Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How Early Retirees Use Treasury Ladders for Predictable Income
Transcript
- Lucas: So you retire early — say age 45 — and suddenly your monthly paycheck stops. You've got a portfolio, but you need to actually spend from it. The question is: which accounts do you tap, and in what order? Luna: Right, and most people default to 'just sell something every month.' But that creates a timing problem when markets are down. Lucas: Exactly. One tool that solves that — especially for the fixed-income side of your portfolio — is a Treasury ladder. It's not flashy, but it gives you predictable cash flow for years at a time. Luna: Let's define that. A Treasury ladder is basically buying individual Treasury bonds or notes with staggered maturities, so something comes due every six or twelve months, right? Lucas: That's it. You don't leave it to a bond fund manager to decide when to sell. You control the maturities. You know exactly when each bond pays back its principal, and you get interest along the way. Luna: And the appeal for early retirees is that you can match those maturities to your expected expenses. Rent, groceries, insurance — all coming due on a schedule. Lucas: Right. Let's walk through a concrete example. Say you have $500,000 allocated to fixed income — maybe 40% of a $1.25 million portfolio. You decide you want predictable income for the first five years of retirement. So you build a five-year ladder using 2-year and 5-year Treasury notes. Luna: Why both 2-year and 5-year? Why not just five consecutive years of 5-year notes? Lucas: Good question. If you buy five 5-year notes in year one, they all mature five years later — that's a bullet, not a ladder. You want each rung to mature in a different year. So you buy one 2-year note maturing in year two, one 3-year note maturing in year three, and so on. But since Treasury doesn't issue 3-year notes every month, you can use 2-year notes and reinvest them, or use a combination of 2-year and 5-year notes to fill the gaps. Luna: Got it. So you might buy a 5-year note that matures in year five, and a 2-year note that matures in year two. When the 2-year note matures, you use that cash for expenses that year. Lucas: Exactly. Let's say in mid-2026, 2-year Treasury notes yield around 4.5%, and 5-year notes yield about 4.3%. If you put $100,000 into each of five rungs, you're getting roughly $21,500 in annual interest across the ladder. Plus, each year one rung matures and returns $100,000 in principal. Luna: So that's $121,500 of cash flow per year from that $500,000 allocation. That's a 24.3% withdrawal rate from that bucket — but it's temporary, because you're spending down the principal. Lucas: Right. And that's the whole point. The ladder is designed to be spent down over five years. Meanwhile, your equity portfolio — say the other $750,000 — stays invested and grows. By the time the ladder is exhausted, your equities have hopefully grown enough to support a sustainable withdrawal rate from the total portfolio. Luna: This is essentially a rising equity glidepath. You start retirement with a higher bond allocation, then as you spend down the bonds, your equity percentage naturally rises. Lucas: Bingo. It's the same concept we've talked about in prior episodes — sequence risk is highest in the first decade of retirement. A bond tent or a cash buffer protects you from having to sell stocks when they're down. The Treasury ladder is just a more structured version of that. Luna: One thing I like: you're not paying any management fees. You buy Treasuries directly through TreasuryDirect or a brokerage — zero expense ratio. Compare that to a bond fund like BND, which has a 0.03% expense ratio. Small, but on $500,000 that's $150 a year. Lucas: And more importantly, bond funds don't have a maturity date. If interest rates rise, the fund's net asset value drops, and if you need to sell shares, you could take a loss. With individual Treasuries held to maturity, you get par value back no matter what rates do in between. Luna: That's the big advantage for cash-flow planning. You can ignore the mark to market volatility because you're not selling early. The only risk is reinvestment risk — when a rung matures, you might have to reinvest at a lower rate. Lucas: And that's a real risk, especially if rates fall. But in the context of a five-year ladder, you're not planning to reinvest — you're planning to spend the principal. So reinvestment risk only applies to the interest payments you don't spend. Luna: Right. If you're spending all the interest and principal as it comes due, there's nothing to reinvest. The ladder is self-liquidating. Lucas: Now, you could extend the ladder to ten years. Buy some 10-year notes for a later rung. But the trade-off is that longer maturities have more price volatility, and the