Building a Financial Bridge to Your Dreams: The Power of Bond and CD Ladders

Imagine having a reliable source of income besides what you earn from your job. Perhaps you’d consider making changes to your life and career: exploring a new direction, rediscovering a postponed passion project, starting your own business, or transitioning into a retirement you once thought impossible. The good news is that there is a strategy to generate reliable additional income with little risk. How? By building a ladder of bonds or certificates of deposit (CDs) that can provide you with supplemental income, serving as a bridge to the next chapter of your life.

The Basics: Bonds and CDs

Bonds and CDs offer a stream of income, and when they mature, they return the money you paid for them. Currently, interest rates and bond yields are higher than they’ve been in years, making it an opportune time to consider building a bond or CD ladder. Unlike the stock market, which can be volatile, bonds and CDs provide reliable mid-to-high single-digit yields. Although the prices of bonds and CDs can fluctuate, their coupon payments and principal repayments are fixed and scheduled for specific future dates.

Understanding Bond and CD Ladders

A bond or CD ladder involves purchasing a series of bonds or CDs with staggered maturity dates. This strategy creates a predictable income stream, as each bond or CD matures and returns its principal at different times. This approach ensures you have a steady flow of income and access to your invested capital over the ladder’s duration.

To illustrate, let’s consider a hypothetical example:

Sheila’s Mid-Life Career Change

Sheila is considering a mid-life career change and expects her income in the new career will eventually match her current salary. However, she needs a financial bridge for the next five years. Sheila can build a five-year CD ladder by purchasing CDs that mature each year. Each maturing CD provides her with principal and interest to cover living expenses or tuition. This approach offers Sheila the financial security to pursue her new career without the stress of immediate financial strain.

For those with longer-term plans, such as transitioning from a high-paying job to a lower-paying, more fulfilling career, or even preparing for early retirement, a longer-term bond ladder may be more appropriate. Here’s another hypothetical example:

John’s Early Retirement Plan

John wants to retire early but needs a steady income stream for the next 10 years until he can access his retirement savings without penalties. By constructing a bond ladder with bonds maturing each year over the next decade, John ensures a consistent income flow. He selects high-quality bonds from diverse issuers to minimize default risk and holds them to maturity. This strategy provides John with predictable income and financial peace of mind as he embarks on his early retirement.

The Benefits of Predictable Income

Knowing what to expect from your investment portfolio can significantly reduce stress during personal or career transitions. A reliable income bridge allows you to retire earlier, change careers, work for less pay but greater fulfillment, or simply take a break to enjoy life more. The financial certainty provided by bond and CD ladders enables better decision-making regarding life challenges and opportunities.

The Trade-Off: Certainty vs. Growth Potential

While investing in bonds and CDs for living expenses sacrifices potential higher returns from stocks, it offers greater certainty. You also spend down some of your principal. However, during certain times in life, the trade-off between potential growth and higher certainty is worth it. This strategy is particularly beneficial when the goal is stability and predictable income rather than maximizing growth.

How to Build a Bond or CD Ladder

If you believe a ladder of bonds or CDs suits your needs, here’s how to get started:

1. Determine Your Time Horizon: Decide how long you need the income bridge. Is it for a few years or a longer period? This will help determine the maturity dates of the bonds or CDs you select.
2. Select High-Quality Bonds or CDs: Choose bonds from reputable issuers with low default risk. For CDs, ensure they are FDIC-insured up to applicable limits to safeguard your investment.
3. Stagger Maturity Dates: Purchase bonds or CDs with staggered maturity dates to create a continuous income stream. For example, if you need income for five years, buy CDs maturing in one, two, three, four, and five years.
4. Reinvest Maturing Principal: As each bond or CD matures, consider reinvesting the principal in new bonds or CDs to extend the ladder and maintain the income stream.
5. Consult a Specialist: Work with a financial advisor or a specialist in fixed income investments. They can help you select appropriate bonds or CDs and construct a ladder that meets your financial goals.

Fidelity’s Role

Fidelity offers over 100,000 individual bonds from various issuers. Their specialists in fixed income can work with you to choose the bonds that best meet your needs. They provide the tools and expertise to help you build a customized bond or CD ladder tailored to your financial goals and time horizon.

Conclusion

Building a bond or CD ladder is a powerful strategy to create a reliable income bridge to a better life. Whether you’re considering a career change, pursuing a passion project, starting a business, or planning for early retirement, this approach offers the financial stability and predictability you need to make your dreams a reality. By investing in high-quality bonds or FDIC-insured CDs, you can enjoy the benefits of predictable income with minimal risk. Start planning your income bridge today and take the first step towards a more secure and fulfilling future.

Remember, while bonds and CDs may not offer the same growth potential as stocks, their stability and reliability can provide the financial peace of mind necessary for life’s transitions. Consult with a financial advisor to determine the best strategy for your unique situation and start building your income bridge to a better life.