March 27, 2013

“Laddering” investments is a method of staggering the maturity dates of these investments.

Why would someone do this? There are several potential advantages and a few disadvantages.


When laddering, an investor purchases a series of fixed-income investments, such as certificates of deposit or bonds, with different maturity dates. Rather than buying one certificate of deposit of $50,000, for example, an investor might purchase five $10,000 CDs that mature in 2015, 2016, 2017, 2018 and 2019.


One advantage is that laddering guarantees you will have some cash available each year if you need it without incurring penalties for early distribution. Replacing the roof on your house, that trip to Hawaii – these expenses can be covered without disturbing your other investments if you’ve created a ladder that periodically frees up cash to spend or invest.

Another advantage is lowering risk by increasing your options to get in or out of the market. The stock market can be volatile. The Dow increased 429 percent during the 1920s. During the ’70s, the stock market dropped 40 percent in 18 months. During the ’90s, the Dow rose 328 percent and NASDAQ increased 788 percent.

When your 2014 CD matures, you have the option of reinvesting in the market if conditions are favorable or holding your money until conditions are more favorable. You have the same option each year as your other CDs mature.

Once you have your ladder in place, you can reinvest in longer-term CDs or bonds. Because investments with shorter maturities generally have lower interest rates, laddering with fixed-income investments that have staggered maturity dates can provide you with the financial benefits of long-term interest rates but the flexibility of shorter-term maturities. You can have a series of long-term investments that mature successively, creating liquidity but also reaping the returns available only through long-term investments.

Laddering also reduces the risk of interest rate fluctuation. Although it’s been a while, or you may be too young to remember, during the ’70s, interest rates reached 20 percent. If you put all of your eggs in one basket at a 3 percent rate of return, and the market rates increase to 8 percent, you lose out.

However, if your investments are laddered, you have cash available each year to invest or not, according to market rates of return. Laddering also protects against inflation because you are able to renew or realign your investments each year.

The more rungs in your ladder, the greater your diversification and the more stable your return. Laddering also can be part of an overall retirement plan designed to provide a predictable retirement income by using, for example, CDs and bonds in combination with staggered liquidation dates.

A series of investments with staggered maturity dates can be designed to provide a regular and dependable source of income to pay living expenses. You also can design your ladders with maturity dates that correspond to planned expenditures, such as your child’s college education, a wedding or the purchase of a new home.

Laddered investments do not all have to have the same maturity length. If interest rates are low when one of your laddered investments matures, you could choose to purchase an investment with a short-term maturity and hope that rates will have risen again when it matures. If interest rates are high when one of your laddered investments matures, you may want to reinvest in something with a longer maturity date.


One potential disadvantage of laddering fixed-income investments is that you need a lot of capital invested this way to provide meaningful income because the yields are low. For example, $500,000 invested in a series of CDs earning 4 percent would yield only $20,000, which would be reduced further by income taxes. If you go after bonds that have higher returns, they likely have higher risks as well.

Under past tax policy, there could have also been tax disadvantages to laddering compared to investing in stock for capital gain. If you bought stock, held it for a year and then sold it at a profit, the capital gains tax was either zero or 15 percent, depending upon what tax bracket you were in. But your income in the form of interest from bonds and certificates of deposit would have been taxed at ordinary income tax rates, which could have been as high as 35 percent.

With the tax legislation signed into law in January 2013, the capital gains tax could be as high as 20 percent. Also, a higher income tax rate – 39.6 percent – has been added to the six existing tax rates for married couples with adjusted gross income above $450,000 and for singles with AGI above $400,000.

Because of changes in tax policy, it makes sense to evaluate the tax consequences before adding laddering to your portfolio.  

This article was originally posted on March 27, 2013 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at