Question on bond ladder

[Anonymous]

My financial advisor is recommending a 6 year bond ladder that would yield about 4% tax free return but the management fees are likely to be about 1.1%.

He did say that each year, some bonds will come due and so will free up some money but that it’s likely better to keep money in the fund till maturity which means some money will be tied up for 6 years.

Is this a good bet for cash part of your portfolio? Are there any other options for higher returns for money sitting in cash otherwise?

Thanks.

[Anonymous]

How much money are you planning to put into bonds?

It doesn't sound great to me, and it is all dependent on how old you are, when you need the money, what the rest of your portfolio looks like, etc.

Is your financial advisor a fee-only fiduciary or a salesman paid on commission? Do they have your entire portfolio and this is one part, or is this the only portion you are placing with them?

[Anonymous]

What kind of bonds are these? If they’re paying 4% after tax, they sound riskier than US treasuries. The 1.1% fee would reduce your return to very slightly above 2 year US treasuries, which are state tax free and fee free. If this is your cash portion, It doesn’t make sense to put it in risky investments that could default. US treasuries are backed by the full faith and credit of the US government. Roll your own 6 year bond ladder. Not hard to do at all at your brokerage. Did you already max out I Bonds for the year? Those are paying 7.2, then 9.6 for a year. You could even front-load all 6 years using the gift box method.

[Anonymous]

Why on earth would you pay someone 1.1% to manage a bond ladder?

[Anonymous]

Anonymous wrote:What kind of bonds are these? If they’re paying 4% after tax, they sound riskier than US treasuries. The 1.1% fee would reduce your return to very slightly above 2 year US treasuries, which are state tax free and fee free. If this is your cash portion, It doesn’t make sense to put it in risky investments that could default. US treasuries are backed by the full faith and credit of the US government. Roll your own 6 year bond ladder. Not hard to do at all at your brokerage. Did you already max out I Bonds for the year? Those are paying 7.2, then 9.6 for a year. You could even front-load all 6 years using the gift box method.

It’s 7.12% for 6 months, then 9.6% for 6 months

[Anonymous]

Anonymous wrote:What kind of bonds are these? If they’re paying 4% after tax, they sound riskier than US treasuries. The 1.1% fee would reduce your return to very slightly above 2 year US treasuries, which are state tax free and fee free. If this is your cash portion, It doesn’t make sense to put it in risky investments that could default. US treasuries are backed by the full faith and credit of the US government. Roll your own 6 year bond ladder. Not hard to do at all at your brokerage. Did you already max out I Bonds for the year? Those are paying 7.2, then 9.6 for a year. You could even front-load all 6 years using the gift box method.

This is the best ladder you can buy.

[Anonymous]

Anonymous wrote:What kind of bonds are these? If they’re paying 4% after tax, they sound riskier than US treasuries. The 1.1% fee would reduce your return to very slightly above 2 year US treasuries, which are state tax free and fee free. If this is your cash portion, It doesn’t make sense to put it in risky investments that could default. US treasuries are backed by the full faith and credit of the US government. Roll your own 6 year bond ladder. Not hard to do at all at your brokerage. Did you already max out I Bonds for the year? Those are paying 7.2, then 9.6 for a year. You could even front-load all 6 years using the gift box method.

This is the OP. Thanks to all of you who have replied so far.

So these are municipal bonds and so they have selection of municipal bonds in this ladder and that is why it’s federal tax free 4 %. Obviously fees eat in this and so return is lower.

How do you create this ladder if I have access to Fidelity? Which bonds do you pick and what duration do you pick? I’m willing to do this in my own but not sure if the specifics.

[Anonymous]

Anonymous wrote:

Anonymous wrote:What kind of bonds are these? If they’re paying 4% after tax, they sound riskier than US treasuries. The 1.1% fee would reduce your return to very slightly above 2 year US treasuries, which are state tax free and fee free. If this is your cash portion, It doesn’t make sense to put it in risky investments that could default. US treasuries are backed by the full faith and credit of the US government. Roll your own 6 year bond ladder. Not hard to do at all at your brokerage. Did you already max out I Bonds for the year? Those are paying 7.2, then 9.6 for a year. You could even front-load all 6 years using the gift box method.

This is the OP. Thanks to all of you who have replied so far.

So these are municipal bonds and so they have selection of municipal bonds in this ladder and that is why it’s federal tax free 4 %. Obviously fees eat in this and so return is lower.

How do you create this ladder if I have access to Fidelity? Which bonds do you pick and what duration do you pick? I’m willing to do this in my own but not sure if the specifics.

How much money are you investing into this bond ladder? You want it to pay out yearly for 6 years? Do you want it to rollover after that? Is this money you will need at a specific time for a specific purpose or is it an emergency fund? Have you invested in I Bonds yet this year? What state are you in?

