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Dear Daily Crux reader, This week, we've got a unique income idea from our friend Tom Dyson. Tom is publisher of Common Sense Publishing, and its flagship advisory The Palm Beach Letter. In The Palm Beach Letter, Tom and editor Mark Ford scour the markets to find the world's safest, most profitable income investments. In this week's interview, Tom explains a little-known way to earn guaranteed retirement income, no matter what happens to Social Security, stocks, or the economy. If you've ever wished you were one of the "lucky" folks with a government-guaranteed pension, this could be the next best thing. Read on for the details... Regards, Justin Brill Managing Editor, The Daily Crux www.thedailycrux.com –––––––––––––––––––––––––––––––––––––––––– The Daily Crux Sunday Interview The safest income strategy you've never heard of... The Daily Crux: Tom, in the latest issue of The Palm Beach Letter, your team recommended a relatively little-known strategy for earning super-safe, consistent income during retirement. Can you explain what this strategy is and how it works? Tom Dyson: Sure. But before I reveal what the strategy is, let me explain why it's so powerful. When properly set up, this strategy pays out a steady income stream like any pension or retirement plan. These payments are guaranteed by law... But this strategy is not affiliated with the government or Social Security. And it's got nothing to do with insurance, the stock market, or real estate. Even better, anyone can do this. You can set it up from the comfort of your own home, and you don't have to deal with institutions, financial advisors, estate planners, or lawyers. And unlike most retirement plans, you can control the size of the payouts and the dates you receive them. You're also not locked in if you need money for an emergency... There are no penalties or early withdrawal fees. Our editor, Mark Ford, has personally used this strategy as the foundation of his wealth management plan for 30 years, and it has never lost money... not even during the worst of the 2008 financial crisis. So what's the strategy? It's called bond laddering. Let me explain how it works. ---------- Advertisement ---------- WARNING from an American Granddad "If you're relying on stocks and mutual funds to pay for your retirement, you're making a BIG mistake. "I've managed money through 2 WARS... 7 RECESSIONS... and 4 stock market CRASHES... "And in 40 years of investing, I've found one investment opportunity that could pay you every single year... no matter what happens in the economy." Click here for full details. --------------------------------------- Most of your readers are probably familiar with bonds, but I'll quickly review... just in case. Unlike a stock – where you take an ownership stake in a company and have a right to that company's profits and dividends – a bond is just a loan. It has nothing to do with ownership. You're simply loaning money to someone – a company, a government, etc. – who legally agrees to pay your money back in full on a certain date, known as the maturity date. They're also agreeing to pay interest on that loan at a guaranteed interest rate – called the yield or the coupon – which is the return you get. Bond laddering simply involves buying a series of bonds with "laddered" maturities – over anywhere from five to 20 years – where each year is a "rung" on your ladder. As an example, let's suppose you want to set up a simple 10-year bond ladder. You would buy one bond that matures next year, one that matures in 2013, one that matures in 2014, and so on through 2021, for a total of 10 individual bonds with 10 sequential maturity years. Obviously, I'm simplifying here. You would probably buy more than one bond per year – the number would vary depending on your investment dollars, income goals, and other factors – but the idea is to build equal-sized positions for each of the rungs of your ladder. Going forward, each of these bonds will pay you coupons on a regular basis – usually monthly or quarterly – until they mature. If you're currently still working and don't need this income, you can put this money toward buying additional bonds for your ladder. This will compound your returns over time as you have more and more bonds paying you income each month. Then, each year when one of your bonds matures, you'll receive a check for the full amount you paid for that bond... In other words, the full amount of the "loan" will be returned to you. So to continue our example, next year in 2012 your first bond will mature and return your full investment. At that point, you can take that cash and buy another bond with a maturity date of 2022. This would extend your ladder one additional year, and maintain it at a total of 10 years. In 2013, your next bond will mature, and you can then buy a bond that matures in 2023, and so on. You would continue to "roll over" your expiring bonds into new bonds – while continuing to collect a steady stream of coupon payments – until you get to retirement. Once you reach retirement, you have some options. You can choose to stop rolling the bonds over. Instead, you can treat each maturing bond as a guaranteed lump-sum income payment, similar to an annuity. I don't usually like to use the word "annuity" because, frankly, not many people know what an annuity is, and those who do tend to have unfavorable opinions about them. Essentially, an annuity takes a lump sum of money that you have today and converts it into cash flow over time. You give up the lump sum today... And in return, you receive cash flow for as long as you live. But you never get your lump sum back. So it's similar, except you don't have to go through an insurance company, you don't have pay an agent some outrageous fee to set it up, and you can get your lump sum back. Of course, if you have other sources of income from a pension or other investments, you could also continue to roll over some or all of the maturing bonds into new bonds, and continue to collect the coupon payments. This strategy is flexible and can be personalized in a number of ways. Crux: Are there any tricks to getting the most out of bond laddering? Dyson: There are a few things you need to know. The first thing you'll realize when you begin evaluating bonds is they're very expensive. They typically trade in lots of $1,000 