Gilgongo wrote:Most "bucket" approaches recommend a bond ladder with maturing bonds doing the spending cash replenishment, and stocks being sold to replace the maturing bond (as I understand it).
First up, we need to specify whether it’s nominal or inflation linked bonds. I think inflation linked are better because they protect you against unexpected inflation, and recall that the three big risks with retirement funding are longevity (running out of money), market risk (poor returns, especially at the wrong time), and inflation. Nominal bonds will be better during periods of deflation but how common are they, and any cash is already giving protection, and it’s perhaps wise to own both nominal and inflation linked bonds (although the nominals won’t be in the ladder, but in the ‘risk portfolio’).
Secondly, what you describe is better thought of, not as a bond ladder (although it is a rolling bond ladder) but as a bucket strategy (where you draw from stable buckets), or just an ordinary old stocks/bonds portfolio that you rebalance by withdrawals.
Thirdly, a safer approach is a non-rolling bond ladder: you buy the bonds, then spend their coupons and redeemed principle over the coming years, nothing is replaced. Safer, but expensive now with yields low.
Fourthly, unpleasant inflation in the near term only (next 3 years perhaps) is less a problem than inflation running for 15 years even if it’s modest inflation. So an inflation linked bond ladder doesn’t need to deal with the next 3 years as seriously (or at all) in the way it should for years 4-15.
Fifthly, yes, interest rates are expected to rise (bad for bond values), but folk have been saying that for a decade now as they’ve kept falling. Beware predictions! But that problem does not exist with a non-rolling bond ladder, because you hold the bonds to maturity (with its guaranteed value), and so falling prices with increasing interest rates have no effect for you. Other than, of course, your money is locked up in bonds you’ve planned to hold to maturity, and are thus losing the chance to buy higher yielding bonds now available. So bond ladders remain a good idea, if they ever were for you.
Sixthly, I don’t think you’re smoothing market volatility with a non-rolling bond ladder. Your assets continue to show market volatility; it’s just that it no longer matters to you because the bond ladder is guaranteed income, and the rest of the portfolio (the at risk part) is not being touched unless you’re replenishing the bond ladder in which case it’s a rolling bond ladder, not a non-rolling ladder.
Seventhly,
hiriskpaul wrote:The advantage of a gilt ladder compared to a deposit ladder though is that of liquidity. Gilts can be sold instantly,
Well, you don’t need liquidity with a non-rolling ladder. Secondly, if you have to sell during rising interest rate times you’ll lose capital. Yuk.
1nvest wrote:Bond ladders are a great idea if real yields are up at +3% levels. Much less so when down at -2.5% type levels.
Indeed, but they still give you a guaranteed, known, predictable, no risk income, No other way to get that, so of course the cost will be high.
Don’t think there's any 'ready made' bond ladder ETF available.
AshleyW wrote:The problem at the moment is that a bond ladder will give you no protection against inflation with current yields lower than current and prospective inflation rates.
Disagree. A non-rolling ladder gives perfect inflation protection; it's just that the real yield on those bonds is negative, so you’ll pay more than you get back. You lose purchasing power, but not because of inflation, it’s because yields are negative.
AshleyW wrote:Neither conventional nor index-linked gilts provide a risk-free option - a conventional gilt ladder will provide poor real returns if inflation and interest rates increase and index-linked will prove to be a bad buy if inflation is less than current market expectations.
Yes, but at the risk of doing something unforgivable like making predictions, you need to ponder which is more likely (inflation or deflation), and which will do more damage to you. Linkers have a floor value I think: no matter how bad the deflation, their value stops dropping when the price gets to that floor; there’s some protection against the loses raging deflation can do to linkers.