Locked up, or locked in? Why a bond ladder isn’t a trap

A reader worried a bond ladder ties his money up. It doesn’t. It fixes the one thing you want fixed, your income, and leaves the rest liquid.

Key takeaways

• “Locked in” runs two different ideas together: locking up your access to your money, and locking in an outcome. A bond ladder does only the second.
• The bonds sit in one of the deepest and most liquid markets you can own, so your capital stays accessible on any business day. Nothing is trapped.
• Liquidity is not what sets a ladder apart from a bond fund; both trade in that same market. The difference is construction: bonds matched to your expenses, rather than to a benchmark.
• What a ladder does lock is the part you want locked: your expense funded on its date, at a yield known the day you buy.
• If those bonds sit in a living annuity, the annuity, not the bond, sets how much income you may draw each year. The ladder works the same inside a living annuity or in a discretionary portfolio.

Read: A rung for your roof: The big once-off costs are your most dangerous withdrawals

Two meanings of ‘locked’

Separate the two things the word is doing at once. The first is locking up your money: a restriction that stands between you and your capital, like a fixed deposit you cannot break without a penalty, or a product with a surrender period.

That is a real feature of some structures, and it is the thing the reader was picturing.

The second is locking in an outcome: fixing, in advance, what you will receive and when. That is what an individual bond held to maturity does. It fixes the yield the day you buy it, and it returns a known amount on a known date.

These are not the same thing, and an individual bond only does the second. It fixes the result. It does not restrict your access.

The market behind the bond

An individual government bond is a listed, tradable instrument, not a contract with a lock-in clause. It trades in the JSE’s debt market, and that market is worth a proper look.

At the end of 2024, the nominal value of listed bonds on the JSE was about R5 trillion. It is the largest listed debt market in Africa, by both size and liquidity, and government bonds are the most liquid part of it: they account for roughly 90% of all the liquidity reported to the exchange.

Read: Baby steps: Investing for beginners

Then the activity. In 2024, close to R44 trillion of bonds changed hands on the JSE. That is nearly nine times the size of the entire listed market, traded in a single year. For a sense of scale next to something more familiar: in a recent month, more than six times as much value traded in South African bonds as in South African shares.

I will write in more detail about the bond market in a future article to help us understand it even better.

That is the pool your retirement income is drawn from. It is deep, it is active, and the part of it you use most is the most liquid part of all.

So nothing is locked up

Because these are traded instruments, you can sell on any business day. That matters more in retirement than at almost any other time: life changes, plans change, and you want the freedom to adapt.

A structure that trapped your capital would be working against you. A ladder of liquid government bonds does the opposite, which is why  liquidity sits so high in the order of what a plan should protect.

Read: Investors now see some corporate bonds as safer bets than government debt

What about the living annuity?

There is one qualification. If your bonds sit inside a living annuity, there is a limit, but it is not on the bonds. It is on income. A living annuity sets how much you may draw as income each year, currently between 2.5% and 17.5% of the value, chosen once a year on your policy anniversary.

That is a rule of the annuity, and it applies to whatever you hold inside it, a bond ladder or a balanced fund alike. It governs how much income you withdraw, not what you may do with the underlying assets.

Inside the annuity you can still buy, sell, switch and re-ladder those bonds freely: the depth and liquidity of the bond market is fully available to you there.

The ladder belongs inside the living annuity just as readily as in a discretionary portfolio, and it works the same way in both. In a discretionary portfolio there is no income band at all; you draw what you like.

So if anything, the ladder is not the thing that limits you. It is how you make sure the income you are entitled to draw is actually sitting in cash on the day you need it, whatever the market is doing.

Read: Getting the asset allocation in your living annuity right

Then what makes a ladder different?

A bond fund trades in this same deep market, so it is just as able to buy and sell. Liquidity is not the bond ladder’s advantage.

The difference is what the bonds are chosen for. A fund holds bonds to track a benchmark or express a manager’s view, and its holdings shift as that view shifts.

A ladder built on the  asset dedication approach holds bonds chosen to match your expenses: specific amounts, on the specific dates you need them. Same market, same liquidity, a different job. One is built to a benchmark; the other is built to your life.

The good kind of locked

So the reader had it half right. Something is locked in, and it is worth having. Not your access, which stays open, but your outcome:  expense funded on its date, at a yield you fixed on day one. You secure both the result you want, and keep the freedom to respond.

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For a retirement income plan built on your own numbers, reach me at jonathan@rexsolom.co.za. I work with clients in both English and Afrikaans.