Retiring Before Social Security Starts? Here’s How to Protect Your Income in the Gap Years

The Gap Years: A Real-World Problem

David and Carol had done everything right. Over three decades of disciplined saving, they'd built a portfolio north of $1.2 million, and when David turned 62, they decided to retire together. Their plan was smart: delay Social Security until 67 to maximize their monthly benefit and let the portfolio cover living expenses in the meantime.

Then year two happened. The market dropped sharply. Their stock holdings fell by more than 20%. And the bond fund they'd always considered the "safe" part of their portfolio? It had also lost value — nearly 13% — because interest rates had risen aggressively. Suddenly, David and Carol needed $100,000 to cover the year's living expenses, and every option meant selling at a loss.

This isn't a hypothetical nightmare. It's essentially what happened to retirees who entered the gap years heading into 2022. But what if there were a way to know, in advance, exactly where next year's income would come from — regardless of what the market does?

That's the idea behind a bond ladder. And for pre-retirees planning to delay Social Security, it may be one of the most underappreciated strategies in retirement planning.

Why the Period Before Social Security Is the Riskiest Window in Retirement

The "gap years" are the stretch between the day you stop working and the day your Social Security income begins. If you retire at 62 and delay benefits until 67 to earn a higher monthly check — a decision that can increase your lifetime benefit significantly — you've created a five-year window where your portfolio must fund 100% of your living expenses.

Consider the math. If you and your spouse need $100,000 per year to maintain your lifestyle, and Social Security won't arrive for five years, your portfolio needs to generate $500,000 in income before a single dollar of Social Security shows up. That's a substantial draw on a portfolio that simultaneously needs to keep growing to support the next 25 or 30 years of retirement.

The risk isn't just the size of the withdrawals — it's the timing. If the market drops 20% in year one, you're not just watching your balance fall. You're actively pulling money out of a declining portfolio, which accelerates the damage. Financial planners call this sequence-of-returns risk — the idea that poor returns in the early years of retirement can permanently impair a portfolio's ability to recover, even if markets rebound later.

For Arizona retirees, there's a silver lining worth noting: Arizona does not tax Social Security benefits, which means the full benefit amount arrives intact once it begins — making the delay strategy potentially even more valuable if you can bridge the gap years effectively.

The gap years can concentrate sequence-of-returns risk at its most dangerous point — when you have no other income to fall back on.

Why Bond Funds Often Fail Retirees Who Need Income Soon

Many retirees assume that the bond portion of their portfolio is "safe money" — the part they can tap when markets are rough. But bond funds carry a risk that isn't always obvious until it's too late: interest rate risk.

When interest rates rise, bond prices fall. This is a fundamental relationship in fixed income investing. The key factor is duration — a measure of how sensitive a bond's price is to interest rate changes. A bond fund with an average duration of six or seven years can lose meaningful value when rates rise by even a percentage point or two. If you need cash in two years but your bond fund holds bonds with an average maturity of seven years, you're exposed to price swings that have nothing to do with your timeline.

2022 was a painful illustration. As the Federal Reserve raised interest rates aggressively, the Bloomberg U.S. Aggregate Bond Index fell approximately 13% for the year, its worst calendar-year return on record. Research from UCLA Anderson Review confirmed that bond fund investors were "laid low" by the Fed's aggressive four-percentage-point rate increase. Retirees who needed to sell bond fund shares for income that year locked in real losses on money they thought was safe.

Now contrast that with an individual bond held to maturity. Say you purchase a 10-year bond at 5% for $10,000. You receive $500 per year in interest, and at the end of 10 years, you get your $10,000 back. The market price will fluctuate during those 10 years, but if you hold it to maturity, the price fluctuation is irrelevant — you get your principal back in full, assuming the issuer doesn't default.