[Anonymous]

^^^are you married? What’s your marginal tax rate?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:What kind of bonds are these? If they’re paying 4% after tax, they sound riskier than US treasuries. The 1.1% fee would reduce your return to very slightly above 2 year US treasuries, which are state tax free and fee free. If this is your cash portion, It doesn’t make sense to put it in risky investments that could default. US treasuries are backed by the full faith and credit of the US government. Roll your own 6 year bond ladder. Not hard to do at all at your brokerage. Did you already max out I Bonds for the year? Those are paying 7.2, then 9.6 for a year. You could even front-load all 6 years using the gift box method.

This is the OP. Thanks to all of you who have replied so far.

So these are municipal bonds and so they have selection of municipal bonds in this ladder and that is why it’s federal tax free 4 %. Obviously fees eat in this and so return is lower.

How do you create this ladder if I have access to Fidelity? Which bonds do you pick and what duration do you pick? I’m willing to do this in my own but not sure if the specifics.

How much money are you investing into this bond ladder? You want it to pay out yearly for 6 years? Do you want it to rollover after that? Is this money you will need at a specific time for a specific purpose or is it an emergency fund? Have you invested in I Bonds yet this year? What state are you in?

Ok will try to answer some of these questions: about 100k, don’t need it for 5-10 years, it’s part of bond allocation, married and high tax bracket. 6 years is mentioned only because that is what the financial advisor mentioned. I just want a nice a higher return than have this money in cash at this point but it’s not part of stock allocation a d so not right for stocks.

[Anonymous]

Anonymous wrote:Why on earth would you pay someone 1.1% to manage a bond ladder?

Exactly what I was going to post. That’s a terrible fee.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Why on earth would you pay someone 1.1% to manage a bond ladder?

Exactly what I was going to post. That’s a terrible fee.

Ok so do you have any suggestions on how to get higher returns on your car/bond portion of portfolio?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:What kind of bonds are these? If they’re paying 4% after tax, they sound riskier than US treasuries. The 1.1% fee would reduce your return to very slightly above 2 year US treasuries, which are state tax free and fee free. If this is your cash portion, It doesn’t make sense to put it in risky investments that could default. US treasuries are backed by the full faith and credit of the US government. Roll your own 6 year bond ladder. Not hard to do at all at your brokerage. Did you already max out I Bonds for the year? Those are paying 7.2, then 9.6 for a year. You could even front-load all 6 years using the gift box method.

This is the OP. Thanks to all of you who have replied so far.

So these are municipal bonds and so they have selection of municipal bonds in this ladder and that is why it’s federal tax free 4 %. Obviously fees eat in this and so return is lower.

How do you create this ladder if I have access to Fidelity? Which bonds do you pick and what duration do you pick? I’m willing to do this in my own but not sure if the specifics.

How much money are you investing into this bond ladder? You want it to pay out yearly for 6 years? Do you want it to rollover after that? Is this money you will need at a specific time for a specific purpose or is it an emergency fund? Have you invested in I Bonds yet this year? What state are you in?

Ok will try to answer some of these questions: about 100k, don’t need it for 5-10 years, it’s part of bond allocation, married and high tax bracket. 6 years is mentioned only because that is what the financial advisor mentioned. I just want a nice a higher return than have this money in cash at this point but it’s not part of stock allocation a d so not right for stocks.

You and spouse should each open up a Treasury Direct account and deposit $10,000 in each of your accounts. If you get it in by April 30, it pays 7.12% for 6 months, then 9.62% for another 6 months. This money will be tied up for 1 year, but then after that, you can withdraw at any time up to 30 years. Around every May and November (slightly before the first) the new rate is announced and it tracks the CPI. If inflation is high, the rate is higher, if inflation is lower, then rate is lower. Do you have a trust or an S Corp or a business? If so, the trust and/or business can open an account and put in another $10,000.

You could also gift each other unlimited amounts. That money will stay in your respective gift boxes until they can be delivered. Each account can only buy or be gifted 10k per year so money in gift box is in limbo and untouchable until it can be delivered out ($10k per year). The money in the gift box, however, accrues interest when you buy it, and the 1-year clock also starts when you purchase it. For more clear instructions, go to The Finance Buff blog and search for i Bond gifts. He does a much better job of explaining than I can.

Personally, DH and I purchased $10,000 each and then gifted each other $20,000. Meaning, in 2023 we can deliver $10,000 to each other, and then in 2024, we can deliver another $10,000 to each other. So that $60,000 total is getting the 7.12/9.62 and then whatever rate comes next. Theoretically, you can purchase 100,000 but that would take until 2025 and 2026 to deliver the remaining gifts. The risk is that your gift box money is totally inaccessible, the rate may go down in the next couple of years, you might find better opportunities elsewhere, etc.

You can put part of your money in I Bonds which are only taxed when you withdraw, and they are state tax free. Do you have a 401k or Roth IRA? The rest of your Bonds should go there so you don’t get taxed at all. You can buy a bond index fund (your 401k probably offers one). If you are in a high tax bracket, you might even owe an additional 3.8% net investment tax on top of your marginal tax rate. I guess that’s why yr advisor recommended municipal bonds. But the muni with a relatively high yield is risky (default, interest rate risk, inflation risk, etc). And after taking out their fee, you’re at about the same as a US Treasury. The Finance Buff also has instructions on how to buy bonds at Fidelity. I bought some 6 months and 1 year bonds with moneys I have earmarked for specific things later this year. They pay more than a high yield checking or CD. For long term savings, however, I would not buy bonds outside of my 401k due to high taxes.