yield curve might not compensate you much. As of mid-2026, the 10-year is yielding around 4.4%, barely more than the 2-year. Luna: So you're not getting paid much to take duration risk. A five-year ladder seems like the sweet spot for early retirees. Lucas: I think so. But let me play devil's advocate against my own argument. Some people say, 'Why not just use a high-yield savings account or a money market fund?' You can get 4.5% right now on money market funds, and you have total liquidity. Luna: Fair point. Money market yields are taxable as ordinary income, same as Treasury interest. And they're state-tax-free for Treasuries, which is a bonus in high-tax states. Lucas: The real difference is behavioral. A money market fund is too easy to dip into for non-essentials. A ladder forces you to plan. You know exactly how much you have to spend each year. It's a commitment device. Luna: I've seen that in my own life. When money is too accessible, I spend it. The ladder creates a mental 'paycheck' that you don't touch until the maturity date. Lucas: And if you have a spouse who isn't as into investing, a ladder is very simple to explain. 'Here are the bonds. This one matures in 2027, this one in 2028, and so on.' No need to understand duration or NAV. Luna: That's a huge practical advantage. Now, what about the mechanics of building the ladder? Do you buy all the rungs at once, or over time? Lucas: You can do either. If you have a lump sum, you buy them all on the same day at the prevailing yields. If you're building it over a few years, you buy a rung every year. For an early retiree, I'd recommend building it before you quit, so the income stream is in place. Luna: One criticism: some argue that Treasury ladders leave money on the table compared to corporate bonds or dividend stocks. You could get 5-6% from investment-grade corporates. Lucas: You could, but the trade-off is credit risk and call risk. If a company gets downgraded, your bond price drops. And many corporate bonds are callable — the issuer can pay you back early, which ruins your ladder. Treasuries are the only truly default-free option in dollars. Luna: For the 'safe' part of the portfolio, I think Treasuries are the right call. You get your risk from equities. No need to reach for yield in bonds. Lucas: Exactly. And speaking of risk, I want to mention a tool we use to think about this stuff. If our conversations about early retirement and portfolio construction have helped you clarify a decision or feel more confident about a plan, honestly, if today's episode was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: Yeah, listener support is what keeps this show ad-free and independent. It's a small gesture that makes a big difference for us. Lucas: And it lets us keep drilling into specific strategies like this instead of chasing clickbait. So, back to the ladder — there's one more nuance I want to cover, which is how to handle the interest payments themselves. Luna: You mean the semiannual coupons? They can either be spent or reinvested. If you're living off the ladder, you probably spend them. But they create small cash flows throughout the year. Lucas: Right. So you need to account for that in your budget. If each rung pays $2,250 in interest twice a year, that's $22,500 total annually. That's real money that you can use for irregular expenses or reinvest. Luna: And if you're in a high tax state, remember that Treasury interest is exempt from state and local income tax. That's worth about 5-10% depending on where you live. Lucas: Good point. Now, let's talk about what happens after the five-year ladder is exhausted. You've spent down $500,000 of principal. Your equity portfolio hopefully has grown. What do you do next? Luna: You could build a new ladder from the equities if they've grown enough. Or you could switch to a traditional portfolio withdrawal strategy like the 4% rule. Lucas: Exactly. The ladder is a bridge. It gets you through the highest-risk period. After that, you have more flexibility because sequence risk diminishes. Luna: It's not a permanent solution. It's a tool for a specific phase of retirement. And that's what I like about it — it's intentional. Lucas: So if you're planning to retire early, consider building a Treasury ladder for your first five years of expenses. It's simple, it's safe, and it lets your equities do the heavy lifting without the pressure of selling into a bear market. Luna: And you can build it while you're still working, so the income stream is ready on day one of retirement. Lucas: Exactly. Next time we'll talk about how to handle the equity side of the glidepath — specifically, how to decide when to rebalance and whether to use new contributions or dividends. Luna: Looking forward to it. For now, I think we've given everyone a concrete way to think about their 'boring money' bucket.