Bond Ladders Explained: Matching Bonds to When You Need the Money
A bond ladder spreads money across individual bonds or CDs that mature in different years. It gives predictable cash at set times and reduces the risk of reinvesting everything at once. Here is how to build one.
A bond ladder is a set of individual bonds, Treasury securities, or CDs that mature in different years. When each one matures, the money is either spent or reinvested at the long end of the ladder. It's a way to know, in advance, how much cash will arrive and when.
How it works
A hypothetical $100,000 split evenly across five rungs maturing in years 1 through 5:
| Rung | Matures | Amount |
|---|---|---|
| 1 | Year 1 | $20,000 |
| 2 | Year 2 | $20,000 |
| 3 | Year 3 | $20,000 |
| 4 | Year 4 | $20,000 |
| 5 | Year 5 | $20,000 |
Show the numbers behind this chart
| Principal maturing | |
|---|---|
| Year 1 | $20,000 |
| Year 2 | $20,000 |
| Year 3 | $20,000 |
| Year 4 | $20,000 |
| Year 5 | $20,000 |
Each year, one rung matures. You can spend it or buy a new five-year bond to keep the ladder going.
Why people use ladders
- Known cash flows: If held to maturity and issuers pay as promised, you know what you'll receive and when, regardless of price swings in between. See bond basics.
- Rate averaging: You reinvest a portion each year, so you're not locking all your money in at one rate.
- Matching expenses: Retirees sometimes build ladders to cover specific years of spending, or to bridge the years before Social Security or a pension begins.
Building blocks
- Treasury securities: backed by the U.S. government; interest is generally exempt from state income tax.
- Inflation-protected Treasuries: principal adjusts with an inflation index.
- CDs: bank deposits, generally insured up to limits; see CD ladders.
- Municipal bonds: interest may be exempt from federal and sometimes state tax.
- Corporate bonds: higher yields, with credit risk.
- Defined-maturity bond funds: funds that mature in a specific year, offering diversification with ladder-like behavior.
Ladder vs. bond fund
| Ladder of individual bonds | Bond fund | |
|---|---|---|
| Maturity | Each bond matures | Fund never matures as a whole |
| Price swings | Don't matter if held to maturity | Affect value continuously |
| Diversification | Limited by number of bonds | Broad |
| Effort | More hands-on | Simple |
Risks
- Credit risk if you use corporate or municipal bonds.
- Call risk: some bonds can be redeemed early.
- Inflation risk on fixed payments.
- Selling early may mean selling at a loss if rates have risen.
The takeaway
A bond ladder turns a lump sum into a schedule of predictable payments and spreads reinvestment over time. It works best for money with known future needs, held to maturity.
Keep reading
Asset Allocation and Rebalancing: Keeping Your Risk Where You Set It
A 60/40 portfolio left alone through a few good stock years quietly becomes a 70/30 portfolio. Here is how drift happens, what rebalancing does and doesn't do, and the main ways people rebalance.
Guide, 4 min read
Bond Basics: Why Bond Prices Fall When Rates Rise, and What Duration Tells You
Bonds are often described as safe, yet bond funds can lose money. The reason is the seesaw between interest rates and prices. Here is how it works, with prices calculated for three maturities.
Guide, 5 min read
Dollar-Cost Averaging vs. Lump Sum: What the Math Actually Says
If you have a large sum to invest, should you put it in all at once or spread it out? We ran both approaches through three market paths to show who wins, when, and why.
Guide, 4 min read