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You might have heard of fixed income ladders before, but what exactly are they, and why do you use them?  Well, you've come to the right place!  Today's article will feature fixed income strategies for those who are thinking about capital protection or cash flow during/before retirement.

What is a bond/GIC ladder?

• A fixed income ladder is where you split your capital into equal portions and invest in fixed income instruments with variable terms/maturities (from short to long term). 
• As each term expires, the released cash is re-invested into a longer term.
• Bond ladders will provide monthly income (except strip bonds), whereas GIC's are compounded until the term is up. 

Why would you use a fixed income ladder?

• This strategy allows the investor to protect their capital while staying invested in the highest fixed income product available.
• Instead of all your capital being stuck in one term, it allows you to diversify your interest rates/exposure as the term/maturity comes due.

What are some examples? 

• For a 5 year (or 5 rung) bond ladder, an investor with $100,000 would split the pot into 5 parts of $20,000 each.  Each part would be invested in bonds with 1,2,3,4,5 year terms.  As each term expires, the cash is re-invested into a 5 year term.  Typically speaking, the longer the term, the higher the rate.  As each term expires, the free cash will be invested at the longest term, in this case, 5 years.  The same can be done with a 10 year bond/GIC ladder.
• The bond ladder is useful if cash flow is required during retirement (low risk Government of Canada bonds are preferred).  The GIC route may be helpful if you're looking for capital protection just prior to retirement.

What are the drawbacks?

• Interest income is 100% taxable, however, unless you have other income during retirement, your RRSP'S are also 100% taxable at your marginal rate anyways.
• The requirement of purchasing individual bonds may be daunting for some.  I have personally never purchased an individual bond.

Conclusions:

This strategy are for those who wish to diversify their fixed income/interest rate exposure.  It is recommended that this strategy only be attempted if you have enough cash for at least 5 "rungs".

Any of you have real life experience with bond ladders? 

This is a simple primer on bond/gic ladders, so please do your own due diligence before attempting such a strategy.

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