Annuity laddering is a strategy in which someone buys or staggers several annuity contracts over some years. The goal is to maximize the benefits that you receive from the annuities, like guaranteed income streams, while managing risks such as interest rate risk.
Strategies for laddering annuities can give you more flexibility in your retirement plan. You can crack down on potential downsides, such as locking yourself into a reduced annuity payout while interest rates are low. That can be a helpful guard against inflation.
When you buy multiple annuities and then wait for some years to turn some of those contracts on, that gives them time for their contractual benefits to grow. You can have more higher lifetime income, or higher interest earnings for your money, as a result of this drawn-out strategy.
Depending on your situation, you may want to tap more than one annuity as part of a laddering strategy in order to maximize your benefits over time. Here are a few different laddering strategies that you can use with annuities to achieve this goal.
Laddering Strategy #1 – Bridging Your Income
Say that you want to wait until age 70 to start drawing on Social Security. Then you could use an annuity to start paying you income to bridge the gap between the time you retire and age 70.
For example, let’s assume that someone is 65 years old and plans to retire this year. Then they could put $100,000 into an annuity and have it pay out over the next five years. The guaranteed income stream from the annuity would cover their living expenses until they reached age 70.
Then our retiree could choose to buy another annuity that will pay them a guaranteed stream of income, starting at age 70 for the rest of their life.
This “income bridge” strategy gives time for your Social Security benefit to grow while you have reliable income for your monthly expenses – and then maximize income at 70.
Laddering Strategy #2 – Staggering Your Contracts
Another laddering strategy is staggering your annuity contracts over time. In this case, you would buy a series of annuities that will start paying out at progressively later dates. As a result, your income will increase over time in order to keep pace with inflation.
For example, you could put $500,000 into five $100,000 contracts that will start paying you income after one, five, seven, 10, and 15 years respectively.
The longer-term annuities will have more time to grow and accumulate interest. Meanwhile, the shorter contracts can give you some income immediately.
You could start by putting $100,000 into an immediate annuity and then the rest into the longer-term contracts. Or you could even keep your money liquid and wait to buy another $100,000 immediate annuity after five years. That way you might get a higher payout if interest rates rise during that time.
Of course, this isn’t a guarantee that interest rates might be higher. But whether you buy a deferred annuity and give it time for the income benefit to grow – or you buy an immediate annuity at a later year – you have flexibility and options.
If you would like to receive annuity income more often than on a monthly basis, then there can also be flexibility here. You could buy several annuity contracts with different payment dates so that you get your money on a bi-weekly or even weekly basis.
For example, you could put $50,000 into four separate contracts that each pay monthly, but on a different day of the month. This way you could get four separate checks each month to carry you through until the cycle starts over again.
Laddering Strategy #3 – Liquid Contracts
You may also want to stagger your annuity contracts so that you have some liquid money coming due on a regular basis. If this is what you want, then check out fixed annuities and fixed index annuities with shorter contract terms.
Fixed annuities can have maturity periods as short as three years in some cases, and most of them will mature in five to seven years. You can also find some fixed index annuity contracts with shorter-length terms like these as well. Ask your financial professional about what your options may look like for this.
If you have a series of staggered annuity maturities, then you could have new money to work with every year or two, depending upon how you stagger them. This can allow you to take advantage of a rising interest rate environment and enjoy possibly better rates for your money over time.
Laddering Strategy #4 – Tap Different Types of Contracts
You can also stagger your annuity money into different types of annuities, such as fixed, fixed index, and variable annuities. For example, you could put some of your longer-term money into one or more fixed index annuities.
While their interest earnings aren’t guaranteed like with fixed annuities, they tend to earn more interest than fixed annuities over time. If you are okay with growth potential not being guaranteed in this sense, then a fixed index annuity can bring nice compounding growth opportunities for your money.
Variable annuities allow you to have the highest growth potential of all annuity types for your money. However, they also have market risk, which brings up risk of loss of your principal. Fixed annuities can bring predictable growth for your money by giving you a guaranteed interest rate for your savings each year.
These are just some of the ways that you can use annuities in laddering strategies to reach your financial goals. Whether for income, growth, or something else, there are many ways that laddering strategies can be tailored for you.
Consult with your financial professional about annuity laddering strategies and whether they might be right for you. If you are looking for a financial professional to walk you through these options, no sweat. Many experienced and independent financial professionals are available at SafeMoney.com to assist you.
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