There is no interest rate risk if you build your ladder appropriately, such that all the expected coupons and maturing principal in a given year meet your spending needs.I had to think a few minutes about your question. I might be missing something, but the reason I have to have both is because they are two independent actions when building a ladder. I have more fixed income maturing every year in my ladder than my yearly cash flow needs. So some is used and some must be reinvested. I think you are asking the question of "why not just have funds mature that meet my spending needs?" The reason is because I want a fixed income ladder to have more flexibility and control to manage my interest rates, interest rate risk, etc. Is there a different way to achieve my objective that I'm not thinking about?These seem like conflicting or at least unnecessarily complex needs. Why do you need both predictable income while you also reinvesting principal?2. As part of this, I'd like to have some predictability on this income. For example, I want to know that I will produce $100k in income next year, $104k the year after that, etc.
3. I also want the flexibility, for the next year or more, of reinvesting maturing bond principle into different maturities on the yield curve, rather than just adding to the end of a 10-year ladder.
Consider the possibility that you overweight your earlier rungs in order to have the flexibility you desire, and interest rates plummet back to near zero. Instead of earning 4.3% for 30 years for your longest rung, you are earning 4% for 5 years and 1% for 25 years. You are way worse off.
Statistics: Posted by toddthebod — Sun Mar 31, 2024 12:42 pm — Replies 33 — Views 2637