How to Build a Bond Ladder Now That High Interest Rates Are in Sight

How “Retirement Preparation” Changes in Your 30s, 40s, 50s, and 60s
The environment surrounding bonds has changed significantly over the past few years.

In Japan, long-term interest rates have risen, and high interest rate levels are also being recognized in the United States. It has become difficult to dismiss bonds as “low-yield and unattractive” as we once did.

However, just because interest rates have become high,

“You should just buy a bunch of long-term bonds right now”

is not the point.

Rather, precisely because high interest rates are in sight as they are now, I believe the significance of a bond ladder—which spreads out maturity dates—is growing.

[High interest rates mean “more options,” not “a reason to buy all at once”]

If interest rates rise, the interest you can receive from bonds increases.

From the perspective of an asset holder, this is not a bad thing.

However, the question is,

“Is this the peak of interest rates?”

That is the issue.

If this is the peak, then buying long-term bonds to lock in a high yield makes sense.

However, if interest rates rise further after that, bonds with even better terms might appear.

That is why I think

• Buy all at once because interest rates are high.

is not the way to go, but rather

• Because interest rates are high, we are now in an environment where we can buy little by little while staggering maturity dates.

is a more natural way to think about it.

[For example, how to structure 10 million yen]

As one example, let’s assume you allocate 10 million yen to bonds.

Instead of putting everything into 10-year bonds,

・2 million yen in 1-year bonds.

・2 million yen in 3-year bonds.

・2 million yen in 5-year bonds.

・2 million yen in 7-year bonds.

・2 million yen in 10-year bonds.

You divide it like this.

This way, even if interest rates rise further, the principal will return in order starting from the nearest maturity.

You can then reinvest the returned funds into bonds with higher interest rates at that time.

Conversely, even if interest rates fall, the yields on the 5-year, 7-year, and 10-year bonds you have already purchased will remain.

In other words,

you don’t have to guess the direction of interest rates correctly on the first try.

This is the major advantage of a bond ladder.

[However, the purpose changes depending on your age]

What is important here is

that “bond ladders are not just for people in their 60s.”

That is the point.

However, how you use them differs between those in their 30s and those in their 60s.

[30s and 40s]

For many people in this age group, it is fine to focus primarily on growth assets like stocks.

Since you can use time to your advantage, there is no need to make bonds the core of your asset formation.

However,

• What is an interest rate?

• What is maturity?

• Why do bond prices fluctuate?

• What happens when you stagger maturities?

It is worth experiencing these things, even with small amounts of money.

This is the time to start thinking about “how to transition from stocks to bonds in the future,” rather than waiting until you are 60 to think about retirement funds.

“How to transition from stocks to bonds in the future”

is something you should start considering.

Now that high interest rates are in sight, I think it is a decent environment to start that practice.

[50s]

Once you reach your 50s, your way of thinking changes a little.

The number of people who are about 10 years away from retirement also increases.

Then,

“how much to grow”

is not the only thing to consider;

“when the money will be used” is also important.

becomes important.

For example,

• Funds that may be needed within 5 years.

• Funds that will not be needed for about 10 years.

• Funds that will not be needed until the latter half of retirement.

should be considered separately.

Then, gradually shift a portion of assets that are heavily weighted toward stocks into bonds.

If you start building a ladder from this period, you won’t need to suddenly restructure everything when you reach your 60s.

[60s]

In your 60s, the significance of a bond ladder becomes even greater.

This is because at this age,

“growing”

is not the only goal;

“spending”

also becomes part of asset management.

For example,

• The 1-3 year portion is for living expenses and emergency funds.

• The 5-7 year portion is for planned expenses such as travel, home repairs, and cars.

• The 10+ year portion is for funds that will not be used for the time being.

You can divide maturities in this way.

This reduces the need to sell stocks to cover living expenses when the market is performing poorly.

This has a significance that goes beyond just the monetary amount.

[Precisely because interest rates are high, do not ‘go all in’ on long-term bonds]

When interest rates are high, it is natural to feel attracted to long-term bonds.

Being able to lock in a yield for 10, 20, or 30 years seems reassuring.

However, the longer the bond, the greater the price volatility due to interest rate fluctuations.

If there is a possibility that you might need to sell before maturity,

‘Just hold until maturity’

is not a sufficient argument.

That is why I believe that

• Short-term bonds.

• Medium-term bonds.

• Long-term bonds.

combining these is more realistic.

This is not a method for aiming at the highest possible yield.

Rather, it is

a way to avoid fatal damage even if your interest rate predictions are wrong

.

[An era where we can consider bonds has returned to Japan as well]

For a long time in Japan, even if you considered bond investment, the yields were low, and

“In that case, cash is fine.”

That era has continued for a long time.

However, as interest rates rise, the situation changes.

Cash.

Japanese Government Bonds.

U.S. Treasury Bonds.

Stocks.

You can assign different roles to each of these assets.

Even for young people,

“Retirement funds = stocks only”

is not the only way to think about it.

Rather, from now on,

a period for growing with stocks,

a period for receiving with bonds,

a period for spending with cash,

I think it will become important to think about these separately.

[Think about retirement funds not just in terms of “amount” but also “time”]

When people talk about retirement funds,

“20 million yen needed”

“30 million yen needed”

It often ends up being a conversation about the amount of money.

However, in reality,

when you will need the money

is more important.

Money you will use in one year.

Money you will use in five years.

Money you will use in ten years.

Money you will use in twenty years.

If the time you need it is different, it is only natural that the investment method should also be different.

A bond ladder is also a way to think about retirement funds not just as a “sum of money,” but as

asset planning with a time horizon.

[High interest rates are a good opportunity to start retirement planning]

When interest rates are high, it becomes a burden for mortgages and corporate borrowing.

On the other hand, for those who hold assets, the options for receiving interest increase.

What is important is

not to fear high interest rates,

nor to jump blindly into high interest rates.

It is to utilize them.

In your 30s, start small to gain experience.

In your 40s, think about your future asset allocation.

In your 50s, begin the transition from stocks to bonds.

In your 60s, link maturities to your living expenses.

What you should do varies by age group.

However, what they all have in common is:

lining up your future money along a timeline, little by little, starting now.

Now that higher interest rates are in sight, I think it is not a bad time to start those preparations.

A bond ladder is not the most profitable method.

However,

it is something you can continue even if you do not know what future interest rates will be.

Is that not a major strength for asset management when considering a long retirement?