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Ask an Advisor: I’ve Heard About the Benefits of a Bond Ladder Strategy. What Are the Downsides?


A financial advisor told me the pros of building a two-part bond ladder (three-year Treasurys and 10-year corporates) to generate fixed income and cover required minimum distributions (RMDs). What are the cons?


When used in the right circumstances and for the right job, bond ladders can provide stable income and a needed buffer against market volatility. 

That said, you are right to question the downsides because there are tradeoffs. Financial planning choices are often about balancing tradeoffs. Ideally, you’ll balance them in a way that provides you with the most value in light of your personal needs and concerns.

Here are what I consider to be the two biggest bond ladder tradeoffs. (And if you need more help on bond ladder strategies, consider working with a financial advisor.)

Bond Ladders Don’t Offer Much Growth Potential

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The main reason to use a bond ladder is for predictable cash flow. When you need that certainty, bond ladders can provide it with their fixed returns. But that also presents bond laddering’s chief downside.

Fixed-rate investments whose interest and principal are guaranteed, like bonds and certificates of deposits (CDs), have lower expected returns than more risky ones.

The longer your bond ladder, and the greater amount of money you devote to it, the more this tradeoff affects you. That may be fine if you have enough savings that you are able to forego that long-term growth.

For many, though, that growth is necessary. Even conservative retirees often need some stocks to make sure their portfolio lasts.

The key here is moderation. Make sure that you are laddering to cover expenses but keep a long-term and properly balanced investment focus for the remainder of your savings. (And if you need more help with your savings, consider working with a financial advisor.)

Bond Ladders Can Be Hard to Diversify

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It can be difficult to properly diversify bond ladders for individual investors. Most individual investors won’t invest a large enough amount to diversify with individual bonds. The problem with that is that even highly rated bonds still carry the risk of default. You need to diversify bond holdings the same way you need to diversify stocks.

Regular bond mutual funds aren’t appropriate because their value will fluctuate. This misses the point of having the bond ladder in the first place. There are target-maturity bond funds that are managed to behave like individual bonds with a fixed maturity. This reduces the diversification problem, but you may not always be able to find one that fits your timeline.

Think about it this way: If one leg of your ladder defaults, that could really put you in a bind. It’s best to avoid putting yourself in that position. (And if you need more help with your savings, consider working with a financial advisor.)

Bottom Line

Bond ladders are one way of handling fixed expenses in retirement. They can be effective, but they also aren’t the only option you have. Other sources of fixed income include CDs, annuities, Social Security and workplace pensions. These can all play their part in your retirement income strategy and provide many of the same benefits as bond ladders.

Tips for Finding a Financial Advisor

  • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.

Brandon Renfro, CFP® is a SmartAsset financial planning columnist and answers reader questions on personal finance topics. Got a question you’d like answered? Email and your question may be answered in a future column.

Please note that Brandon is not a participant in the SmartAdvisor Match platform.

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