each. And most brokers won't make trades for you with anything less than $10,000. This is fine if you've got at least $100,000 of disposable income to invest in your bond ladder... But most of our readers aren't millionaires. They're hard-working middle-class folks trying to get the most out of their retirements. So this wouldn't work for them. Fortunately, we've found a way around this problem. We're recommending a type of bond we call "retail bonds," because they sell in much smaller denominations and are more accessible to retail investors. You can buy them for as little as $25 each. And unlike most bonds, these bonds trade in the market. You can buy and sell them as easily as a stock. In fact, if you didn't know any better, you might think these are stocks. They have ticker symbols just like stocks. And you can buy and sell them through your online broker and pay the same flat trading commissions you would for any stock. So these things are completely within the reach of anyone who normally invests in the stock market... Yet, they are bonds. They have a maturity date. There's a legal obligation for you to get your money back. And they pay you interest through a coupon. There is absolutely no stock market risk in these things. In addition, because they're much less expensive and the commissions are so low, you can afford to buy them in smaller increments over time as part of your savings plan. This isn't cost-effective with normal bonds. The next thing you should consider is how you'll purchase the rungs of your ladder. There's really only one guideline here: We recommend that for the earliest years of your ladder – years one through three – you buy Certificates of Deposit (CDs) instead of short-term bonds. This may sound a bit counterintuitive, but our research shows you'll tend to get higher interest rates for those years in CDs. Beyond that, you can generally purchase the individual rungs as you see fit, based on how much money you have to spend each month, how long you want your ladder to be, and how much money you'd like for retirement. You can purchase a small amount each month or entire rungs all at once. It doesn't matter, because you won't be using the money until retirement. But again, the idea is to have each ladder relatively equal so you don't have large swings in income as they mature. Crux: Are there any risks with this strategy? Dyson: As you know, all investments have risk – even putting your money in the bank has risk – and there are three main risks with this strategy. Fortunately, you can greatly minimize them by following a few simple rules. The first significant risk is default. When you lend money to a company, the worst thing that can happen is something impairs its ability to pay you back. It could fall victim to theft. An accident could cost it money. A bad decision could cause a loss. When companies can't pay back their loans, bond traders call it a default. This is the biggest risk when buying any bond. If one of the companies you loan money to defaults and cannot pay you back in full, it could tear a big hole in your bond ladder. So you've got to be picky about the bonds you put in your ladder. You only want to lend money to the absolute safest companies. The strategies for finding the safest companies could fill up a book by themselves. But generally, you're looking for many of the same things you look for in a safe stock. You want companies with long histories of success, stable businesses, plenty of cash, and low debt. Naturally, you want to avoid most small companies, and businesses like banks and those involved in mortgages or real estate. Once you've found super-safe companies, there are really only two significant risks to your money in bonds: rising interest rates and inflation. You can minimize the risk of both by being smart about how many years you build into your ladder – otherwise known as the average maturity of our bond ladder – and by rolling over maturing bonds into new bonds as I mentioned earlier. The more time a bond has until it matures, the more likely it is that rising interest rates and inflation could destroy its value. For example, most people intuitively understand you wouldn't want to hold 20- or 30-year bonds during inflation. By the time you got your money back, interest rates would be much higher... And your original investment would actually be worth less because of inflation. So the key here is to limit the "length" or average maturity of your bond ladder. InThe Palm Beach Letter, we recommend limiting your ladder to bonds maturing within one to 1o years out, as I explained in my example earlier. If you do this, the average maturity of your ladder will only be five-and-a-half years when complete. That's short enough that inflation won't affect you too badly. Rolling over maturing bonds reduces the risk further. If inflation and interest rates begin rising, you'll capture higher rates each year when you roll your money over into new bonds with maturities 10 years into the future. This will increase the overall average yield you receive from the bond ladder. It's sort of a built-in hedge. Crux: Any closing thoughts? Dyson: Admittedly, an obvious criticism of the strategy is interest rates aren't very high right now. That's true... The interest rates you'll get right now aren't great. But it definitely beats putting your money in the bank. And it's safer than just about any other comparable income vehicle out there. And like I just mentioned, if interest rates begin to rise, you'll benefit as your bonds roll over. Of course, you could get much higher yields by going with dodgy companies... But that's a huge mistake. There's an old expression that "more money has been lost chasing yield than in any other endeavor in history." Stick with the best bonds from the safest companies, keep your maturities on the short side, and you should do very well. Crux: Sounds great. Thanks for talking with us. Dyson: Thanks so much. My pleasure. Editor's Note: If you would like to learn more about the benefits of bond ladders – and discover other safe, wealth-building strategies most people will never hear about – consider a subscription to The Palm Beach Letter. Your four-month, risk-free trial will give you immediate access to Tom and Mark's research on how to structure your own bond ladder for maximum safety and income. To learn more, click here.