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Income Ladder Example

Assume that the goal is to create a reliable stream of investment income for 10 years with the first year's income starting at $30,000 and then increasing 3% each year thereafter to compensate for inflation.  The desired income is then as follows:

Year Desired Income
1 $30,000
2 $30,900
3 $31,827
4 $32,782
5 $33,765
6 $34,778
7 $35,822
8 $36,896
9 $38,003
10 $39,143

Enter these amounts in the first row of the calculator as shown below:

Next assume that the income ladder will be funded with bank certificates of deposit (CDs) and that they are currently available with the annual yields and corresponding maturities shown below.  You can find current yield rates at: Bankrate.com

CD Maturity Annual Percent Yield
1 Year 2.5%
2 Years 2.8%
3 Years 2.9%
4 Years 3.1%
5 Years 3.5%
6 Years 3.7%
7 Years 3.8%
8 Years 4.0%
9 Years 4.0%

Enter these yield rates as shown next.  Notice that only 9 yield rates are needed for a 10-year income ladder.

Next select the Type 1 income ladder button where interest is withdrawn annually from each CD.   

The Principal Income row represents the amount of capital that needs to be invested at each yield and corresponding maturity in order to provide the desired income.  It is assumed that the first year's income will be met with cash.  Notice for example that the second year's income of $30,900 is partly provided by the principal from the matured 1-year CD and partly provided by the interest earned on all CDs.  The CDs that should be purchased to fund this income ladder are as follows:

Type 1 Income Ladder - Interest Withdrawn Annually

Amount Invested CD Maturity Annual Percent Yield
$21,868 1 Year 2.5%
$23,342 2 Years 2.8%
$24,951 3 Years 2.9%
$26,657 4 Years 3.1%
$28,497 5 Years 3.5%
$30,538 6 Years 3.7%
$32,742 7 Years 3.8%
$35,093 8 Years 4.0%
$37,637 9 Years 4.0%

This schedule of investments will exactly provide the desired income for years 2 through 10 assuming that interest is withdrawn annually.  Again the first year's income is assumed to be met with cash.  The total capital needed to purchase this ladder plus the first year's cash income is $291,330.

Important: Some investments do not offer the option to withdraw interest annually or they may impose penalties for doing so.  It is important to understand the terms associated with the specific investments that will be used to fund an income ladder. 

For comparison, next select the Type 2 income ladder button where interest is not withdrawn each year but rather accrued and compounded until maturity:

Notice now that each investment only contributes interest income after it matures.  The total cost to fund the ladder is nearly the same as the Type 1 income ladder, but slightly higher at $292,010.  The Type 1 income ladder will be the lower cost option in most cases, but there are exceptions.  During times when the yield curve is inverted  (see Bond & Income Ladder Definitions), the Type 2 ladder can be the lower-cost option.  The CDs that should be purchased to fund the Type 2 income ladder are as follows:

Type 2 Income Ladder - Interest Accrued to Maturity

Amount Invested CD Maturity Annual Percent Yield
$30,146 1 Year 2.5%
$30,116 2 Years 2.8%
$30,087 3 Years 2.9%
$29,883 4 Years 3.1%
$29,282 5 Years 3.5%
$28,805 6 Years 3.7%
$28,418 7 Years 3.8%
$27,768 8 Years 4.0%
$27,501 9 Years 4.0%

This schedule of investments will exactly provide the desired income for years 2 through 10 assuming that interest is not withdrawn annually.  And again it is assumed that the first year's income is met with cash.

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