Bond laddering is an approach to investing that has a lot of appeal for the typical retirement client, providing stability and predictability while helping to bridge the gap until larger income sources like Social Security kick in — or to create a predictable foundation while other assets are positioned for growth.
But, as explored in the latest episode of the Retire With Style podcast by the retirement researchers and collaborators Wade Pfau and Alex Murguia, there are important nuances to the strategy that advisors must consider. It also takes a lot of work to construct and maintain bond ladders "by hand," which can be a challenge for time-constrained financial advisors.
In dissecting the matter, Pfau and Murguia interviewed Nate Conrad, head of LifeX at Stone Ridge Asset Management, which manufacturers exchange-traded funds that mimic the output of traditional bond ladders.
At its core, Conrad explained, bond laddering is a simple concept. It involves purchasing bonds with staggered maturity dates so that as one matures, the principal is returned and can be reinvested or spent, depending on one's needs at that time. For retirees, the steady cash flow this technique provides ensures they have income ready when needed — without relying on market conditions.
The downside, Conrad observed, is that building and managing a traditional bond ladder is no small task. To match monthly or even annual spending needs with bond maturities, one could end up placing dozens — or even hundreds — of individual trades. Adjusting or rebalancing that strategy can become an administrative headache, especially as life circumstances evolve.
Recognizing these challenges, the investment industry has introduced new tools that aim to preserve the benefits of bond laddering while reducing some of the friction. In the case of Conrad's firm, the preferred approach is to utilize the flexibility of the ETF investment vehicle to assemble an appropriate mix of Treasury bond funds designed to personalize bond investing with an emphasis on tax-efficient monthly cash flow.
But, as explored in the podcast, there are many ways put the basic theory behind bond ladders to work, and regardless of the specific strategy, the experts agreed, it's important for investors and their advisors to start by understanding the basics behind bond laddering.
See the accompanying gallery for seven highlights from the podcast episode.
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