One measure by which to judge the crafting of an insurance or financial plan is flexibility: the ability to adjust the plan to meet the changing retirement needs of the client. When considering annuities for the plan, advisors say there may be no better way to achieve that flexibility than to use a laddering strategy.

“Once it’s determined that an annuity is an appropriate product for the client, then the idea of using more than one just adds to a plan’s flexibility,” says Chip Williams, president of Williams Financial Services Inc., Coral Springs, Fla. “It provides the leeway needed to adapt to changed financial circumstances down the road.”

Sources say laddering–the purchase of multiple annuities that annuitize at different times during an individual’s retirement years–is ideal in part because it allows clients to meet unexpected liquidity needs. An individual can, for example, dip into funds invested in a second, third or fourth annuity that annuitize at staggered 5-year intervals while deriving current income from an immediate annuity.

Deferred annuities that are part of a laddering approach can also stay invested in the equities market after the customer retires, providing potentially greater income in future years than alternative approaches–including approaches relying solely on bonds and equities.

A study by Springfield, Mass.-based MassMutual tested 4 strategies for managing a retirement income account over 181 time periods between 1965 and 2006. It found that the 3 strategies involving an income annuity, whether purchased all at once or over time, generally outperformed the stock- and bond-only strategy, regardless of market conditions.

In that study, the investment-only approach, even during strong equity and bond markets, ran out of money in 25% of cases. In contrast, the strategy of laddering into a life annuity matched the income goal in 100% of cases tested.

“The reason is that when you buy an income annuity, you’re building security, but you’re using less of your capital to generate the income you need,” says Jerry Golden, president of MassMutual’s Income Management Strategies Division. “That means more of your capital is available to be invested long-term and to enjoy the returns of the market.

“Also, when you ladder, you’re selling mutual funds, and buying annuity income, at different points in time,” he adds. “So you’re enjoying the effect of dollar-cost averaging.

“And finally, you’re buying the income annuity at advanced ages, so you’re getting more income at the later ages,” Golden says.

Of the hypothetical strategies tested in the MassMutual survey, one called for leaving 50% of funds invested in equities and 50% in bonds. In the second scenario, one-third of mutual funds are sold to purchase an income annuity. In scenarios 3 and 4, the client ladders into, respectively, a life annuity and a life annuity with 20-year period certain.

While the stock- and bond-only strategy preserved the original deposit at the end of each period tested in 45% of the cases, the laddered life annuity strategy preserved the original deposit in 93% of the cases. For the 45% of cases in which the stock- and bond-only strategy preserved the original deposit, the average liquid value of the laddered life annuity strategy was 66% higher.

In every case, the laddered life annuity strategy matched the income of a life and 20-year certain annuity (which offered no liquidity) using 100% of the deposit. The laddered approach, on average, more than tripled the original deposit at the end of the period. Also, in contrast to a strategy of living off interest and preserving the original deposit, the laddered life annuity strategy matched the income in every case and on average resulted in more than 5 times the original deposit.

Annuity laddering is advantageous not only because it can yield a superior return on investment. Williams says the technique’s flexibility and tax benefits are also prized by advisors.

To illustrate, Williams cites 2 hypothetical clients. Client A invests $200,000 in a single variable annuity that enjoys a $100,000 gain in value; while Client B divvies up his $200,000 among 4 VAs, 3 of which experience a collective gain in value of $100,000 while the 4th stays flat.

In the event Client A requires an emergency distribution of $25,000 on top of a 4% annually permitted payout ($7,000), the total withdrawn ($33,000) will count against market gains and be subject to a capital gain tax. But, says Williams, Client B can take the same distribution against the 4th VA in his portfolio that experienced no rise in value and thus pay no tax.

Excess withdrawals can also reduce any living benefits guarantees attached to the contract, adds Williams. Referring again to Client A’s single VA, he points out that a withdrawal of $15,000 above an annually permitted 5% distribution will be applied against guaranteed minimum withdrawal, accumulation or income benefits employing a pro rata formula commonly used among carriers. But Client B can preserve the full guarantee on the original investment (as well as any gains) by spreading the excess distributions among his 4 annuities, limiting the withdrawal made against each contract to the annual penalty-free maximum.

“With laddering annuities, you gain flexibility and control taxes,” says Williams. “Whatever the scenario, the client is better off. Also, when laddering, I’ll generally recommend that the client attach different riders to each contract, such as a guarantee that yields a higher payout rate for one annuity or a greater death benefit for another.”

Securing the benefits of laddering doesn’t require purchasing multiple annuities. Rick Bonifant, president of Bonifant Financial Group, Bryantown, Md., says many clients prefer the simplicity of vehicles that systematically reallocate assets invested in managed stock-and-bond portfolios to purchase increments of annuity income over time. MassMutual’s Retirement Management Account, a solution Bonifant uses, does just that.

With the RMA, Bonifant says, clients can automate the laddering process, selecting the amounts, payout rates and timing of future annuity purchases upon opening an account. If, after the account starts paying income, clients decide they don’t need the guaranteed income, they can reinvest funds back into a bond-and-equities portfolio.

“Basically, you can stop and start, buy annuity income immediately or over time and reinvest in the model portfolio,” says Bonifant. The simplicity makes it superior to the traditional laddering approach, he contends.

Even so, Bonifant acknowledges that clients who don’t wish to invest their retirement savings in such a managed account likely won’t take to the solution. It’s the clients who are receptive to a mixed portfolio of equities, bonds and annuities that are receptive to the product, he says.

For many customers, however, the most urgent question is not how to ladder annuity purchases, but whether and when use of the technique is appropriate. Golden says younger boomers who are still accumulating funds for retirement would do well to stay invested in mutual funds or securities, delaying purchase of annuities until they are closer to retirement.