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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Building a Bond Ladder: Guaranteed Income on Same Date Every Year

Updated: Jul 28, 2022

The bond ladder--a tool in retirement that provides guaranteed cash flow on the same date each year for a low price. We love them, but most of the industry doesn't talk about them.

So, let's talk about the nuts and bolts.

When people retiring, they will need income. They want to know their cash flow is guaranteed. They want to know what to expect and when it will pay out.

As fee-only advisors, we work in our client's best interest. We think the bond ladder is the best way to go. Often, we combine a bond ladder and a CD ladder in client portfolios.

One major tool is US Treasury Strips, otherwise known as zero coupon bonds. We buy them so that one matures each year, generally on or around the same date.

The great thing about these is that they're guaranteed by the full faith of the US Government. For retirement income, "safety trumps yield."

During 2007-2010, clients who had these were not panicked. They know they have their income that is set.

The downside protection offered by bond ladders really helps people feel peace of mind and stick with their plans.

Bonds are like pickles. These are not fancy, but they’re there.

Interest rates aren’t the reason we buy these, but they still are something we notice. Generally the interest rates on these seem low.

Currently, the rates are ticking up! Sure, they might be higher later, but it’s always a good time to buy. A bond ladder also protects you from deflation.

Here's Bridget's firm website:

John's firm website:

For advisors around the US:

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John: We love bond ladders for producing income in retirement. Why is that? We'll talk about that on today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer. And I own a fee-only financial planning practice in Middleton Wisconsin.

Bridget: And I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois. Before we go any further, let's ask people to subscribe. It helps us on YouTube and helps you get notified before upcoming episodes. So, John, let's talk bond ladders. It's something I use all the time.

John: Yeah. It's something that's out there and maybe people have heard about it, but the way that you and I use it, I think, is different than most. And maybe we should start by explaining how we use bond ladders. Do you want to maybe get into some of the details on that?

Bridget: Let's do it first and then we'll talk about how it plays out.

John: Yeah. Great.

Bridget: When people are retiring and they've got an IRA and they've got a bunch of money in their IRA, they're going to need income, and they're going to want to be able to depend on their income. We want to know it's guaranteed income, safe, and it's not going anywhere. It's not going up or down. It's going to pay out on a specific day. And we know exactly how much this is going to be.

And that's what US Treasury Strips do for you. You buy a strip at say $80 and then in seven years it’s going to pay you $100. And in the interim, the income builds up in the bottom ladder. And again, we like to use Treasury Strips, and you can buy these. We often buy them through Schwab, so you can buy them on Schwab and set the date. And again, it's US Treasury Strips.

And we like those because those are ones where, again, you buy it for a lower price, and it pays out how much your cash flow is going to be on that set date. We usually have them set up so that they mature on specific days in the future—November 15th, 2027, November 15th, 2028, November 15th, 2029... We have it set up so that each year on that specific date, you get paid out the amount and that gets just deposited directly into your account.

John: Yeah, I love that. I just want to pull out a couple of things there, Bridget. One is that idea of guaranteed income. Similar to you, we use Treasury Strips. They're backed by the government. Even if the government raises taxes, the return is guaranteed—no matter what happens. We'll use some CDs as well if they’re FDIC insured and guaranteed. All in all, we use things that are super low risk.

And the focus for us is on return of your money, not return on your money. We still want to get good interest rates and things, but the idea, that you just described, of consistency is what we do. Listen, in five years, when you need X number of dollars to be able to spend that year, it's going to show up guaranteed by the government in your checking account. That sort of security is key.

Bert White, a friend of both of ours, says that “safety trumps yield” when it comes to this. And that is totally true for how I look at it. And we describe it to people who are familiar with CDs as if it were like buying a series of one-year, two-year, three-year, four-year, five-year CDs. But instead of getting interest off that each year, like you described, you buy it at a lower rate and the interest sort of builds up inside. So that's exactly how we take a look at it as well.

Bridget: We use CDs as well, but we usually use CDs for years one through five, and sometimes those are in the retirement accounts and sometimes not. That just depends on the client's total situation. And the only reason we do CDs versus the Treasury Strips is because the prevailing rates on CDs have been higher for quite some time. That doesn't mean that they'll always be higher, but it's only based on the rates; it's not because of any other reason. If we look at the rates and say, “Okay, CDs are higher,” then we're buying CDs. But if things change and the treasury rates are paying higher, then we'd switch over to short-term treasuries.

John: Yeah, I was just explaining this when I was talking with a client who's getting ready to retire in a few years, and one of the analogies that I use—I’ve shared it with you before—is the idea of your investments, your financial life being like a farmer having a farm. When your crops out in the field, if you're raising corn or beans, that's where you make money. And that's also where you take risk for floods and droughts. And then you've got bumper years and your garden grows.

