The Eight-Rung Treasury Bond Ladder That Pays a 72-Year-Old $40,000 a Year With Zero Credit Risk on $850,000

A retiree with $850,000 in savings who wants about $40,000 a year in reliable income may not need to take the risks associated with high-yield funds or complex income strategies. One alternative is a ladder of individual U.S. Treasury notes spread across multiple maturity dates. Because Treasuries are backed by the U.S. government and return full principal at maturity when held to the end, they are often viewed as one of the safest income investments available. Treasury interest is also exempt from state income taxes.

The main challenge is that Treasury yields have shifted lower from the highs seen last year, meaning investors need to evaluate the ladder using current interest rates rather than older, more attractive yields. Even so, Treasury ladders can still provide a relatively predictable stream of income while preserving principal and reducing overall portfolio volatility.

How the eight-rung structure works

The ladder works by dividing the $850,000 portfolio into eight roughly equal Treasury positions of about $106,250 each. One Treasury note is purchased for each maturity year, starting with a one-year Treasury and extending out to an eight-year Treasury. As the shortest-term bond matures each year, the proceeds are reinvested into a new eight-year Treasury, keeping the ladder in place over time.

This structure helps reduce the risk of locking the entire portfolio into a single interest-rate environment. Part of the money is always coming due within the next year, while the rest remains spread across longer maturities. Because the investor plans to hold each Treasury until maturity, short-term price fluctuations in the bond market matter far less. The focus is on receiving scheduled interest payments and the return of principal at maturity rather than trading the bonds for price gains.

The May 2026 yield curve

Here is what the U.S. Treasury curve looks like right now:

• 1-year: 3.8%
• 2-year: 4.1%
• 3-year: 4.2%
• 5-year: 4.3%
• 7-year: 4.5%
• 10-year: 4.7%

The Treasury does not issue four, six, or eight-year notes directly, so those rungs are filled with secondary-market paper or by interpolating along the curve. Using the published points and reasonable fills for the gap maturities, the eight-rung average lands at roughly 4.3%.

What $850,000 actually produces

At a blended 4.3%, $850,000 generates about $36,400 of annual interest. That is short of the $40,000 target by roughly $3,600. There are two honest ways to close the gap:

1. Commit more capital. Hitting $40,000 at a 4.3% blended yield requires closer to $935,000. An extra $85,000 of principal does the work without taking duration or credit risk.
2. Extend the long rung. Replacing the eight-year top rung with a 20-year Treasury yielding 5.2%, or a 30-year at 5.2%, raises the blended yield, but it also extends the longest maturity well past the retiree’s likely planning horizon and increases reinvestment-rate uncertainty when that rung eventually matures.

Taxes and the state-income exemption

Treasury interest is taxed as ordinary income federally, but it is exempt from state and local income tax. For a retiree in California, New York, or New Jersey, that exemption can be worth several percentage points of after-tax yield versus a corporate bond fund paying the same headline rate. The Fed Funds Rate has been parked at 3.75% since December 10, 2025, which is part of why current Treasury yields sit where they do.

TIPS and ETF alternatives

Inflation-protected Treasuries trade at a real yield of 1.7% at five years and 2.2% at ten. With headline CPI running at 2.1%, the nominal-versus-real spread is roughly compensating for the Fed’s target. TIPS are worth a slice of the ladder for a 72-year-old who expects to be drawing income into their 80s.

Bond ETFs like iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG | AGG Price Prediction) offer diversification at an expense ratio of 0.03%, but their share price moves daily with rates. A Treasury held to maturity does not.

What Investors Should Consider

Before building a Treasury ladder, investors should first calculate how much after-tax income they actually need. Because Treasury interest is exempt from state income taxes, a lower amount of Treasury income may provide similar spending power compared to fully taxable bond fund income.

Investors can build Treasury ladders directly through TreasuryDirect or purchase Treasuries through brokerage firms such as Charles Schwab and Fidelity Investments, which typically offer commission-free Treasury trading.

Some retirees may also choose to include a Treasury Inflation-Protected Security, or TIPS, within part of the ladder. TIPS generally offer lower starting yields than standard Treasuries, but they provide protection against inflation by adjusting principal values over time.