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Posted on November 28, 2008

Retirement Investing Basics: Bond/CD “Laddering”

Bond CD investing

Especially in these uncertain times, future retirees are seeking maximum safety for their retirement nest eggs. Bank certificates of deposit (CDs), government bonds, and top-quality corporate bonds are traditional safe investments. Assuming you want to invest in them, how can you maximize return on investment without incurring risk, or being forced to “bet” on whether interest rates are going to rise or fall?

An ideal way to accomplish this is by using an investment strategy known as laddering. Basically, laddering is the process of spreading out different time frames (maturities) and interest rates to ensure that your overall portfolio has the desired average maturity and interest rate.

In order to accomplish this, you place a portion of your total investment in short term maturities (one to two years), then some in medium term maturities (three to seven years), and the remainder in longer term maturities (ten years). When the short term investments mature, you place the proceeds into longer term maturities, essentially leapfrogging over the longest maturities you currently hold. Because you always hold the bonds or CDs to maturity, you don’t have to worry about them rising or falling in value in the interim. This shields you against potential losses if interest rates rise. If interest rates fall, you have locked in at least a portion of your investment at the higher rate for the longer term. It’s a “can’t lose” strategy for those who aim not to speculate on interest rate fluctuations, but rather to get maximum returns with minimum risk.

Once you’re retired, you can continue to employ the strategy, and you’ll have the same advantages as before. But then, an additional benefit will come into play: because a portion of your portfolio will be maturing every few years (or even every year if you structure your “ladder” accordingly), you’ll never have to wait for long periods of time, or cash out early, in order to have available funds. If you need some of the money, you can simply withdraw it without worrying about whether bond prices are high or low. If you don’t, you can keep the ladder going as before.

In short, the strategy of laddering belongs in every future retiree’s portfolio. If the fixed-income portion of your portfolio isn’t yet laddered, why not get started today? You have nothing to lose.

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