For an individual investor, a properly diversified bond ladder is likely to be too much work, says Carlo Panaccione, CFP and founder of the Navigation Group in Redwood City, Calif. A good financial planner can set this up for you, but you generally need a minimum of $100,000 to construct a properly diversified bond ladder.
Variants on bond ladders
"Sometimes a bond ladder doesn't always make sense, depending on what the yield curve looks like," Mayabb says. Often, the middle-term maturities tie up your cash longer but fail to reward you with higher rates.
Instead, she favors a barbell approach, in which you divide your money equally between short-term bonds and those with 10- to 15-year maturities, skipping intermediate-term bonds altogether. "Those are the sweeter spots for getting the rates.''
Or consider laddering the coupon payments on a bond, rather than the bonds themselves, Horan says. For instance, if you need $50,000 each year, you could buy a five-year bond with a 5 percent coupon and $1 million face value. At the end of the five years, you'd get $1 million back.
It may be more efficient to find a single bond with the desired payment structure, rather than piecing together five different bonds in a laddered structure, he says.
As with a traditional bond ladder, these variants may also suffer from a lack of diversification and need to be monitored for credit quality, says Panaccione.
If all this seems like too much work, consider investing in a floating-rate fund -- also called a bank-loan fund -- which holds a variety of bonds or bank loans with adjustable rates, giving you exposure to a range of credits. "In fixed income, you have to be realistic about how closely you're willing to watch" credit quality, Panaccione says. "If you're not willing to review things on a regular basis, don't buy individual bonds."
Unlike individual bonds, floating-rate funds have no maturity date, so you can lose principal if market fluctuations cause fixed-income investments to drop in value. "I don't like bond funds because they don't guarantee my principal," Rodgers says, while conceding that they can be a good choice in some cases. "For the individual investor who's not using an adviser, they should be using a bond fund."
Focus on the total return of your portfolio, rather than the rise or fall in a particular fund, says Anthony Valeri, CFA, a senior vice president and market strategist at LPL Financial in San Diego. Liquidity is an issue, since these bonds don't trade on an exchange. "If we have a recession you'll see price declines" in floating-rate funds, Valeri says.
The classic strategy for ensuring a stream of income in retirement, of course, is purchasing an immediate annuity. This insurance product guarantees that you will receive a stream of payments for as long as you live.
The downside: You pay a premium for that guarantee and lose control of your assets forever.
"I've done annuities this year only because of clients demanding them," Panaccione says. The insurance companies are "probably investing in what you would've invested in and charging you a premium. Is that what you need to sleep at night? Then it's probably worth paying the premium."
If you're married, the question of an annuity becomes more complicated. You can buy a joint life and survivor annuity for a smaller payout, or opt for provisions that guarantee some portion of your payment goes to your spouse if you die. But it will cost you, Mayabb says.
By choosing an annuity, you lose the flexibility of changing your mind. "Once you annuitize, those assets are no longer yours," she says. "With a bond ladder, CD ladder or investment account, if something happens and you need $20,000, you go sell something."
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