This strategy can be used with a variety of financial vehicles that focus on providing fixed income. You could use CDs, US Treasuries, Fixed Annuities, Corporate Bonds or even International Bonds. Often times the strategy is used when someone wants to make sure they have a little more income coming in each year down the road and don’t mind tying up their money for potentially long stretches of time.
To illustrate how this works I will use all of the above mentioned vehicles in combination with one another. To keep the math easy I will assume someone has $100,000 and needs at least $3,000 a year of income from those assets. Each “step” of the ladder is represented by one product but in practice it could be one or several financial vehicles at each step.
Step Investment Product Used Income Amount
1 $10,000 1 year 1% CD $100
2 $10,000 2 year 1.5% Treasury $150
3 $10,000 3 year 3% Corp bond $300
4 $20,000 4 year 3.3% Corp bond $660
5 $20,000 5 year 3.1% CD $620
6 $20,000 6 year 5% Intl bond $1,000
7 $10,000 7 year 5% Fixed Annuity $500
……………………………………………………………………………..Total Income = $3,300
The numbers used above are not representative of rates currently offered. The numbers used are for illustrative purposes only to demonstrate how a ladder is set up to help meet one’s income needs.
Generally speaking, investors who use a ladder reinvest their principal amount at the end of each year in a new vehicle at the back end of the ladder. Using the above example this investor, at the end of the first year, would take their $10,000 that they received back by cashing in their CD and buying something with a 7 year maturity since the 7 year fixed annuity they originally purchased will be expiring in 6 years so they need something to fill that 7 year slot.