Method 2. Match Bond Income with Annual Costs
This strategy's premise is you know what exactly you need for what time, then scan the bond universe to construct a bond portfolio that best meets your life needs.
This method is different, or is better than, the traditional bond ladder or annuity product because the customized bond portfolio could meet the "spikes" of life needs - for example, you want to do a 6-month world cruise in 3 years which will double that year's living expenses compared with the normal level. The bond portfolio will be constructed in the optimal way (in terms of amount and maturity) to use the bond interest and redemption to meet each year's specific needs.
What's the downside of this strategy?
First of all, it's not easy to DIY - individual investors don't have the bandwidth to do the bonds related research and construct such an optimal bond portfolio. We have mentioned the Asset Dedication tool that is available for financial planners to help their clients to get the job done. Second, it is probably not the best investment decision to lock in longer term bonds when interest rates are low.
The Bottom Line
The best action for a pre-retiree to do is probably to purchase a single premium annuity to meet the basic needs of life, then use the above two methods - managed retirement incomes and matching bond income with expenses to meet those discretionary spending, because both methods have drawbacks and higher costs.