Connecticut Money: Laddering strategy can provide income stream

This article was published in the New Haven Register on March 26, 2021.

The interest you earn on CDs and bonds are still near a low point again, after briefly rising in
2015-18 from historic lows after the 2008 financial crisis.

When yields are low, many people buy CDs or bonds with five-year maturity periods, because
they earn more interest than those with briefer maturities. What happens, though, if interest
rates rise? Those buyers have locked in a lower rate for five years and cannot take advantage
of higher rates.

One strategy is called laddering. It’s a strategy that may allow investors to respond more
quickly to changes in interest rates, and it may help produce a steadier flow of income for
retirees.

Laddering means that you buy multiple CDs or bonds, each with a different date of maturity.
You can buy CDs, for instance, that mature in in one, two, three, four and five years. Here’s
an example: Start by purchasing five CDs, each with a different maturity date. Then, as each
CD matures, you reinvest the money into new five-year CDs. After five years you will have
five long-term CDs, each earning higher interest rates than those with shorter terms, but with
one maturing every year instead of all maturing at the same time.

This strategy may help smooth out returns whether interest rates rise or fall. If rates fall, you
will still obtain a lower yield when you reinvest, but you will also hold the long-term CDs with
higher returns. If rates rise, then you will reinvest each year at higher yields rather than
having all long-term CDs that are locked into the lower rates.

Bonds can give you even more flexibility in terms of maturity periods and types of
investments. You can buy corporate bonds or tax-free municipal bonds, for example. The
higher the interest, the higher the risk. Laddering gives you a way to diversify by having some
of each, again with different maturity periods.

The number of bonds offered in the market is staggering. An experienced financial planner
can help you decide, based on your individual needs and tax bracket, whether to invest in
bonds and whether tax free bonds or taxable bonds make the most sense. A financial adviser
can also help you determine how many steps you need on your ladder and how high your
ladder should go (i.e., the longest maturity).

Both bonds and CDs can play an important part in diversifying investment portfolios and
providing a stream of income to retirees.

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