Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / The Bond Ladder That Pays Your Early Retirement Bills
Transcript
- Lucas: So you've got your nest egg. Seven figures, maybe eight. You're ready to walk away from the desk. And then you hit the first real test — paying your bills when the market drops twenty percent and your stock dividends get cut. That's where a lot of early retirement plans go quiet. Luna: Yeah, the sequence of returns risk we talked about in episode five. Selling stocks in a downturn is brutal. But what's the alternative? Keep two years of cash in a savings account earning nothing? Lucas: That's one approach, and it works if your spending is tiny. But for someone with a three or four percent withdrawal rate, cash drag adds up fast. There's a middle ground that a lot of the FIRE community doesn't talk about enough — a bond ladder. Luna: We've touched on bonds before, but a ladder specifically. So you buy individual bonds that mature in different years, and each year a rung matures and gives you cash. Lucas: Exactly. Instead of a bond fund where the price bounces around every day, you own a series of bonds with known maturity dates. If you hold to maturity, you get your principal back plus the coupon payments along the way. You're not forced to sell when rates spike. Lucas: If our money conversations have helped you think about a decision differently — maybe which account to draw from, or how to handle your bond ladder — that's exactly why we do this. We deliberately don't run ads on these episodes. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: It's a small way to keep this thing ad-free. And we appreciate it. Okay, back to the ladder. Let's build one. Lucas: Let's use a concrete example. Say you're forty-five, you've got eight hundred thousand dollars saved, and you plan to withdraw thirty-two thousand a year — four percent. You want ten years of predictable income before you need to touch your stocks again. Luna: So that's three hundred and twenty thousand dollars you want in bonds, roughly. Forty percent of the portfolio. Lucas: Right. You take that three-twenty and build a ten-rung ladder. Each rung is thirty-two thousand dollars in face value of a bond maturing in one of the next ten years. Year one, year two, all the way to year ten. Luna: And you're buying Treasury bonds for the early rungs? Or corporate? Lucas: I'd start with Treasuries for years one through five. You get the full faith and credit of the U.S. government, no credit risk. As of late May 2026, the two-year Treasury yields around four point two percent. The five-year is around four percent. So on the first five rungs, you're earning roughly four percent annually on that two hundred thousand dollars. Luna: That's about eight thousand a year in coupon payments alone, before you even touch the maturing principal. Lucas: Exactly. And then for years six through ten, you can go out a bit further. The ten-year Treasury is yielding about four point three percent right now. But you could also use investment-grade corporate bonds for those later rungs to pick up a bit more yield. A company like Microsoft or Johnson & Johnson might offer a bond yielding fifty to seventy basis points more than Treasuries. Luna: So you're getting, say, five percent on those later rungs. On the hundred and twenty thousand dollars in years six through ten, that's another six thousand a year in coupons. Lucas: Add it up — roughly fourteen thousand a year in interest from the ladder. Plus, each year a thirty-two thousand dollar rung matures, you get that principal back. So in year one, you've got the thirty-two thousand from the maturing bond plus the fourteen thousand in interest. That's forty-six thousand dollars — more than your thirty-two thousand withdrawal. You can reinvest the extra or spend it. Luna: And the beauty is, you never have to sell a stock when the market is down. You just let the ladder pay you. Lucas: The stock side of the portfolio keeps growing untouched for ten years. Historically, that's long enough to ride out even a severe bear market. By the time you need to dip into stocks again, they've had time to recover. Luna: What about inflation? If we get a repeat of 2022, a four percent nominal bond ladder is losing purchasing power fast. Lucas: That's the biggest objection. And it's a fair one. The fix is to use TIPS — Treasury Inflation-Protected Securities — for some of the rungs. TIPS adjust your principal for inflation, so the coupon payments rise with CPI. Right now, the ten-year TIPS real yield is about two percent. That's not huge, but it's positive — meaning you're guaranteed to keep pace with inflation plus two percent. Luna: So you could build a TIPS ladder for the later years, or mix them in. Maybe years one through three are nominal Treasuries, years four through seven are TIPS, years eight through ten are investment-grade corporates. Lucas: Exactly. You tailor it to your spending needs. If you expect your spending to grow with inflation, tilt toward TIPS. If you have fixed expenses like a mortgage, nominal bonds are fine. Luna: One thing I've wondered — why not just buy a bond ETF like BND or AGG? It's simpler. Lucas: Simplicity is real. But a bond ETF doesn't have a maturity date. Its price fluctuates with interest rates every day. In 2022, when rates shot up, BND dropped about thirteen percent. If you needed to sell shares to pay your rent, you would have locked in losses. With a ladder, you just wait for the next rung to mature. Luna: And the ETF's yield changes constantly. With a ladder, you lock in the yields when you build it. Lucas: Right. The trade-off is that you have to manage maturity dates and reinvestment. But for someone who's already managing a portfolio in retirement, it's not that much extra work. You set a calendar reminder once a year when a bond matures, and you decide whether to spend the cash or replace the rung. Luna: How do you actually buy individual bonds? I think that's a barrier for a lot of people. Lucas: At most major brokerages — Fidelity, Schwab, Vanguard — you can buy Treasuries at auction for no commission. You just place an order for the number of bonds you want. The minimum is usually a thousand dollars face value. For corporates, you might buy on the secondary market, where there's a small bid-ask spread. But for a thirty-two thousand dollar rung, the spread is maybe ten or twenty basis points. It's negligible. Luna: So you're saying someone can start with ten thousand dollars and build a mini ladder. Lucas: Absolutely. If you have fifty thousand in bonds, you can do five rungs of ten thousand each. The principle scales down perfectly. The key is matching the rungs to your expected spending years. Luna: What about taxes? If your bonds are in a taxable account, the coupon payments are ordinary income. Lucas: That's why I'd put the bond ladder inside a tax-advantaged account if you can. A traditional IRA or a 401k is ideal. If you're already retired and living off the ladder, your taxable income might be low enough that the coupons are taxed at a lower rate. You can also use municipal bonds for the later rungs if you're in a high-tax state — that interest is federal tax-free and sometimes state tax-free. Luna: But munis have lower yields. So you have to run the numbers. Lucas: Right. The tax-equivalent yield matters. But for most early retirees, a Treasury ladder in an IRA is the cleanest path. Luna: Let me ask the obvious question. What if interest rates fall? Then you're locking in lower yields on the new rungs when you reinvest. Lucas: That's the reinvestment risk. If rates drop, your new rungs pay less. But remember, the existing rungs still pay the original higher yield. And your spending is covered by the maturing principal. The lower new yields only affect future income. One way to mitigate it is to build a longer ladder — fifteen or twenty years — so you're not reinvesting as often. Or you can use a barbell strategy: hold short-term bonds for liquidity and long-term bonds for yield. Luna: So there's no perfect solution. But a ladder gives you more control than a bond fund. Lucas: Exactly. It's a tool, not a magic bullet. For someone who values predictability and hates the idea of being forced to sell stocks in a panic, a bond ladder is hard to beat. Luna: I think the takeaway is: if you're within five years of early retirement, start building your ladder now. Even if it's just two rungs. It changes your relationship with market volatility. Lucas: And it gives you the freedom to ignore the daily noise. Which is really the whole point of financial independence, isn't it?