A Bond/CD Ladder Toolkit

A while ago I created a little toolkit to design my own bond and/or CD ladder. With a bond/CD ladder, by the way, I mean holding a portfolio of bonds and/or CDs so the cash flows comprised of maturing CDs/bonds plus interest income exactly matches a specified time series of target cash flows over time. Of course, if you’re regular readers of this blog you know that I’m not too thrilled about investing in bonds or CDs. Yields are just too low, compliments of my former colleagues at the Federal Reserve. But there are still a few interesting applications for bond/CD ladders. Some of them purely for “academic curiosity” and not because I actually want to implement them. So, here would be a few questions I’d try to answer with this toolkit:

  • If I wanted to build my own little “quasi-annuity” to guarantee a certain cash flow for 30 years or so, how much money would I have to set aside today to guarantee that cash flow? This is obviously not because I actually want to do this. As we will see later, the cash outlay today would be so prohibitively high that I’ll prefer to take my chances with the stock market and the Sequence Risk that comes with it!
  • How much of a difference would it make if I required regular cost-of-living adjustments (COLA) along the way rather than getting one fixed nominal “income” along the way?
  • Related to the issue above, if someone already has a corporate pension without COLA, how much would he or she have to set aside to supplement this pension and guarantee a certain COLA, say, 2% a year?
  • When interest rates were higher only a few decades ago, how feasible would it have been to create a bond ladder for retirement? Could we have gotten rid of Sequence Risk completely?
  • If I wanted to hedge my first 5-10 years of early retirement against Sequence Risk and at least partially fund my retirement expenses through a CD ladder, how much money would I have to set aside?

So, today I’ll share that spreadsheet and some of my sample calculations and results. I hope you’ll find value in playing around with it, too… Continue reading “A Bond/CD Ladder Toolkit”