If you are like many pre-retirees or retirees, you may be hesitant to purchase annuities because you worry you will enter the market at the wrong time and won’t maximize your returns. An increasingly popular technique known as “annuity laddering” may help guard against this situation and make the transition to annuities much easier and less stressful for you.
What is Annuity Laddering?
Building an annuity ladder means that you purchase a series of annuities over time instead of dumping a lump sum into one annuity that locks you into one rate. With a ladder, you split your premium across multiple smaller annuities. For instance, maybe you decide to buy one annuity every two years for the next ten years. Or you buy one annuity per year for the next five years.
Key Advantages of Annuity Laddering
The annuity ladder strategy has several advantages.
- Diversification: The first advantage is that you don’t have all your eggs in one basket. By diversifying your annuities, you are less susceptible to the fluctuations of the market.
- Capitalizing on Interest Rates: The second advantage is that you can take advantage of changes in interest rates. When interest rates rise, you can purchase annuities that have not yet been affected by the market change.
- Flexible Payout Options: The third advantage is that you can ladder annuities with different payouts. For example, you could buy an annuity with a term period of 5 years, the next year buy another 5-year term period, and up the ladder, you go. When you use the annuity as income, when one matures, simply start converting them to an income stream. Income periods can be any length you wish, even a lifetime. This way, you would have a stream of income that would last for the rest of your life.
Managing Risk with Annuity Ladders
Annuity laddering can help you manage risk. By laddering annuities with different maturity dates, you create a “spread” that can protect you against interest rate risk. Since predictions of whether interest rates will go up or down are, at best-educated guesses, an annuity ladder lets you bet on both scenarios. A ladder may increase your chances of earning more when rates go up or smooth out losses if rates go down.
Types of Annuity Ladders
There are many different ways to build annuity ladders for yield, including fixed-rate ladders using multi-year guaranteed annuities (MYGAs). You can also use a “mixed-fix” approach combining MYGAs and fixed–index annuities. Deferred multi-year ladders work in a somewhat similar fashion to certificates of deposit (CDs).
Another approach is the deferred multi-year annuity ladder. You take a lump sum to purchase several small annuities in a deferred multi-year annuity ladder, each with a different maturity date. As each annuity matures, you either roll it over into a new annuity or convert it to income.
Is Annuity Laddering Right for You?
Creating an annuity ladder may not work for everyone. Still, it is worth bringing up with your retirement advisor, especially if you find yourself considering adding Safe Money products to your portfolio.
Disclaimer:
This information is for educational purposes only and should not be considered investment or financial advice. Annuity products are complex financial instruments and may not be suitable for all individuals. Before making any decisions about purchasing an annuity, consult with a licensed financial advisor or insurance professional who can assess your specific financial situation and needs. Guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. Rates and product availability may vary. Any mention of “Safe Money” is not a guarantee against losses and simply reflects a type of product design.
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