Ladder to stack of moneyOne of the common concerns people have regarding their retirement is a fear of running out of money. We all want our retirement income to last as long as we do, and many of us also want to be able to leave something beyond that to our heirs.

Those are legitimate concerns.

We may have a retirement budget written down, and a good mix of investments for our savings and it might appear we’ll have plenty of money to cover our expenses during retirement. But then something happens to “rock the boat,” and we are suddenly faced with insufficient income to maintain the lifestyle we had expected throughout our retirement.

Sometimes it’s a rapid increase in the inflation rate 1 which erodes the value of our income because our expenses rise. That’s why we should try to plan for at least some amount of inflation when creating an ideal retirement plan.

Other times it’s a sharp downturn in the markets 2 in the years just before or just after someone retires. That can drastically reduce a retiree’s accumulated assets – and that may lead to a choice between either a reduction in living expenses (getting by on less) or continuing to live and spend as originally planned but running out of money at some point. That’s one reason we should try to transition our retirement savings into more stable investments (think less stocks and more bonds) as we get closer to entering retirement.

One way to create a buffer to help you with situations like these is to use a “bond ladder.” 3 We don’t personally have control over the inflation rate or how the stock markets perform, but we are able to use something like a bond ladder to try to help cushion the blow from some of these adverse events if they occur.

A bond ladder is a strategy for investing where a series of bonds with staggered maturity dates are purchased (often maturing over a number of years, and perhaps at different months within those years). It is frequently used to diversify reinvestment risks over time and/or to create an income stream.

In the event of a drastic market downturn such as what we mentioned above, having a set of laddered bonds might provide the income needed to meet expenses while waiting on the overall stock markets to recover. And unlike selling off some of your stocks in the midst of a downturn to generate cash, having a bond ladder and simply using the income generated as each bond matures won’t diminish your stock portfolio and reduce the assets you have invested there for your future years.

It’s worth mentioning that we’re talking about bonds with specific maturity dates, not bond funds. They should be highly rated, not callable early 4 (that would mess up your timed distributions), etc. A good financial planner can assist you with creating a bond ladder as part of your overall financial retirement plan, if that’s right for you.

And a bond ladder isn’t right for everyone. For example, some people don’t have enough savings to invest significantly into stocks and still have enough remaining to create a bond ladder. You’ll likely want 5 to 10 ‘rungs’ in your bond ladder at a minimum. Corporate bonds are typically $1,000 face value each, municipal bonds average around $5,000 face value and government bonds are often $10,000 face value. 5 So, a ladder with 5 to 10 rungs would run $5,000 to $10,000 even with only corporate bonds – and five to ten times that amount if it’s built using municipal or government bonds.

That’s just the face value. The actual price you’ll pay to invest in those bonds will differ according to each bond’s coupon rate 6 and prevailing interest rates. It can get complicated, and while it is helpful for some investors it may not be beneficial for others. Some people might be better served simply by purchasing bond funds. 7 Again, a financial planner can help you in determining whether or not a bond ladder makes sense for you and your retirement investments.

Ask about a free initial visit. If it seems like we might be a good fit for one another, we’ll arrange to meet with you to discuss your current finances and your hopes and plans for your retirement years. Then we can help you map out a strategy to get you to and through your retirement – whether that includes bond ladders or not.

We’d like to help you get retirement right – your way!