Building Your Retirement Paycheck? Consider Using a Ladder

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As your retirement nears, your portfolio’s investments and purpose will begin to change. Your money no longer has to get you to retirement; it has to get you through retirement. And as your regular paychecks stop, you’ll need a strategy to help provide for your income needs.

CD Ladder chartWith this shift toward retirement income, focus on the purpose of your investments. Different investments serve important roles. Some are designed to provide income now and others income later, but they’re all important.

To ensure your income needs are covered, we usually recommend that you have about one year’s worth of living expenses in cash within your portfolio at any given time. One way to accomplish this year after year is a CD ladder. Working with your financial advisor, you can purchase certificates of deposit (CDs) or other short-term investments that will mature annually over the next three to five years to cover your income needs.

This chart shows how it works. Let’s say you decide to invest some of your retirement portfolio in CDs. This ladder would make up the short-term portion of your overall fixed-income allocation. You’d purchase five CDs with different maturities: one year, two years, three years, four years and five years.

One year later, your first CD (the one-year maturity) would pay you back. Depending on the market environment and your needs, you could then either spend that income or reinvest it in another CD. For example, if the markets are up, you may decide to pay for your expenses using the growth in your portfolio, and your financial advisor could purchase another five-year CD to keep your ladder growing.
Using a ladder can help provide the ongoing “paycheck” you need to help you live the retirement you deserve, as well as ensure your income needs are covered, regardless of the markets’ short-term movements.

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