by Sean Sparkman

Patricia and Stan were a recently retired couple looking for safer ways to invest their money. Through a friend, they had heard about a financial strategy known as “annuity laddering” and were intrigued by the idea.

Patricia and Stan had saved for retirement for many years. However, they hadn’t had the chance to invest their money in anything other than traditional savings accounts and certificates of deposit. As a result, the couple was interested in discovering more about annuity laddering and how it worked,  They wanted to determine whether it would be a helpful tool in achieving their goal of creating a safe, tax-advantaged income stream.

Stan and Patricia learned that annuity laddering is a popular financial strategy that involves setting up multiple annuities of different maturities to create a steady income stream over time. The idea behind creating an annuity ladder is to stagger the annuities so that a portion matures each year. This method provides a reliable source of income while still allowing some funds to stay invested in the annuities. An annuity ladder can help ensure that retirees have a continual flow of income while diversifying risk in their portfolios.After researching and talking to a safe money and income specialist, the couple decided to try annuity laddering. Following their retirement advisor’s advice, they purchased annuities for different terms, such as three, five, and ten years.

Once they established their annuity ladder, Stan and Patricia decided to simplify their retirement planning by dividing their money into three “buckets.” In the first bucket, they placed short-term investments, such as stocks and bonds. The second bucket held their mid-term investments, such as mutual funds. Bucket number three consisted of long-term assets, including annuities.As the years went by, the couple continued to reinvest their annuities when they matured. They were also careful to diversify their investments, re-balancing their portfolio regularly as their risk tolerance and financial goals changed. Stan and Patricia found that annuity laddering gave them the peace of mind they were looking for in their retirement. By using an annuity ladder, they could ensure their money was safe and secure while also having an opportunity to benefit from the potential growth of their investments.

Since adding annuities to their retirement matrix, Stan and Patricia have realized they can enjoy their retirement without worrying about their money’s safety. Annuity laddering was instrumental  in helping them achieve their financial goals and creating a retirement that is less stressful and more prosperous.

As mentioned, an annuity laddering strategy is one way to structure your annuities to maximize income. It involves building a ladder with multiple annuities, each having different maturity dates and payouts at different points in time. Annuity laddering, however, is not for everyone. While there are definite benefits, there are also some drawbacks to consider when deciding if an annuity laddering strategy is right for you.

Using an annuity ladder has both pros and cons. Here are just a few:

Pro: An annuity ladder creates a reliable income stream.  Having an additional income stream is helpful if you want or need another source of income to supplement a pension or Social Security when you retire. With an annuity laddering strategy, you can have a predictable income stream that lasts a lifetime.

Pro: You experience tax-advantaged growth. An annuity laddering strategy allows your money to grow tax-deferred. This means you won’t have to pay taxes on any of the earnings until you start withdrawing the funds.

Pro: A ladder can give you more flexibility. With an annuity ladder, you can choose when and how to receive your income. This feature is excellent if you must adjust your income stream to match changes in your financial situation.

Pro: An annuity ladder can help in estate planning: A ladder can also be a valuable tool for estate planning purposes. By staggering your annuity investments, you ensure that your heirs receive income from the annuity at different times.

Con: You might have fees. Annuity laddering strategies may sometimes involve additional costs. These fees could reduce the amount of income you receive from the annuity.

Con: You have limited investment options. When you use an annuity ladder, your investment options may be more limited than with other investments. Such limitations mean you cannot invest in the funds or securities you want.

Con: Laddering is a little complicated. Implementation and management of an annuity laddering strategy can be complicated. You will probably need help from a financial advisor or retirement income specialist.

Con: You may experience market risk. Depending on the kinds of annuities used in your ladder, your money may be subject to market risk. Adding risk means that the value of your investment can fluctuate over time, affecting the income you receive from your annuity.  There are ways to avoid this, however.

Sean says: Properly designed, implemented, and managed, an annuity ladder can be a powerful tool for retirees and pre-retirees.  Annuity laddering may be ideal for those seeking a steady source of income and tax-deferred growth. When deciding if an annuity laddering strategy is right for you, it is crucial to understand how an annuity contract works, how to choose the right products to structure an efficient ladder, and the pros and cons of this approach.

It’s always wise to consider the fees, limited investment options, and market risk associated with this, or any other retirement income option.  If you want to discover more about annuity laddering, contact me today, and I will be happy to assist you.