New Haven Register (Sunday) (New Haven, CT)
Laddering strategy can provide income stream
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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Eric Tashlein is a crtified financial planner professional and founding principal of Connecticut Capital Management Group, LLC, 2 Schooner Lane, Suite 1-12, in Milford. He can be reached at 203-877-1520 or through www.connecticutcapital.com. This is for informational purposes only and should not be construed as personalized investment advice or legal/tax advice. Please consult your advisor/attorney/tax advisor. Investment Advisor Representative, Connecticut Capital Management Group, LLC, a Registered Investment Advisor. Connecticut Capital Management Group, LLC and Connecticut Benefits Group, LLC are not affiliated.