Ladder Annuities for Potentially More Income

24 Feb

If you’re 70 and living off your income from a Certificate of Deposit (CD) you may find it more advantageous to switch to a laddered annuities for more income. Let’s consider how.

A $100,000 5yr-CD paying  5% gives you an annual taxable income of $5,000. At a 25% income tax rate, you’re left with $3,500. Of course you’re also left with your $100,000 too.

But if you need more income, and you don’t want to get locked into any current income rate, you may consider investing your $100,000 into a set of annuities. Laddering these (i.e. stagger when begins its income stream) allows you to follow income rates if they go up (or down).

Laddered Annuities Option
We’ll assume you’re 70; and with your $100,000, you buy 5 annuities each for a single premium of $20,000. The first will be a Single Premium Immediate Annuity (SPIA) for a 5 year payout term. The four others will be Single Premium Deferred Annuities (SPDA) geared to produce a payout after 5, 10, 15, and 20 years respectively. Let’s consider what sort of income you’d generate in this case. Refer to the table. These are hypothetical examples and all fees have been ignored (immediate annuities usually don’t have fees as they are already included in the income stream).

You can see under the SPIA 5 year certain payout  that you’d receive $4248 income giving you an after tax (25% income tax rate) of $4,186. This beats out your CD net income, although all the money in this SPIA is gone after 5 years. But, you’re still accumulating savings in all the other SPDAs.

I’ve assigned a hypothetical accumulation interest rate of just 4.5% – safely under the CD’s rate. And I’ve kept the rate constant over time as a neutral scenario. Increasing (decreasing) rates would affect both the annuities and the CDs together.

You can see what the (neutral) projected values of the 5, 10, 15, and 20 year SPDAs would be when they become due as you turn 75, 80, 85, and 90 respectively. Along with these values are the projected income they’d produce  (based on current payouts) for both a 5 year term payout and for your remaining lifetime – if you chose the latter.

As you approach age 85, you may decide to choose a lifetime income from the next SPDA, and leave the remaining SPDA as a legacy for your beneficiary.

By annuitizing your assets, you have more income to live on.  You can use the fixed annuity calculators to see the figures for yourself.

Note: With tax deferred investments, income taxes may be due upon withdrawal of funds, withdrawals prior to age 59½ are subject to a 10% penalty, the rate of return above is hypothetical and does not reflect the return of a particular investment and the values shown should not be used to project future income. This table refers to hypothetical investments only and is not indicative of a guarantee of any particular investment results. There are no fees or expenses in the annuity illustrated, but if they were present, they would reduce performance.  Earnings withdrawn from an annuity are taxed as ordinary income.  Note that many differences exist between CDs and fixed annuities such as the FDIC insurance which applies to CDs but not to annuities or bonds, the fact that annuities may have surrender charges or expenses associated with them, while CDs may have early withdrawal penalties and the fact that the term of annuities often exceeds the terms of CDs. While CDs are FDIC-insured, annuities are guaranteed by the claims paying ability of the insurance company. Additionally, the purchase of annuities may incur commission and annuities may not be as liquid as CDs. Annuities, once annuitized, cannot be surrendered for value.

Laddered Annuity Asset

SPIA

5 yr Certain

Fixed or indexed SPDA 1

Fixed or Indexed SPDA 2

Fixed or Indexed SPDA 3

Fixed or Indexed SPDA 4

Accumulation period (yrs)

0

5

10

15

20

Premium Amount

$20,000

$20,000

$20,000

$20,000

$20,000

Assumed Interest Rate

N/A

4.5%

4.5%

4.5%

4.5%

Current Annual Income

$4248

$900

$900

$900

$900

Current Taxable Income

$248

0

0

0

0

Net annual income @25% tax rate

$4186

$900

$900

$900

$900

Future Value at end of accumulation period

0

$24,924

$31,059

$38,706

$48,234

Estimated annual income for

5 year term payout

N/A

$5,292

$6,600

$8,220

$10,248

Estimated annual income for

lifetime payout

N/A

$2,171

$4,116

$6,348

$9,900

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