Copper Beech Advisors Blog

Your Retirement Paycheck

Posted by Timothy Caban on Aug 28, 2015 10:00:00 AM

Buying the Stairway to...Retirement?

What is your plan for making the transition from working life to retirement? Will you need to depend on money that you've saved while you were working?  Most people do. 

How then will you replace your paycheck in a way that is dependable and gives you the confidence that you will be able to weather any financial storms that may arise? 

Consider building a bond ladder.

Living Expenses

The first step is to figure out how much it costs you to live.  For example, say that your after-tax cost of living was $90,000.  You may expect to receive $25,000 per year from Social Security and you may have a pension for another $20,000 per year.  Together, this is equal to $45,000 of your lifestyle already secured in guaranteed payments from the government or from your company.  This leaves $45,000 left that you will need to provide for.  Knowing this number is a crucial first step to be able to create a bond ladder.

Stripped Treasuries

No, there is nothing risque about these treasury bonds.  A bond is simply a loan.  If you buy a bond from the US Government, you are loaning them your money and they are promising to pay you back plus interest.  A stripped treasury is just a bond where the principal and interest portions have been separated.  This makes things simpler when planning your retirement paycheck.  This is because you don't have to account for periodic coupon payments when planning your cash flow. If you know you need $50,000 in 5 years to give you your paycheck, you can buy a bond for $50,000 face value that will mature for that amount just when you need it.  If you buy a bond that matures in succesive years, for example in year 5, year 6, year 7  and so on, you effectively create a ladder of government guaranteed payments.

Safety Trumps Yield

If you are going to be depending on these bonds to pay off when you need them, then it is important to remember that "safety trumps yield", a concept that was pioneered by Bert Whitehead who has used this approach for many years.  The phrase is a good one and it highlights why you want to use treasury bonds as opposed to buying potentially higher yielding bonds issued by companies, known as corporate bonds.  Another aspect of treasury bonds is that they are non-callable.  This means that as long as you hold them to maturity and the government doesn't default, then they will pay off for the stated amount.  Many corporate bonds are callable which means that they can take back their bonds if they want to.  This typically happens when rates go down and they can reissue their bonds at a lower rate.  By holding treasury bonds, you can avoid this and ensure that your paycheck will be there when you need it.


The ideal place to hold your treasury bond ladder is inside of a tax-qualified account like an IRA.  Although your treasury bonds don't actually pay you coupon payments, you still owe tax as if they did.  This taxable income must then be reported on your tax return.  By holding the ladder inside of an IRA, this interest grows tax deferred while simultaneously avoiding the need to report taxable income unless you choose to do so.  These bonds can also ensure that there is appropriate money available to cover your Required Minimum Distributions once you live past age 70 1/2.

Seesaw In Practice

Now that we've described how to create a bond ladder and where to hold it, we can integrate the idea of a bond ladder into the rest of your overall investments.  Ideally, we would recommend having a bond ladder to cover 15 years of living expenses.  As an example, this may make up 50% of your investment portfolio.  The other 50% of your investments can then be invested in stocks where risk taking is better compensated through higher expected returns.

In retirement, you have a bond ladder in one hand and your stock investments in the other hand.  Every year, you can make a decision.  If stocks have had a good year, you may choose to sell stocks to fund your paycheck and pay what is typically a lower capital gains tax on the income.  If stocks are having a bad year, you can then take the money from your maturing bond and live on it.  This prevents you from having to sell your stocks when they are down which is a sure way to reduce your stock investment returns. 

Peace of Mind

Having a bond ladder can provide tremendous peace of mind, particularly when the stock market is experiencing a downturn.  Most recently, that can be in the form of a reaction to Greece or China.  In the not too distant past, is serves an even more important role when there is a downturn like we experienced in 2008 or after the tech bubble in 2000.  Building a bond ladder will allow you to strengthen your investment muscles and ensure a good night's sleep, even when there is volatility in the market.








Topics: Cash Flow, Bonds, Bond Ladder, Retirement Paycheck, Investments, Retirement