If you’re like many advisors today, you may be searching for a new strategy that will help you solve the retirement income puzzle for your clients. The answer for many advisors and their clients could be a process called retirement annuity laddering. It involves incremental purchases of annuity income with assets transferred over time from equity and bond investments.
Retirement annuity laddering can help the client achieve their desired level of guaranteed lifetime income more often than other commonly adopted strategies. It can also develop more liquidity to address other retirement needs, such as medical costs, and can help build more long-term wealth.
How it works
Retirement annuity laddering embraces an emerging approach to retirement income that recognizes that wisely structured retirement income accounts should incorporate three asset classes — equity and fixed income investments along with an immediate annuity — not just the traditional two asset classes.
A study conducted by the Income Management Strategies Division of MassMutual compared four methods of managing a retirement income account over 181 time periods starting in 1965. They found that the three strategies involving an income annuity, whether purchased all at once or over time, generally out-performed the stock-and-bond-only strategy. In fact, the investment-only approach — even during historical strong equity and bond markets — ran out of money in 25 percent of the cases when compared with a hypothetical purchase of an immediate annuity upfront.
The winning strategy in the study, however, was one in which the retirement income account was laddered into life-only income annuities. This strategy matched the study’s income goal in 100 percent of the time periods tested and preserved the initial deposit in 93 percent of the periods.