laddering annuity investments

Diversify your annuity investments by laddering

Even with the guarantees they provide, people are sometimes hesitant to contribute large sums of money to a single annuity. The good news is that you don’t have to. You can build a customized plan to address your current and future income needs by incorporating a laddering strategy.

Laddering is a process of buying multiple annuities so that you purchase them at different intervals and/or you receive payouts at different intervals.

There are multiple types of laddering strategies:

SPIA laddering. Instead of buying one SPIA today, you can divide that money and purchase one at different durations. You could buy one each year for three or four consecutive years, or you could buy one today, one in five to 10 years and another in 15 years. Each subsequent SPIA will pay out a larger amount because you will be older. So after you’ve purchased all the lifetime income annuities in your laddering strategy, you will have a larger monthly income than you would have had you just bought the one SPIA.

Different income deferrals. Another common strategy is to purchase three or four annuities at once. For example, you could buy a SPIA to receive immediate income, defer another annuity five years, one seven years and another 10 years. Because of the deferral period and your older age when you receive payouts, the deferred annuities will have higher monthly payouts.

Reverse income deferral. In this scenario, you buy a longer-term annuity, say a 10-year deferred annuity, today. Five years later, you purchase a five-year deferred annuity. Five years after that, you buy a SPIA. Your three annuities will thus being paying you income at the same time. You might do this if you don’t need immediate income and you want to maintain some liquid assets.

Period certain laddering. In this scenario, you maximize the annuity payouts by taking them only for a limited period instead of lifetime. For example, you could purchase a SPIA today with a five-year payout, a five-year deferred with another five-year payment and a 10-year deferred with a five-year payout. At the end of those 15 years, you purchase a lifetime payout SPIA. This allows some liquidity as well.

Diversification laddering. Some investors want to allocate some of their money to higher risk, higher returning investments, but don’t want to risk all of their assets. One strategy is to ladder between the different types of annuities: fixed, indexed and variable. The fixed annuities will provide a guaranteed rate of return and payout, the indexed will offer a potential for higher returns but provide a guarantee of not losing principal, and the variable will provide the potential for a greater return but also carry more market risk.

Laddering can provide the following potential benefits:

Maximize your income. Because you’re either deferring income or shortening payout periods on some of your annuities, your overall income will often be greater than if you purchase just one type of annuity.

Delay Social Security benefits. The longer you wait to receive Social Security, the higher your monthly benefits will be. Some laddering scenarios will front load your annuity income, allowing you to delay Social Security payments up until age 70 1/2, the latest you can defer that income.

Maintain some liquidity. One of the downsides of annuities is that they provide little liquidity. If you contribute $100,000 toward an annuity, you’ve essentially lost control of most or all of that money. But if you ladder your purchases, you can maintain control over much of those assets longer. For example, if you split that $100,000 into four annuities bought at intervals, then you still have some to use in case of emergency or other needs.

Plan for inflation. You can ladder your annuity payouts so that they increase every few years to maintain buying power.

Take advantage of increasing interest rates. One of the problems with making a single annuity purchase today is that the current low interest-rate environment limits the annuity’s growth and income potential. At the same time, if you wait, you lose immediate income or tax-deferred growth, and there’s no guarantee rates will increase in the near future. But you can ladder your purchases so that if rates increase, you’ll be able to take advantage.

Spread out your risk between different companies. Annuity guarantees are provided by the issuing insurance company. Though insurance companies are heavily regulated and have their finances monitored, there’s some risk, however slight, of a company defaulting on its obligations. By purchasing annuities from different companies, you can minimize that risk.

The key to making a laddering strategy work is to work with an agent or to use a calculator to ensure the laddering strategy provides a higher income stream than just a single purchase.