As FINRA explains, if you're a "buy and hold to maturity" bond investor, interest rate changes may have little or no direct impact on your fixed income assets. That distinction — between owning a bond fund and owning individual bonds you intend to hold to maturity — is the foundation of the bond ladder strategy.

How a Bond Ladder Works

A bond ladder is straightforward in concept: you purchase individual bonds whose maturity dates align with the specific months you'll need income. Instead of relying on a fund manager's portfolio of bonds with varying maturities, you control exactly when each bond comes due.

Aligning bond maturities with actual cash flow needs

Let's return to David and Carol's situation — $100,000 per year needed for five years before Social Security begins. Rather than buying one large bond per year, a bond ladder breaks each year's income need into smaller increments. For example, purchasing four bonds per year — each maturing in January, April, July, and October — creates a quarterly income stream. That's 20 individual bonds across five years, each for roughly $25,000, each maturing right when the cash is needed.

When a bond matures, the principal is returned and used for living expenses. Assuming the bond issuers meet their obligations, there's no need to sell anything on the open market. No need to worry about what interest rates have done. No need to check the stock market before paying the mortgage. The income arrives on a predictable schedule because the maturity dates were chosen to match it.

Managing default risk with investment-grade bonds

Once you reduce interest rate risk by holding bonds to maturity, the primary remaining risk is default risk — the possibility that the issuer fails to repay the principal. This is why bond ladders are typically built with investment-grade bonds, which are issued by governments and corporations with strong credit profiles.

According to data cited by the Corporate Finance Institute, S&P Global has reported that the highest one-year default rates for AAA, AA, A, and BBB-rated bonds have been 0%, 0.38%, 0.39%, and 1.02%, respectively. Those are not zero — investment-grade status reduces default risk substantially but does not eliminate it entirely. U.S. Treasury bonds are generally considered the only bonds free of default risk. But for the purposes of a bond ladder designed to cover a few years of retirement income, investment-grade bonds can offer a meaningful degree of certainty.

In the current interest rate environment, investment-grade corporate bonds with maturities of five to ten years can offer yields in the range of approximately 4.25% to 5.25%, according to Schwab's 2026 corporate credit outlook (reflecting yield data as of late 2025). Actual yields may vary depending on credit quality, maturity length, and market conditions at the time of purchase. The key point is that a bond ladder can provide a yield that is predictable — assuming the bonds are held to maturity and the issuers do not default — on the portion of the portfolio dedicated to near-term income, in exchange for giving up the potential equity upside on that same money.

That's a deliberate trade-off — and for money you need in two or three years, accepting a yield of roughly 4.5% or 5%, known at the time of purchase assuming the bond is held to maturity, may be far more appropriate than risking a 20% or 30% equity decline.

What Happens to the Rest of the Portfolio

A bond ladder isn't a whole-portfolio strategy. It's designed to cover the near-term income window — typically two to five years — while the remainder of the portfolio stays invested in growth-oriented assets like equities.

Equities are volatile in the short term. Historical data shows that the S&P 500's worst calendar year produced a return of approximately -43.8% (1931), while its best year returned roughly +52.6% (1954). In any given 12-month period, the range of outcomes is enormous — and largely unpredictable. That's precisely why equities are a poor choice for money you'll need next year.

But as the holding period lengthens, the range of historical outcomes narrows considerably. Analysis of rolling 20-year periods since 1928 shows that the S&P 500 has historically produced positive annualized returns in every measured 20-year window — though this is a historical observation, not a guarantee that future 20-year periods will follow the same pattern. The worst 20-year annualized return was approximately 3.1%, and the best was roughly 17.7%.

Past performance is not a guarantee of future results, and there is no assurance that this historical pattern will continue. But the data illustrates an important principle: equities have historically rewarded patience.

This is the logic behind pairing a bond ladder with an equity portfolio. The ladder handles the income you need in the next two to five years with a high degree of predictability. The equity portfolio handles the income you may need in years six through thirty, where the longer time horizon may allow it to recover from short-term downturns and potentially capture growth that helps keep pace with inflation.

