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A Bond Ladder for Regular Retirement Income
Key takeaways
- A bond ladder staggers bond maturities so that a portion of the portfolio matures each year.
- It eliminates both reinvestment risk and the risk of selling at the wrong moment.
- A ladder works best with individual bonds, not bond funds.
- The length of the ladder should match the distribution horizon, or at least 5–10 years.
- Regular coupon income supplements the returns from maturities.
A bond ladder is a strategy in which you purchase bonds with different maturity dates so that a portion of the portfolio matures each year (or every two years), bringing in cash. For retirees, it is one of the most elegant ways to secure predictable income without market stress.
How a Ladder Works
Imagine investing in bonds maturing in 1, 2, 3, 4, and 5 years. Each year one of them matures — you use the proceeds for expenses or reinvest in a new bond with a five-year maturity. The ladder renews continuously and you know exactly how much you will receive and when.
- Years 1–5: successive bond maturities, regular cash.
- Ongoing reinvestment: a new bond with the longest maturity replaces the one that matured.
- Coupon income: supplements cash flow between maturities.
What a Ladder Does Not Solve
A ladder protects against market risk, but not against inflation or the issuer's credit risk. That is why it is appropriate to use government or investment-grade bonds. Also do not rely on a ladder as the sole income source — combining it with dividend ETFs or index funds delivers a better overall result.
Practical Implementation in the Czech Republic
In the Czech Republic, the market for individual bonds for retail investors is less accessible than in the US. However, a ladder can be assembled from Czech government bonds, euro-denominated government bonds through a broker, or bonds from supranational institutions. When selecting a broker for bonds, compare fees and market access — our guide on how to choose a broker in the Czech Republic will help.
FAQ
What is the difference between a bond ladder and a bond fund?
A bond fund has no fixed maturity — its price fluctuates with interest rates and the manager decides on its composition. A ladder of individual bonds has fixed maturities: you know exactly how much you will receive and when, without dependence on the market price.
How many bonds do I need for a ladder?
At least 4–5 for a meaningful spread of maturities. Ideally 8–10 if you want annual maturities over a longer period. It depends on the size of the portfolio — for smaller portfolios, transaction costs are relatively higher.
Does a ladder work when interest rates are low?
It works, but the yield is lower. At low rates a ladder primarily provides capital protection and cash flow predictability. The return component then lies more in the equity portfolio that the ladder complements.