Retirement Income - Should a Bond Ladder Be Part of Your Plan? Read Transcript Open new window Transcript of the video: If you're looking for ways to create retirement income, you're probably looking at bonds as part of your solution. But some worry that getting today's highest bond interest rate means locking up money for 10, 20, or 30 years. And by doing that, they'll miss out on an opportunity if interest rates rise. The question is, can you get the predictable income of bonds and the flexibility to reinvest if rates go up? You can with a bond ladder. Instead of locking up money in one bond for a long period of time, you divide that money across multiple bonds with different maturities. Now, while your overall interest rate may be lower, you have bonds maturing regularly, giving you the flexibility to reinvest your principal--potentially at a higher rate. And you still get the predictable income you've come to expect from bonds. Here's how it works. Let's say you build a bond ladder that includes five bonds maturing in one, two, three, four, and five years. Generally, the longer a bond's maturity, the higher the interest rate--all else being equal. In this example, your five-year bond pays the most, the one-year bond pays the least, and your average return is in between. Once your bond ladder is set up, you'll start to receive predictable income in the form of interest payments from each bond. You'll also have bonds coming due annually, making the principal regularly available. When the one-year bond matures and pays you back, you'll have a choice. You can use the money for planned purchases or essential expenses, or you can reinvest the money into another five-year bond, possibly at a higher rate. If rates drop, you still have some bonds invested for the longer term at higher yields, so a ladder can make sense whether rates rise or fall. Just keep two things in mind. One, try to avoid callable bonds. If interest rates fall and your bond is called, your principal will be paid back early. Two, try to buy high-quality bonds. Bonds with higher credit ratings generally have less likelihood of defaulting. Now back to our original question-- Can you get the predictable income of bonds and the flexibility to reinvest if rates go up? With a bond ladder, the answer is yes. For help building a bond ladder or finding the right strategy for you, Call a Schwab Bond Specialist at 800-626-4600.