You don't just sell all that stuff; you put some applesauce and some pickles in your pantry. And that's where that bond ladder comes in for us. How are your pickles growing in your pantry? Nobody would ever ask that question. It’s the same sort of concept with bond ladders. We're not looking for growth in the bond ladder. But golly, when things are bad, when whatever's going on—inflation or war or different things happening—now we got our pickles to eat. We don't worry about eating for 5, 10, 15 years, that sort of thing.

Bridget: Right. Exactly. It's not that we don't invest in any stocks when people are retired or near retirement; it's that we like to guarantee the next 15 years of income and then we feel free, because the next 15 years are guaranteed, to go ahead and invest in stocks. And then what happens is that when stock prices go up, we sell some stocks and buy additional rungs in the bond ladder. In the years that stocks go down, we just use the rung on the bond ladder.

There's a constant cycle as you get older, but you always have 15 years of guaranteed income that you know is safe, so when the stock market tanks, you can say, “Okay, great, I still have money here.” One of the things that I like about this is that when the stock market goes down, it protects our clients and it protects us because we can say, “Gee whiz, look at this. I know I can wait this out. I don't have to sell anything because I've got all this on the bond ladder, and I know my income is going to be fine for the next 15 years.”

John: Right. I tell this story all the time to clients. Back in 2007, 2008, 2009, when the credit crisis hit and everything was going crazy, none of our clients was happy; nobody was excited about it, but our retired folks weren't worried about where their cash flow was going to come from. They weren't concerned because we had this long runway to go, “Listen, we can let things shake out. And who knows? If things continue bad for five years, we'll have to make some decisions, but we don’t have to panic.”

With bond ladders, you've got that sense of security, that peace of mind. And one of the things that we really like about it is that you can see it. We have a spreadsheet; I'm sure you have a similar thing. But here's this rung of this CD or this treasury that comes due. And here's this one. And I can tell you in 2027, here's where the money is going to come from—guaranteed. And I can almost visibly see people relax and go, “Oh, yeah, that's what I'm looking at. I don't have to worry about what's going on with inflation.”

Maybe we'll have to worry about it, but not today. We got 5, 10, 15 years to figure that out. That peace of mind and calm is really huge. And so, going through those things is helpful. We've had some bumps in the road and different things like that, but we haven't seen a massive hiccup in 15 years. And when that comes in, though, when you have that downside protection, it's just such a comforting thing to be able to stick to the plans we've made.

It all sounds good until we forget what happened back 2008. Not only was the market down, but unemployment was at double digits for the first time in 30 years, and the oldest bank in America went out of business. It wasn't just, “Oh the markets down,” it was, “Is the world ending financially?” And with bond ladders, you could go, “Listen, as long as the United States is still a country, I’ve got cash coming in,” and then you could think, “This is a bummer, but I don’t need to panic.”

Bridget: Right. I love the idea of bonds like pickles. They are not fancy, but they're there and they're good in the pantry for the long-term. That's what you want from this.

John: I'll tell you one other thing that just popped into my head. Though interest rates aren't the most important thing, they're still important. We're not focusing on the pickles for growth, but it'd be nice if they multiplied in there, right? And going back to that 2007, 2008, 2009-time frame, I remember just before that buying some bond ladders for clients who were retiring. And back then the longer-term rates—and I can't remember if it was eight or ten- or twelve-year bonds—we're paying 5% interest.

And today you think, “5% Holy Moly!” But back then, it was as low as they've been in 30 years. We were thinking, “Really? We're going to lock money away for twelve years at 5%? What? This is crazy!” And for the reasons we just described safety trumps yield—we need to have these guarantees in there. And it was sort of like, “Okay, let's hold our noses and buy these even if they are really stinky.”

And of course, five years later, ten years later, we were thinking, why did we buy more of those at 5%? It's always in the same thing. Today, with the ten-year treasury at 2.5% or whatever it is, you go, “We're going to lock money away for ten years at that?” But shoot, if interest rates go down, having that consistency is really important. And I know that some people think like that in today's low interest rate environment. But man, it was too low at 5%. It was too low at 2%. It's the philosophy—this plan works.

Bridget: It helps your emotional peace of mind. It really is a peace of mind enhancer. And the rates always seem low.

John: Yeah. Right.

Bridget: And it always seems like they’re going to be higher in the future. But they can go lower.

John: Right. Exactly. I think that's a great place to wrap things up as far as why we love bond ladders. And if you're looking for guaranteed cash flow in retirement, as you make this transition from earning an income to spending money the rest of your life, using a bond ladder can be really helpful. And the way that we talk about it with guaranteed cash flow is something that I think should be on everybody's agenda as they start to approach and get into retirement.

Bridget: Well, to wrap it up, I'm Bridget Sullivan Mermel, and this is John Scherer. We're both proud members of ACP or the Alliance of Comprehensive Planners, started by Bert Whitehead, whom we mentioned before. If you like our letters and what we were talking about, members of ACP think a lot like us on these matters. Not everybody does, but most do. Find an advisor in your area by looking at

John: That’s right. Don’t forget to hit that subscribe button. Thanks, Bridget. Until next time.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

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