In terms of securing the assurance of a steady income in the future, annuities can be considered to be one of the most reliable instruments. They guarantee a streamline flow of cash as well as protection from market fluctuations, and are designed to fit your specific financial requirements.
Many people do make the same mistake when they put the entire amount of annuity purchased all in one lump sum on one date. Although this might seem simple, it’s not always the best strategy, especially in a volatile interest rate environment.
That’s when the “laddering strategy” is in the picture. Similar to laddering bond or certificate of deposit (CDs), annuity laddering is the process of spreading your purchase over a long period of time. The result? Greater flexibility, possibly higher payouts and better alignment with your ever-changing retirement requirements.
What Is Annuity Laddering?
Annuity laddering is the process of dividing retirement savings into multiple annuities, bought at various times and/or having different maturity dates.
Instead of purchasing a single fixed annuity of $300,000 today, for instance, it is possible to buy:
- $100,000 now
- $100,000 investment in two years from now
- $100,000 investment in five years from now
This method of staggered payments allows you to benefit from fluctuating rates of interest and adapt to your lifestyle situations as they change.
Why Laddering Can Outperform a Single Purchase
Annuity purchases make a one-time lock the rate of your payout based on the current market conditions. If interest rates increase after you’ve invested all your money, you could miss out on higher income for decades to come. The laddering process helps reduce that risk. This is why it works:
1. Capturing Higher Rates Over Time
Annuity payout rates and interest rates tend to fluctuate. When you spread your purchases across various time periods, you improve the chances of getting a portion of your income at higher rates in the future.
Example:
If you purchase all your annuities in the low rate environment, your payout is set in stone. However, with laddering, in the event that rates rise those who bought annuities at later times will be locked in the more favorable rates, which will boost your retirement income overall.
2. Reducing Market Timing Risk
The process of trying to “time” the market or interest rates is notoriously challenging even for experts. Laddering lets you relax all pressures to make a “perfect” decision at a single moment in time. Instead, you’re able to average the purchase prices, similar to dollar-cost averaging in stock investing.
3. Increasing Flexibility for Life Changes
The way things go in life is rarely according to plan. Your health, expenditures and goals may change in time. The laddering system ensures that you don’t have to put all of your retirement savings at once, giving you the flexibility to alter the future purchase of annuities to meet the changing needs of your family.
4. Customizing Your Income Stream
By laddering, you are able to make annuities that start with different payout dates and in accordance with the anticipated expenses. Examples are:
- One annuity could start immediately to cover everyday living costs.
- Another option could be to delay it for 5-10 years, which could boost the amount of money you earn in retirement.
- The third one could be structured to address long-term care requirements.
How the Laddering Strategy Works in Practice
Let’s say a person is 62 years old and plans to retire at 65 and has the sum of $500,000 allocated for annuities.
Instead of buying a large annuity you could use them to:
Step 1: Purchase an immediate annuity when you retire at age 65, you can invest $200,000 into an instant fixed annuity to pay for the essential living expenses.
Step 2: Purchase a deferred annuity five years later at age 70, you can invest an additional $150,000 into a deferred annuity that begins to pay at age 75. It will secure potential higher rates and supplement Social Security.
Step 3. Add a longevity annuity when you reach 75, apply the remaining $150,000 for it, which begins the payouts at age 85. This will ensure financial security through the end of life.
This organized approach generates the tiered stream of income that can be adjusted to the various levels of retirement.
Benefits of Annuity Laddering
- Interest Rate Optimization: You can avoid locking in all your money at possibly low rates.
- Cash Flow Matching: Payouts can be synchronized with the time you’ll require the most money.
- The hedge against inflation: Later annuities bought with higher payouts may help offset inflation risks.
- Relaxation: You have the financial flexibility instead of committing to your entire retirement budget in one lump sum.
Potential Drawbacks and Considerations
Like any strategy, laddering isn’t flawless. Be aware of the following:
- delayed full income: You could be waiting for later annuities to begin, so a budgeting plan is crucial.
- Complexity: managing multiple annuity contracts demands more planning and organization.
- Surrender Costs: If you decide to reconsider your purchase, most annuities come with surrender periods.
A finance advisor can assist you evaluate these aspects and decide the best laddering strategy for you based on your goals, risk tolerance as well as other income sources.
Who is the most likely to benefit from laddering?
While laddering may be beneficial to many retired people, it’s particularly attractive to:
- People Nearing Retirement, But concerned about rates: If you are concerned that rates of interest could increase by the end of the year, laddering allows you to participate in any future rate rates.
- Early retirees: You may delay your income to fill the gap prior to when Social Security or pension benefits start.
- Conservative Investors: Laddering can provide predictable income without the market volatility.
- For those who plan for longevity: Deferred or longevity annuities on a ladder can guarantee income well into your 90s or 80s.
Keen Coverage’s Approach to Annuity Laddering
We at Keen Coverage, believe that the concept of retirement income planning isn’t a one-size-fits-all. Being an independent brokerage for insurance, we compare multiple top-rated insurance companies to assist you in constructing an annuity ladder which:
- Maximizes your payout potential
- Compatible with your particular retirement needs
- The balance between immediate needs and the long-term security
- Benefit from the most effective products available on the market
Our team has a specialization in developing specific strategies to integrate annuities and other retirement assets, to ensure that the income you plan to earn is durable as it is secure.
Final Thoughts
Annuity laddering isn’t about trying to find a “perfect” interest rate, it’s about creating an adaptable, flexible and, potentially, more profitable income plan to help you retire. Through securing your purchases, you have the possibility of capturing future rate hikes, match your income to your financial needs at various life stages, and avoid locking in all your savings all at once.
If you’re thinking of annuities for your retirement plan, don’t make the one-and-done purchase. Find out how laddering can benefit you, and consult experts that can customize the plan to meet your needs.
Are you interested in learning more about how an annuity ladder might improve the income you earn in retirement?
Contact Keen Coverage today to schedule a personal no-obligation, no-cost consultation. Together, we’ll develop an investment plan that will provide regular income along with financial flexibility along with peace of mind, for the years to come.