Ladder Annuities for Control over Interest Rate Fluctuations

11 Sep

One major advantage of an immediate fixed annuity is the security of a guaranteed income. You can count on those regular monthly payments. If returns on other investments diminish–because of a fall in interest rates or a stock market slump–your annuity payments remain steady.

Offsetting this advantage is if interest rates are down when you purchase your annuity, your monthly payments will be less and may not keep up as easily with inflation. Is there a way to offset this situation?

First, realize that once your immediate annuity begins, it is irrevocable. You cannot change your mind; there’s no lump-sum repayment provision (there are a few companies that offer commutation–the ability to get your principal back at a discount). So, shop for the best deal when you buy.

The amount of your monthly annuity check is based on the size of your investment, your age, and what the insurance company estimates it will earn on their contract with you. But realize, too, that the monthly payment on the same size investment can vary significantly from company to company. Get several different proposals to ensure you are getting a good deal.  Do not let anyone rush you into making a purchase. The consequences are permanent. Check out a company’s rating from Standard & Poor or A.M. Best & Company. You will be counting on those monthly payments for quite a while.

Now, if you are ready to buy an annuity but interest rates seem historically low, you might consider laddering your annuity investment to take advantage of hopefully higher interest rates in the future.  To do this, simply take the total amount of money you have set aside for purchasing an annuity and divide it evenly into several amounts.  Purchase an annuity with the first amount now according to prevailing interest rates and the best deal you can find. Then do the same with the remaining amounts spread out over the next five or six years.  This is referred to as “laddering annuities” or an “annuity ladder.” Hopefully interest rates will ratchet up for your later purchases. 

You can in fact purchase all of the annuities today to create your annuity ladder.  The first one, which will start the payments immediately and the other will be deferred annuities.  After the first year, you will convert deferred annuity “A” into an immediate annuity (i.e. you will annuitize the contract).  After 2 years, you will do the same with annuity “B” and so on.  Or, maybe you do this at 5 year intervals pictured like this

 

 

 

 

 

Immediate

 

Tax-Deferred Legs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leg #1

 

Leg #2

 

Leg #3

 

Leg #4

Age

 

Years

 

 

 

 

 

 

 

 

60

 

Initial Investment

 

$33,495

 

$22,276

 

$14,815

 

$29,414

65

 

Year 5

 

0

 

 

$33,495

 

$22,276

 

$44,229

70

 

Year 10

 

 

 

0

 

 

$33,495

 

$66,505

75

 

Year 15

 

 

 

 

 

0

 

 

$100,000

 

 

Monthly Income

 

$604.73

 

 $604.73

 

$604.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

$100,000

You could be better off with a higher average rate among them than if you had purchased one annuity when interest rates were low.  Of course, if interest rates seem historically high today, you’re best of by getting all of your funds into an immediate annuity and locking in a high lifetime payment.

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