[Anonymous]

I personally would not start a bond ladder going into a quick, steep raise of interest rates. It's very likely the principle could decrease more than any interest earned.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:What kind of bonds are these? If they’re paying 4% after tax, they sound riskier than US treasuries. The 1.1% fee would reduce your return to very slightly above 2 year US treasuries, which are state tax free and fee free. If this is your cash portion, It doesn’t make sense to put it in risky investments that could default. US treasuries are backed by the full faith and credit of the US government. Roll your own 6 year bond ladder. Not hard to do at all at your brokerage. Did you already max out I Bonds for the year? Those are paying 7.2, then 9.6 for a year. You could even front-load all 6 years using the gift box method.

This is the OP. Thanks to all of you who have replied so far.

So these are municipal bonds and so they have selection of municipal bonds in this ladder and that is why it’s federal tax free 4 %. Obviously fees eat in this and so return is lower.

How do you create this ladder if I have access to Fidelity? Which bonds do you pick and what duration do you pick? I’m willing to do this in my own but not sure if the specifics.

How much money are you investing into this bond ladder? You want it to pay out yearly for 6 years? Do you want it to rollover after that? Is this money you will need at a specific time for a specific purpose or is it an emergency fund? Have you invested in I Bonds yet this year? What state are you in?

Ok will try to answer some of these questions: about 100k, don’t need it for 5-10 years, it’s part of bond allocation, married and high tax bracket. 6 years is mentioned only because that is what the financial advisor mentioned. I just want a nice a higher return than have this money in cash at this point but it’s not part of stock allocation a d so not right for stocks.

You and spouse should each open up a Treasury Direct account and deposit $10,000 in each of your accounts. If you get it in by April 30, it pays 7.12% for 6 months, then 9.62% for another 6 months. This money will be tied up for 1 year, but then after that, you can withdraw at any time up to 30 years. Around every May and November (slightly before the first) the new rate is announced and it tracks the CPI. If inflation is high, the rate is higher, if inflation is lower, then rate is lower. Do you have a trust or an S Corp or a business? If so, the trust and/or business can open an account and put in another $10,000.

You could also gift each other unlimited amounts. That money will stay in your respective gift boxes until they can be delivered. Each account can only buy or be gifted 10k per year so money in gift box is in limbo and untouchable until it can be delivered out ($10k per year). The money in the gift box, however, accrues interest when you buy it, and the 1-year clock also starts when you purchase it. For more clear instructions, go to The Finance Buff blog and search for i Bond gifts. He does a much better job of explaining than I can.

Personally, DH and I purchased $10,000 each and then gifted each other $20,000. Meaning, in 2023 we can deliver $10,000 to each other, and then in 2024, we can deliver another $10,000 to each other. So that $60,000 total is getting the 7.12/9.62 and then whatever rate comes next. Theoretically, you can purchase 100,000 but that would take until 2025 and 2026 to deliver the remaining gifts. The risk is that your gift box money is totally inaccessible, the rate may go down in the next couple of years, you might find better opportunities elsewhere, etc.

You can put part of your money in I Bonds which are only taxed when you withdraw, and they are state tax free. Do you have a 401k or Roth IRA? The rest of your Bonds should go there so you don’t get taxed at all. You can buy a bond index fund (your 401k probably offers one). If you are in a high tax bracket, you might even owe an additional 3.8% net investment tax on top of your marginal tax rate. I guess that’s why yr advisor recommended municipal bonds. But the muni with a relatively high yield is risky (default, interest rate risk, inflation risk, etc). And after taking out their fee, you’re at about the same as a US Treasury. The Finance Buff also has instructions on how to buy bonds at Fidelity. I bought some 6 months and 1 year bonds with moneys I have earmarked for specific things later this year. They pay more than a high yield checking or CD. For long term savings, however, I would not buy bonds outside of my 401k due to high taxes.

DP. Great advice!

1. Would you recommend waiting until we get closer to Nov 1 before one invests a large amount into in iBonds (gift box approach)? By then, the Fed's interest rate hikes would be mostly in and we will know if the next 6 months (Nov 1) iBond will have a base rate+inflation or just inflation. I'd much rather tie up my money if there's a base rate involved.

2. What do you think of iBonds as an alternative to (or investing a portion of) 529? I have one kid in college (freshman) and another a rising junior. We are quite underfunded for kid 1 (paying a lot of money for a T-20 school with no aid) and will need to invest in the 529 upto the gift tax limit (32K per year) for kid 1. We do get the 5.75% state tax rebate (VA). Thinking of limiting this to 22K and 10K into iBonds. This way, we could choose to just leave the iBonds intact and give it to DC when they graduate. Not sure about kid 2's college prospects yet obviously but he's not a high achiever so more than likely an in-state school.

Thoughts?