to maintain a relatively constant duration, individual bonds and target maturty bond funds will have shorter durations as they get closer to maturity... but if one is refilling the ladder at the long end as bonds mature, then the duration shoudl be relatively constant.

 

[pb4uski]

Playing around with the Bulletshare tool... if one wants higher credit quality but is willing to go longer, a portfolio of 15% in the 2022-2026 Corporates and 5% in the 2020-2024 High-Yield would give:

Yield to Maturity 3.66%
Yield to Worst 3.51%
30-Day SEC Yield 3.21%
Distribution Rate 3.29%
Effective Duration 5.09 yrs
Holdings (#) 2038
Portfolio Range 2020 - 2026

 

[jetpack]

I have a 10 yr CD ladder. Was using direct from bank CDs, now using brokered CDs at Vanguard. The big draw for me was no risk of losing the money I put in. At this point, most are at and around 3%.

 

[Big_Hitter]

guy i used to w*rk with retired on a bond ladder at 50

 

[daylatedollarshort]

More specifically, TIPS protect against higher than expected inflation.

Or from another perspective, the spread between nominal and TIPS treasuries is the expected inflation rate .... ~2.5% / year.

"Inflation protection" is the common terminology -

Inflation Protected

Treasury Inflation Protected Securities.

 

[RenoJay]

Though I don't recommend chasing yield, there are instruments with higher yields in the 6-8% range. Theoretically if you put a smallish amount ($50k of your cash) into one you'd increase your total monthly cash flow. P2P services like lendinghome.com, LendingClub.com and various REITs have higher yields. Some are backed by real estate, some by credit, but all have a degree of risk.

 

[B0bL0blaw]

I don't see how I can get $14K a year from $400K, without risk, by doing it myself with other fixed income investments.

Your overall plan sounds fine to me, if a bit conservative. But this line quoted above caught my attention. Because, you should know that these corporate bonds also have risk. This is not a risky plan, but it's also not a risk-free plan.

 

[ace8]

"Inflation protection" is the common terminology

Maybe so. This thread is a discussion of risks. Inflation Protected products protect against some risks: namely higher than expected inflation and not so much against others: an increase in real interest rates, low yields and taxes.

 

[Cheesehead]

I think the OP is getting 3.5% because of credit rather than duration but it is hard to tell from the info in the OP. That is more credit risk that I would take on but I don't see how he is getting to 3.5% without some substantial credit risk.

Hi PBuski,

I'm the OP, back after a few days, what more information do you need and I will provide it. I value yours, and everyone's, opinion here.

Thanks

 

[pb4uski]

My comment was comparing the 3.5% portfolio that you referred to in your OP with the roughly 2.25% that a portfolio of 1-9 year maturity bulletshares would pay. A 2018-2026 Corporate Bulletshare ladder would pay ~2.25% and have a duration of 4.1 years... so the extra 1.25% must be coming from credit quality or duration.

Your OP mentioned that most were BBB or BBB+... the Corporate Bulletshares are mostly A, BBB and AA so are better credits, hence the lower yield.

What is the duration of the proposed bond portfolio? and the credit quality distribution?

 

[ace8]

Hi PBuski,

I'm the OP, back after a few days, what more information do you need and I will provide it. I value yours, and everyone's, opinion here.

OP I would also be interested in more information about your objectives as they relate to time. Are you looking for 3% yield for Y years? What changes in Y years? How long is Y? Do you have a specific need for the principle preservation of individual bonds?

 

[ace8]

I would like to make sure your original question is still in mind.

You posted you have a 1100K nest egg with an AA of 36/36/27% or 400/400/300K.

You indicated a 10 year corporate bond ladder held in a tax deferred account.

I would estimate 27K / year yield from that portfolio based on the rates 2/4/1%.

I see this is a very conservative portfolio. I am making assumptions, in particular in my 4% bond yield assumes credit quality and duration a PB 4 U ski points out. Shorter term, corporate bonds will not payout at 4%.

I recommend you read some of the asset allocation threads and confirm yours.