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A bond bridge to your future

Key takeaways

  • High-quality bonds and CDs of varying maturities can give you reliable income, in addition to what you earn from work.
  • Having an additional source of income may help you make changes in your life and work.
  • Relatively high current interest rates may make this a good time to consider building a bond or CD ladder to use as a bridge to your future.

What would you do if you had a reliable source of income besides what you earn from your job? Maybe you would consider making changes to your life and career by exploring a new direction, rediscovering a postponed passion project, starting your own business, or even transitioning into a retirement life that you may not have thought possible. The good news: There is a strategy you can use that seeks to generate reliable additional income with little risk. How? By building a ladder of bonds or certificates of deposit (CDs) that can provide you with additional income which can act as a bridge to the next chapter of your life.

Bonds and CDs offer a stream of income and when they mature, they return the money that you paid for them. Now is a particularly good time to consider building a bond or CD ladder because interest rates and bond yields are higher than they’ve been in years. Rather than adding uncertainty to your life by putting most of your money into the stock market which moves up but also down, you can currently earn reliable mid-to-high single-digit yields on bonds and CDs. Although the prices of the bonds and CDs will also move up or down, their coupon payments and repayments of principal are fixed and scheduled for specific dates in the future. The key risk to be aware of is the risk of default which could jeopardize those future income flows. CDs are FDIC-insured up to applicable limits and with bonds you can minimize the risk of a bond defaulting by selecting high-quality bonds and diversifying across different issuers.

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How do bond and CD ladders work?

To create a predictable income stream that serves as a short-term bridge, you could buy a series of bonds or CDs with maturity dates that extend into the future and span the period of the bridge. The bonds or CDs pay a fixed income from their coupons and the return of principal as each bond matures. By holding the bonds to maturity, you can receive the full income from the coupons and maturing principal during the years you want to supplement your cash flow.

This hypothetical example shows how building a ladder of CDs can help make a mid-life career change easier by providing supplemental income that can be used for living expenses or to pay for tuition.

Graphic shows 2 5-year CD ladders. Both start with an initial investment of $250,000. The first is evenly distributed across 5 CDs worth $50,000 each and has an average interest rate of 4.89%. Income starts at $62,000 in the first full year and declines to $51,000 in the fifth year. The second option is adjusted to account for 3% inflation. Because larger CDs are maturing later, income starts at $53,000 in the first full year and grows to $59,000 in the fifth year.
Source: Fidelity Investments This example is for illustrative purposes only and does not represent the performance of any security. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed.

Because Sheila expects that her income in her new career will eventually be comparable to what she makes in her current job, she is only looking to build a bridge for the next 5 years. However, a bridge built with longer-maturity bonds may be helpful if you are looking to transition from a higher income job to a new career that does not pay as well, or even to having no job at all. Here’s another hypothetical example of how that type of longer-term bond ladder might work.

Graphic shows a 10-year bond ladder. Starting with an initial investment of $250,000 and an average yield of 4.61%, this ladder provides income starting at $27,000 in the first year and rising to $37,000 in the final year as larger bonds mature.
Source: Fidelity Investments This example is for illustrative purposes only and does not represent the performance of any security. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed.

Knowing what to expect from your investment portfolio can help reduce stress as you work through personal or career transitions. It can provide the bridge income you need to retire earlier or to change jobs or careers, perhaps to work where you’ll earn less but be more fulfilled—or just to take a personal break and play more pickleball. An income bridge can give you the financial certainty you may need to make better decisions about the life challenges and opportunities you may face.

Of course, if you’re investing in bonds and CDs for income to live on, you are foregoing the potential higher returns that stocks can offer. You are also spending down some of your principal. But during certain times of our lives, the tradeoff of potential growth for a higher degree of certainty may be just what you need.

How to build a bond or CD ladder

If you believe that a ladder of bonds or CDs might be what you need, Fidelity can help you. Fidelity offers more than 100,000 individual bonds from various issuers and our specialists in fixed income can work with you to choose the ones that meets your needs. You can reach them at 800-544-5372.

You can also build a ladder yourself if you believe you have the time, skill, and will to select and manage the bonds or CDs in your ladder. You can research individual bonds and use the fixed income tools and services available on To learn more about whether trying it yourself is for you, read our bond ladder strategy article.

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Investing involves risk, including risk of loss. This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities). Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Lower-quality fixed income securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Foreign investments involve greater risks than U.S. investments, and can decline significantly in response to adverse issuer, political, regulatory, market, and economic risks. Any fixed-income security sold or redeemed prior to maturity may be subject to loss.

Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Your ability to sell a CD on the secondary market is subject to market conditions. If your CD has a step rate, the interest rate of your CD may be higher or lower than prevailing market rates. The initial rate on a step rate CD is not the yield to maturity. If your CD has a call provision, which many step rate CDs do, please be aware the decision to call the CD is at the issuer's sole discretion. Also, if the issuer calls the CD, you may be confronted with a less favorable interest rate at which to reinvest your funds. Fidelity makes no judgment as to the credit worthiness of the issuing institution.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.

A bond ladder, depending on the types and amount of securities within it, may not ensure adequate diversification of your investment portfolio. While diversification does not ensure a profit or guarantee against loss, a lack of diversification may result in heightened volatility of your portfolio value. You must perform your own evaluation as to whether a bond ladder and the securities held within it are consistent with your investment objectives, risk tolerance, and financial circumstances. To learn more about diversification and its effects on your portfolio, contact a representative: 1-800-544-6666. Fidelity Investments does not provide tax or legal advice so you may want to consult an attorney or tax adviser regarding the portfolio bonds you have identified before purchasing your ladder.

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