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What is Annuity Laddering?

Annuity Laddering

If you've been thinking about buying an annuity recently, you must be used to seeing your hopes for higher interest rates dashed. Even the best economists have been wrong in their forecasts lately, predicting rates to rise, then forced to announce further delays as new economic data emerges.

With daily predictions that "rates will rise," always a year away, what should you do now? There is an approach you can take that helps overcome the interest rate uncertainties in stages. It’s called an annuity ladder.

What exactly is an annuity ladder?

·      An annuity ladder simply means to purchase a series of annuities over time. Instead of spending your lump sum on one annuity that locks you into one rate, consider splitting your premium across several smaller annuities over time. Perhaps you buy one annuity every year for five years, or one annuity every two years over the next 10 years.

·      With an annuity ladder, you're kind of betting on both sides, since nobody knows whether interest rates are headed up or down. Even the best financial analysts can only make well-reasoned guesses, and, as you may have noticed, their opinions vary widely.

·      Annuity laddering also provides a psychological benefit. You don’t have to worry as much that interest rates will spike over the next few years and you are locked into a 7 or 10 year contract

·      Annuity laddering works best when applied to deferred multiyear guarantee annuities

Deferred multiyear annuity ladder

·        A deferred multiyear annuity is similar in some ways to a certificate of deposit without FDIC protection. Let's say you have $300,000 to invest at a fixed interest rate and you've determined that a multiyear annuity makes financial sense.

·      Instead of buying one large annuity with the whole $300,000, consider purchasing several smaller ones each with a different maturity date. This way you can rollover each one or convert it to income as it matures.

·      How would you do this? You'd divide the $300,000 premium by three and invest $100,000 each in three annuities with staggered maturity dates: 3-year, 5 year, and 7-year

·      Then at the end of three years, when your first annuity matures, you can roll it over into a higher-yielding contract (if rates have moved up). Hopefully, you can do the same with the other three annuities as each matures.

·      This also leaves you with more liquidity as you should never be more than 2 or 3 years from an annuity in the ladder from maturing.