“Laddering” A Solution for Your Retirement Income Needs

Published by Sharekhan Education | October 3, 2021

A “Laddering” A Solution for Your Retirement Income Needs

Retirees generally rely on fixed interest instruments to meet their income needs but with Covid-19 and interest rates at their all-time low plus prevailing economic uncertainty likely to continue in the near future; it has been a challenging time for all especially those relying on regular income for their living needs. It may not be wrong to say that these existing conditions may be driving many retirees to the brink of financial extinction. How then should you seek recourse?

An easy and effective solution is the Laddering investment approach. A strategy generally used by the investment managers in debt instruments, especially bonds; can be used to safe guard your debt investments from fluctuating interest rates, reduce reinvestment risk and at the same time get you some liquidity.

This strategy, though old, isn’t popular among retail investor. So let us understand more about this strategy and how it can help you achieve your retirement income goals.

Laddering Investment Approach:

A laddered investment approach or Laddering is based on allocating portions of your total investment at different maturity dates. Aptly known as the ladder this strategy spreads your money into similar investments of different maturities. As the total investment is broken into multiple smaller units or rungs you lock in only a smaller portion of your investment for a longer period and not the whole. The greater the number of rungs, the more diversified your portfolio and better protected you will be from the risk of default or interest rate fluctuations.

With this strategy only smaller portions that mature may be impacted by declining interest rates.  Even if interest rates drop, only a smaller portion of the corpus is at risk of reinvestment at lower returns. Thereby delivering a potentially higher than average yield.

An example here would help simplify things for you as follows: Let us assume you have allocated Rs. 10 lakhs towards your debt portfolio and need to create a steady cash flow to meet your retirement income needs. Spread or ladder your investment to capitalize on fluctuating interest rates instead of locking it all in one instrument. Instead of investing the entire Rs. 10 lakhs for a one year period and renewing it annually probably at a lower interest rate you could create a 5 rung ladder. Each rung of Rs. 2 lakhof ascending maturities from 1 year to 5 years with probably each investment earning a higher interest rate. (You could invest in the same or different debt instruments  keeping in mind tax efficiency, inflation and your risk profile.) Now as each rung matures you could reinvest it for a 5 years term and within a short time all your investments would be earning the higher 5 year returns.

Conclusion:

To summarize, we can say that Laddering could be a solution to your retirement income needs in times of economic uncertainty. Soduring fluctuating interest rates, the laddered approach will not only create a steady cash flow by way of regular payout from the chosen debt instruments but also give you partial liquidity as the rung matures, while delivering more consistent returns over the long term.

By enrolling in this stock market course, a learner can learn the basics and the various aspects of trading. 

Happy Reading……….