Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / The Laddered CD Strategy That Protects Your Early Retirement
Transcript
- Lucas: So there's this listener question that's been sitting in my inbox for a few weeks, and I keep coming back to it because it gets at something a lot of early retirees wrestle with. The question is: 'I've got my 60-40 stock-bond portfolio, but every time the market drops twenty percent, I panic about selling bonds to pay my bills. Is there a way to structure the bond side so I never have to think about it?' Luna: And the answer is yes, but it's not the typical bond fund that everyone defaults to. Lucas: Right. The classic BND or AGG — the total bond market ETFs — they work fine for accumulation, but in early retirement, where you're pulling money out every month, you're at the mercy of whatever the bond market is doing that day. And we've seen this play out badly. In 2022, BND dropped over thirteen percent. If you were drawing down, you were selling at a loss. Luna: Which is exactly the sequence of returns risk that can break early retirement. We talked about that in episode 27. Lucas: Exactly. So the alternative is a laddered bond portfolio — specifically a ladder of CDs or Treasury securities. And the reason I want to talk about this now is that June 2026 is actually a pretty interesting moment for it. The yield curve is still inverted — short-term rates are above long-term rates — which means you can lock in five percent or more on a one-year CD, while a ten-year Treasury is yielding closer to four and a half. Luna: That's the opposite of normal. Normally you get paid more for lending your money for longer. Lucas: Right. And that inversion creates an opportunity for someone building a ladder today. The classic ladder is five rungs: one-year, two-year, three-year, four-year, five-year. You put twenty thousand in each. As each rung matures, you reinvest it into a new five-year bond at whatever the rate is then. That way you always have a rung maturing within twelve months, and you're not forced to sell anything. Luna: So it's like having a rolling cash buffer, but earning bond-level interest instead of the near-zero you'd get in a savings account. Lucas: Exactly. And if you think about it, this is actually what the three-fund portfolio crowd misses. They lump all fixed income into one ETF, but that ETF has an average duration of about six years. If rates spike, you lose principal. With a ladder, you know exactly what each rung is worth at maturity — it's a guarantee. And that certainty is worth a lot when your paycheck depends on it. Luna: Yeah, I think that's a huge psychological benefit too. If you know that in June of 2027 you have twenty thousand dollars coming due no matter what, you can sleep through a market crash. Lucas: And speaking of sleeping well at night — and this is something I don't say enough — a couple of dollars a month from listeners is genuinely what keeps these episodes ad-free and independent. If our money conversations have helped you think about a decision differently, buy me a coffee dot com slash fexingo makes a real difference. Even five bucks helps cover the hosting costs for a month. Luna: Yeah, it's a small way to keep this going, and we really appreciate it. Lucas: So back to the ladder. Let's walk through a real example. Say you need forty thousand dollars a year from your portfolio. You could put two hundred thousand into a five-year ladder — forty thousand per rung. The first rung is a one-year CD earning, say, five percent. At the end of year one, that rung matures worth forty-two thousand. You take the forty thousand you need for spending, and you reinvest the remaining two thousand — plus the original forty from your next rung — into a new five-year bond. Luna: So the ladder keeps the same structure, but you're always rolling forward the rung that just matured. Lucas: Exactly. And the yield on that new five-year rung will be whatever the market offers at that time. If rates have dropped, you lock in lower rates, but you've already benefited from the higher rates on the earlier rungs. If rates have risen, your new rung captures the higher yield. It smooths out the interest rate cycle automatically. Luna: What about taxes? In a taxable account, the interest from CDs and Treasuries is ordinary income, so it's taxed at your marginal rate. That's not ideal compared to municipal bonds, but for early retirees in the twelve or twenty-two percent bracket, it's manageable. Lucas: Right, and there's a nuance. Treasury interest is exempt from state and local taxes, which can be a meaningful saving if you live in a high-tax state like California or New York. CDs from banks are fully taxable at all levels. So if state taxes are a big factor, Treasuries might be better for your ladder, even if the yield is slightly lower. Luna: And you can buy Treasuries directly from TreasuryDirect or through a brokerage. I think most people are better off using a brokerage because you can auto-roll them and you see everything in one place. Lucas: Absolutely. TreasuryDirect is clunky. I'd recommend using Fidelity, Vanguard, or Schwab — they all have tools to build a bond ladder. You can buy new-issue Treasuries at auction, and they'll handle the reinvestment automatically. Fidelity even has a 'ladder builder' tool that shows you the yields at each maturity so you can construct it in a few clicks. Luna: Let's talk about the elephant in the room though. If the Fed starts cutting rates later this year or in 2027, short-term yields will drop. That means when your one-year CD matures, the replacement might yield only three percent. Does that break the strategy? Lucas: No, but it changes the math. The key is that you're not trying to maximize returns — you're trying to create predictable income. If rates drop, your new rungs earn less, but your existing rungs are still