By Bill Broich
Win the low interest rate war with this easy and safe approach to retirement planning.
Planning for retirement? Confused about what to do? Should you leave your assets in growth mode or are you ready to run to safety? These questions have no real right answer, the solution depends on your situation and your personal goals.
One answer could be to use an annuity for your income needs but that is also confusing. What if an annuity is a mistake, how can you go back and make corrections? What about inflation, what about the future cost of medical expenses, how will you survive the golden years?
Consider using an annuity but not just any annuity, use an annuity tool. Consider using an annuity ladder. Interest rates are quite low and have been for some time now, how would an annuity adjust to increasing rates in the future when you have locked in an annuity at the current low rates? Which raises an important question: How do you know that it’s the right time to buy an annuity?
An annuity ladder allows you to receive income now for your retirement needs and to send funds ahead to attempt to capture higher interest rates in the future. The simple approach is to use an annuity for income now and purchase additional annuities with different maturity dates, each future annuity would have interest credited to an outside source which allows for potential higher interest rates.
An annuity ladder simply purchases a series of annuities which mature over time. Instead of spending 100% of your available money on one annuity which locks you into one rate, you split your premium across several smaller annuities. There is no magical time to select future annuity maturity dates but as an example if you used a portion of your funds for a 5 year immediate income annuity, you would simply add another for maturity after 5 years and another each 5 year period of time after that. At each maturity term you would easily convert the accumulated annuity to a period certain guaranteed pension income.
Almost any combination can be used and the actual time periods of annuity maturity can vary. Suppose you have $400,000 available in retirement funds. You would buy a $100,000 immediate income annuity to produce income for 5 years, then a second annuity would handle the next 5 years, it would have more value because it would have earned interest for the 5 years it was at “rest”. The balance of the $200,000 could be sent even further ahead for the 10 year mark and it probably would nearly have doubled in value. At that time you merely reexamine your needs and goals and use that annuity to complete your retirement planning.
This approach is safe and can allow you to have increasing income each 5 year segment in the future to help offset future increasing needs. The potential to buy in at higher interest rates is only a part of the benefit of laddering an annuity.
As with any serious planning consideration, solutions depend on your personal goals. Always make sure you fully understand all aspects of a plan before making a final decision.