A financial advisor told me the pros of building a two-part bond ladder (three-year treasures and 10-year companies) to generate steady income and cover required minimum distributions (RMDs). What are the negatives?
-Ken
When used in the right conditions and for the right job, Bond ladders It can provide a stable income and a necessary buffer against market fluctuations.
Having said that, you are right to question the downsides because there are trade-offs. Financial planning choices are often about balancing tradeoffs. Ideally, you’ll balance them in a way that provides you with the most value given your personal needs and interests.
Here is what I consider to be the biggest trade-off on the bond ladder. (And if you need more help with bond ladder strategies, consider working with A financial consultant.)
Bond ladders don’t offer much growth potential
The main reason to use a bond ladder is the expected cash flow. When she needs that certainty, bond ladders can provide her with steady returns. But this is also the main downside of the bond ladder.
Fixed rate investments whose interest and principal are secured, such as bonds and Certificates of deposit (CDs), have lower expected returns than riskier ones.
The further up the bond ladder, and the more money you allocate to it, the more impact this trade-off will have on you. That might be fine if you had enough savings That you are able to let go of this long-term growth.
For many, this growth is essential. Even conservative retirees often need some stocks to make sure their portfolio lasts.
If you are ready to match up with local advisors who can help you achieve your financial goals, then let’s start.
The key here is moderation. Make sure you scale to cover expenses while maintaining a properly balanced and long-term investment focus for the rest of your savings. (And if you need a little more help with your savings, consider working with A financial consultant.)
Bond ladders can be difficult to diversify
It can be difficult to properly diversify bond ladders Individual investors. Most individual investors will not invest a large enough amount to diversify with individual bonds. The problem with this is that even highly rated bonds still carry default risk. You need to diversify your bond holdings the same way you need to diversify stocks.
Regular bond mutual funds are not suitable because their value will fluctuate. This misses the point of having an association ladder in the first place. There are target-maturity bond funds that are managed to behave like individual fixed-maturity bonds. This reduces the problem of diversification, but you may not always be able to find one that fits your schedule.
Think of it this way: If one leg of your ladder falters, it could put you in trouble. It is best to avoid putting yourself in this situation. (And if you need a little more help with your savings, consider working with A financial consultant.)
minimum
Bond ladders are one way to deal with fixed expenses the retirement. It can be effective, but it’s also not the only option you have. Other sources of steady income include CDs, annuitiesAnd Social security and workplace pensions. All of these can play their part in a 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 difficult. Free SmartAsset tool It matches you with up to three vetted financial advisors serving your area, and you can interview your own advisors at no cost to determine which one is right for you. If you are ready to find a counselor who can help you achieve your financial goals, let’s start.
-
Consider a few advisors before settling on one. It is important to make sure you find someone you trust to manage your money. When you consider your options, These are the questions You should ask a counselor to make sure you are making the right decision.
Brandon Renfro, CFP® SmartAsset financial planning columnist and answers readers’ questions on personal finance topics. Do you have a question you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAdvisor Match platform.
Photo credit: © iStock.com / Ridofranz, © iStock.com / Goodboy Picture Company
the post Ask an Advisor: You’ve heard about the benefits of the bond ladder strategy. What are the negatives? Debuted SmartAsset Blog.