locked in at the higher rates. And remember, you're spending the maturing principal, not reinvesting all of it. So the impact is smaller than you'd think. A 2 percentage point drop in yields on a forty thousand dollar rung reduces your annual interest by eight hundred dollars. That's not nothing, but it's not catastrophic either. Luna: And the alternative — keeping everything in a bond fund — would have a much bigger hit because the fund's net asset value would rise when rates drop, but you'd be selling shares at a higher price. Wait, that's actually good. Why wouldn't you prefer the fund in a falling rate environment? Lucas: Because you can't control the timing. If you need to sell during a panic — like March 2020 — you might be selling at a discount even if rates are falling. With a ladder, you know exactly when each rung matures. You're never forced to sell early. And in the 'rates fall' scenario, your ladder's maturing rungs are reinvested at lower rates, but your total portfolio value doesn't decline the way a bond fund's does. The ladder's value at maturity is always par. The fund's value can drop if rates spike. Luna: So the ladder trades upside potential for certainty. For early retirees, that trade makes sense because you need to know your spending is covered. Lucas: Exactly. And I want to push back on one thing some critics say — that building a ladder is too complex for the average investor. It's not. You decide how much you need per year, divide by five, buy five bonds or CDs with maturities staggered one year apart, and then once a year, you reinvest the maturing proceeds. That's it. You can do it in an hour, and then you don't touch it for twelve months. Luna: What about using brokered CDs versus direct bank CDs? There's a difference in liquidity. Lucas: Good point. Brokered CDs trade on the secondary market, so you can sell them early if you need to, but you might take a loss if rates have risen. Direct bank CDs often have early withdrawal penalties — typically three to six months of interest. For a ladder, I prefer brokered CDs because you can see the yield curve across maturities and you're not locked into one bank. But the safest option is probably Treasury securities, because the secondary market is incredibly liquid and there's no credit risk. Luna: And Treasuries are also exempt from state tax, which we mentioned. So for a California early retiree, that's worth maybe 0.5 to 1 percent extra yield on an after-tax basis. Lucas: Yeah, it's meaningful. Let me give a concrete comparison. As of this week in June 2026, a one-year Treasury is yielding about 4.8 percent. A one-year CD from a top online bank is around 5.1 percent. If you're in California, the Treasury is exempt from state tax — that's 9.3 percent. So the after-tax yield on the Treasury is roughly 4.35 percent, and the CD after state tax is about 4.6 percent. The CD still wins by a quarter point, but the Treasury has better liquidity and no FDIC insurance limit issues. It's close. Luna: So the listener with the sixty-forty portfolio: how much should they convert to a ladder? All of the bond allocation, or just a portion? Lucas: That's the key question. I think a ladder works best for the portion of your portfolio that you expect to spend in the next five to seven years. So if you have a million dollar portfolio and you're spending forty thousand a year, you might put two hundred thousand — five years of spending — into the ladder. The rest of your bonds can stay in a total bond fund for diversification and rebalancing with stocks. The ladder is your income floor; the bond fund is your shock absorber. Luna: So you're not all-or-nothing. You're building a system where the ladder guarantees your near-term spending, and the rest can ride the market. Lucas: Exactly. And that hybrid approach lets you sleep at night. Because when stocks drop forty percent, you know your next five years of spending is already locked in. You don't have to sell anything. You just let the ladder mature and spend the proceeds. By the time you get to year six, the market has usually recovered, and you can refill the ladder from your stock gains. Luna: That's the classic 'bucket strategy' adapted for bonds. I know some advisors criticize bucket strategies as mental accounting, but I think for early retirees, the behavioral benefit is real. Lucas: It is. The math works, but the psychology matters just as much. If a ladder prevents you from panic-selling in a bear market, it's done its job. And the cost is minimal — you might give up a few basis points of yield compared to a total bond fund over a full cycle. But that's a small price for the certainty. Luna: And in today's inverted yield curve environment, the short-term yields are actually higher than long-term yields, so the ladder is earning more than a longer-duration bond fund right now. That's a nice tailwind. Lucas: It is. But that tailwind will fade when the curve normalizes. The point is, you're not trying to time that. You're building a system that works in any rate environment. And the listener who asked the question — I think they'd benefit from starting with a three-year ladder to keep it simple: thirty-three thousand in each of three rungs for a hundred thousand total. See how it feels, then extend to five years. Luna: That's a great way to start. And if they use auto-roll at a brokerage, it's almost passive. Lucas: Exactly. So here's my takeaway: if you're an early retiree losing sleep over bond fund volatility, build a ladder. It's not complicated, it's not expensive, and it gives you a guaranteed income stream for the next five years. That's the peace of mind that lets you enjoy the freedom you worked for. Luna: And that's really the whole point of early retirement, isn't it? Not just the numbers, but the freedom. Lucas: Exactly. So go build that ladder, and maybe grab a coffee while you're at it.