The right size for a bond ladder depends on individual circumstances. A more conservative retiree may want to ladder five or six years of income. A more growth-oriented retiree might ladder only two or three years. Neither approach is inherently right or wrong — the goal is to match the ladder size to the retiree's ability to tolerate short-term portfolio fluctuations without needing to sell.

Is a Bond Ladder Right for Your Retirement Plan?

Not every retiree needs a bond ladder, but the strategy may be worth considering if your situation includes certain characteristics:

• Are you planning to retire before Social Security begins? If so, your portfolio will need to cover 100% of your income for the gap years — the exact scenario where sequence-of-returns risk is most dangerous.
• Do you have two to five years of living expenses that need to come from your portfolio with high certainty? A bond ladder is designed for money where predictability matters more than growth potential.
• Are you concerned about a market downturn in the early years of retirement? If the thought of selling stocks during a 20% decline keeps you up at night, a ladder can provide a buffer that may allow you to leave your equity portfolio untouched during downturns.
• Would knowing exactly where next year's income is coming from reduce your anxiety about market volatility? For many retirees, the psychological benefit of predictable income is as valuable as the financial benefit.

It's worth noting the trade-offs. The yield on a bond ladder is predictable only if the bonds are held to maturity and the issuers do not default — it is not an unconditional guarantee. And the portion of the portfolio allocated to bonds gives up the potential for equity-level returns. The right ladder size, bond selection, and overall portfolio structure depend on your specific income needs, risk tolerance, tax situation, and time horizon — all factors that a qualified financial planner can help you evaluate.

Bridging the Gap with Confidence

The gap years between retirement and Social Security represent one of the most underappreciated risks in retirement planning. A bond ladder is a straightforward strategy designed to match predictable income to the specific months it's actually needed — without requiring you to abandon the long-term growth potential the rest of your portfolio may provide.

The right structure depends on your individual income needs, risk tolerance, and the current rate environment. If you're approaching retirement and thinking about how to protect your income during those critical early years, consider working with a financial planner who can help design a strategy that fits your specific situation.

We'd welcome the opportunity to walk through how this might work for you. Schedule a conversation with Sonmore Financial here.

References

1. CNBC. "2022 was the worst-ever year for U.S. bonds. How to position your portfolio for 2023." January 7, 2023. https://www.cnbc.com/2023/01/07/2022-was-the-worst-ever-year-for-us-bonds-how-to-position-for-2023.html
2. UCLA Anderson Review. "Unintended Consequence of Stale Corporate Bond Fund Prices Amid Fed Tightening." May 15, 2024. https://anderson-review.ucla.edu/unintended-consequence-of-stale-corporate-bond-fund-prices-amid-fed-tightening/
3. FINRA. "Brush Up on Bonds: Interest Rate Changes and Duration." https://www.finra.org/investors/insights/bonds-interest-rate-changes-duration
4. Corporate Finance Institute. "Investment-Grade Bonds – Overview, Default Rates, Example." May 7, 2026. https://corporatefinanceinstitute.com/resources/fixed-income/investment-grade-bonds/
5. Charles Schwab. "2026 Corporate Credit Outlook." January 2, 2026. https://www.schwab.com/learn/story/corporate-bond-outlook
6. History of Market. "S&P 500 Annual Returns by Year: Complete Table 1928–2026." August 17, 2026. https://historyofmarket.com/articles/sp500-annual-returns-by-year
7. QuantFlow Lab. "S&P 500 Average Return: Honest Historical Data (1928–2025)." March 30, 2026. https://quantflowlab.com/sp-500-average-return/

Disclosure

This content is for informational purposes only and should not be considered tax, legal, or financial advice. Consult a qualified financial professional before making any investment or tax-related decisions.

Advisory services are offered through Sonmore Financial LLC, an Investment Advisor in the State of Arizona. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.