Layin’ It on the Line: What is annuity laddering?
“Laddering is a strategy that spreads out the maturities of different fixed-income vehicles. Laddering is often used to invest in certificates of deposit and bonds but can also be an excellent way to maximize an annuity’s value.” –Lyle Boss
Some seniors hesitate to add an annuity to their portfolios because they fear missing out on investment gains during bull markets.
Although chasing after returns may not be ideal, the desire to do so is understandable because some older Americans believe that they don’t have enough saved to maintain their lifestyles when they stop working and will need to take on more risk. Laddering annuity products is one way to offset less-than-stellar returns and mitigate opportunity costs. Sometimes associated with safe money products such as CDs and bonds, laddering may be a viable strategy for retirees and pre-retirees.
Laddering annuities can also help spread interest rate and reinvestment risk over time, preserve short-term liquidity and help take advantage of longer-term rates. The laddering strategy is a way to increase your chances of earning more money as interest rates tick upward.
For example, you could buy an annuity each year for several years to get the best deal available for the economic conditions that exist at the time of your purchase. These conditions may include interest rates, age at the time of purchase and your age when your payouts start.
Annuity laddering is one method of avoiding locking up all your cash in a low-rate vehicle and missing out on a chance to place that money into better-performing investments. At the same time, you won’t have all your savings chasing after higher returns only to watch those rates sink lower and lower.
There are many ways to build a ladder
Laddering is a highly-individualized tactic. If you’re interested in the annuity laddering concept, you would be wise to partner with an advisor who thoroughly understands safe money products. Your advisor should also be well-versed in constructing annuity ladders specific to clients’ financial goals.
Some standard techniques are used to build a practical and efficient annuity ladder. One way of laddering is spreading out your principal. Let’s say you had $500,000 earmarked for buying annuities. You could spend $100,000 a year for five years to purchase an annuity. This method means you won’t have all your savings tied up in one product and could pursue other investment options.
Another method of constructing a ladder is to buy several fixed-rate annuities with different surrender periods. An annuity’s surrender period is the length of time you must wait before withdrawing funds penalty-free. If you need to withdraw more than what is allowed in the contract, you will have to pay a surrender charge. You can begin withdrawals without penalty at the end of a surrender period as long as you are at least 59.5 years old.
Other methods of creating an annuity ladder include:
- Investing your money in different types of annuities to balance the advantages and disadvantages of each type. Each kind of annuity product has pros and cons. Purchasing several different types may allow you to leverage the pros while offsetting any cons.
- Increasing your payments with staggered payment dates. Besides laddering your annuity purchases, you can also ladder when your payouts start, beginning at age 59 ½. When you begin getting payouts, the older you are, the higher those payments will be. The longer your life expectancy, the less you’ll receive in payouts.
Take it from the Boss: If you are someone who wants principal protection, guaranteed income for life, protection against longevity risk or to leave a legacy for your loved ones, annuities may be an excellent choice. Strategies such as laddering exist, and they can assist you in tapping into the many beneficial aspects of this safe money powerhouse. Plus, you shouldn’t forget that many annuities give you a measure of liquidity by allowing you to withdraw up to 10% of the annuity’s value each year, without penalties. This flexibility is one more reason you should take a closer look at annuity products. Reach out to a safe money and retirement income specialist today. Your advisor can explain the annuity vehicle and its’ ability to provide greater peace of mind when the time comes to retire.
Lyle Boss is a member of Syndicated Columnists, a national organization committed to a fully transparent approach to money management. Boss Financial, 955 Chambers St., Suite 250, Ogden, UT 84403. Telephone: 801-475-9400.