Before talking about what an income ladder calculator is, let's define what we mean by income ladder in general.
An income ladder, also often referred to as fixed income ladder, is a financial strategy used by investors to manage interest rate risk and potentially generate a predictable stream of income. It involves diversifying investments in fixed-income securities, such as bonds or certificates of deposit (CDs), with varying maturities. These investments are structured in such a way that they mature at different intervals, creating a "ladder" of maturities.
To build an income ladder, also called laddering, the investments must have a set maturity date. Bond etfs holding fixed income securities with a maturity band (e.g., 0-1, 1-3 years, 3-7 years) are not suitable, because those bond etfs are selling the bonds as soon as they are not within the maturity band of the etf any longer. Accordingly, such bond etfs without set maturity date are also exposed to losses due to rising interest rates (long-term bonds more than short-term fixed income securities).
What Is an Income Ladder Calculator
Since an income ladder consists of many different assets with various maturity dates and yields, you might want to find out what your overall yield from your income ladder is. For that the income ladder calculator is needed for.
Yield Calculator for Investments
One income ladder calculator you can find on the German website www.zinsen-berechnen.de as yield calculator. What you need to enter is investment amount, start date, end date and amount including interests received at the end. The yield calculator can be used as income ladder calculator for time deposits as well as fixed income assets like bonds as you know what you will get at the end of maturity.
Yield Calculator for Bond ETFs
For bond etfs with predefined maturity date such as the iBonds from iShares, the asset management company offers a calculator of the estimated yield you can expect when you hold until maturity date. Simply chose one etf you want to invest in from the list of all iShares iBonds here, enter the purchase price per unit into the calculator and you receive a term sheet even considering the total expense ratio.
Income Ladder Calculator for iBonds
On the US website of iShares US investor can simulate with the iBond ladder tool how composition of iBonds with different maturity dates impacts the net acquisition yield and other key metrics of a bond portfolio.
Fixed Income Dashboard for Portfolio Analysis
Investors holding a free brokerage account with InteractiveBrokers will see from their PortfolioAnalyst report a specific section dedicated to their fixed income part of their portfolio, showing the total market and face value, average yield to maturity, duration, credit quality summary, cashflow overview by month and many other key metrics.
Further Readings
Should you consider using single bonds for creating a fixed income ladder, you might want to know which type of bonds to own - corporate or government bonds. Besides different type of bonds, there are a few other things to know about single bonds and bond etfs.
In a separate article we provide everything you need to know about income ladder or laddering here: how to create an income ladder, pros and cons of income ladders and how to set up an income ladder strategy.
Disclaimer: The scenarios or investment products presented above should not be construed as investment advice. All investments involve some level of risk, and past performance is never a guarantee of future returns. As always, do your own research in order to validate and better understand the underlying risks.
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