Can Annuity Laddering Solve the Retirement Income Puzzle?

Implications
Retirement annuity laddering may:

• Give a client more income security than simply investing savings and drawing on them year after year for income
• Provide more flexibility than simply buying an income annuity in a lump sum, which can limit a client’s options if unexpected needs or emergencies arise
• Enable clients to create wealth over time so they have resources at later ages when medical and long term care issues are more likely to occur
• Help smooth out interest rate and market spikes or dips over time in the early years of retirement
• Discipline clients to purchase income annuities at increasingly older ages with the possibility of increased income payout rates (income annuities pay out higher amounts when purchased at older ages)

Perhaps most importantly, the strategy can give retirees the comfort of knowing that they have a plan in place to reach their basic needs and expenses in retirement. Thus, the strategy should appeal to clients who have a gap between the essential expenses they must meet during retirement and the secure sources of lifetime income from Social Security and pensions. Further, these are clients who value flexibility, as well as the potential for long-term liquid funds.

The retirement annuity laddering strategy, however, can pose challenges for advisors in implementation, record-keeping, and ongoing management. For example, coordinating the transfer of savings from mutual funds to the purchase of multiple annuities, managing multiple contracts, and generating multiple income checks for the client could be unappealing.

However, these challenges can be addressed through bundled accounts that are being developed for the advisor market that make the strategy easy to execute while also providing the ability to plan, re-plan, and manage the account. For example, these solutions will feature model mutual fund portfolios into which retirees can invest their qualified retirement savings, then transfer those savings over time into an annuity capable of receiving multiple premiums. The account will generate one income check for the retiree and one statement tracking both the mutual fund portfolios and annuity payouts. Planning software will help the advisor make recommendations to the client on a continuing basis.

Conclusion
At a time when large numbers of retirees are concerned about the security of their incomes, this group is increasingly willing to trade liquidity for guarantees; this could be a mistake. A trade-off of this nature might not be necessary, however, if the client pursues a laddered income annuity strategy. Using this strategy, they can manage both guaranteed income and long-termliquidity. As a result, you can help keep many retirees from making compromises that they simply may not have to make.

Jerome S. Golden is president of the Income Management Strategies Division for MassMutual Financial Group. He can be reached at [email protected].