I'm on board with this. Bond ladders have merits, regardless of low interest rates, so press on.
But confused, have I got this right? The plan is to buy nominal gilts maturing in about (from now) 10 years, 11 years, 12 years and subsequently up until you hit 65-ish years. Then as the first bunch of bonds matures at age 65 you buy another bunch maturing at age 75, then repeat each year to age 85-ish. Is that it?
So, the coupons don't get re-invested. They're used for living expenses; fine.
Firstly, the purpose was not clear to me, but presumably to provide predictable returns because the bonds are held to maturity. Fine.
What I don't quite understand is that because bond yields are low the coupons won't provide very much to live on unless the total value of the bonds is huge. Thus, if the coupons alone are insufficient to live on, then how and when is the principal being consumed?
Newroad wrote:At this point, the capital of the first gilt would be redeemed (with negligible risk - as sound as the UK Government) then reinvested in a new 10 Year gilt at the prevailing rate.
As I read the strategy, and tried to summarise it, above, no principal is withdrawn until at least age 85. Je ne comprend pas.
Secondly, if the principal were to be consumed along the journey to age 85, then surely one would buy less of the earlier maturing bonds and more of the later maturing bonds (in an attempt to even out the income) because during the later years after some bonds have been consumed there would be less coupon income than in the earlier years when more bonds were held.
Thirdly, three significant risks retiree investors face are longevity, inflation and sequence of returns. Wouldn't a bond ladder of inflation linked bonds make more sense that nominal bonds, or perhaps 50:50?