Why You Should Build a Bond Ladder

by Jeff C. Johnson

Ladder with one orange rung

Making regular monthly contributions of a fixed amount into a retirement plan over a working career can make even an average-performing investment look good.

The investment strategy known as “dollar-cost averaging” effectively forces investors to buy more shares when prices are down, potentially a very profitable practice during your accumulation years. Dollar-cost averaging is not a guarantee of profits, and generally, it cannot be effective unless it’s put in place for decades or even over an entire working career. Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such investments.

Monthly salary deferrals into a 401(k) or other retirement plan are a classic example of dollar-cost averaging at work. 

This strategy, which works for you in your saving and accumulation years, can work against you when you are retired and use something like reverse dollar-cost averaging, taking distributions monthly.

Consider that during accumulation, you are forced to buy at low prices (good), and during retirement, systematic withdrawal forces you to sell at low prices in “down” cycles (bad).

Far too many retirees use a systematic withdrawal approach.

One answer for providing income from an IRA or retirement portfolio is to build a “bond ladder” with a portion of the retirement nest egg. A bond ladder is simply a portfolio of bonds that mature in intervals, usually each year, where the principal is intended to provide cash for income distributions in retirement (or other purposes).

This method of withdrawing money for retirement income protects retirees from the forced sale of stock investments during market declines.

Periodically during periods of market strength, stock holdings can be reduced and the proceeds invested in more bonds to extend the rungs of the ladder.

If you’re contemplating retirement investing for income, be certain that you, or you and your fiduciary financial professional, fully understand the use of this technique.