Financial professionals often help clients "ladder" bonds and bank certificates of deposit. Some may not realize that clients can do the same thing with annuities.
Laddering annuities can help clients earn more income and gain flexibility.
How It Works
Laddering involves allocating some or all of a client's assets to a series of bonds or CDs with different maturities, rather than to just one or two bonds or CDs.
In normal circumstances, the longer the money will be tied up to maturity, the higher the interest rate will be.
For example, a laddered investment in bonds might include bonds with maturities of one, three and five years.
Clients don't know when they buy bonds what rates will be like when the bonds mature. Laddering helps mitigate reinvestment-rate risk.
Multi-year guaranteed annuities (MYGAs) are similar to CDs, but they frequently offer higher rates than CDs.
Just as laddering can protect a bondholder against reinvestment-rate risk, laddering MYGAs can protect a MYGA owner against the risk that crediting rates will be lower than expected after a contract's rate guarantee period ends.
The Income Starting Date
Unlike typical corporate pension plans, which often have rigid payout options, laddered annuities can give a client the flexibility of choosing when to start collecting lifetime income.
While some retirees plan to stop working at a certain age and immediately stop earning wages, others will shift from full-time employment to a "hybrid retirement" strategy.
Those clients might continue to collect wages for part-time work or fees for consulting services.
Uncertainty about what earned income will be after a client leaves full-time employment can present a challenge when the available sources of guaranteed income require an "all or nothing" election.
Owning multiple annuity contracts can help a client compensate for a relatively gradual decline in income.
Say a client, John Doe, is scaling down his work schedule over five years.
He could offset the drop in earnings by starting to collect income from one annuity immediately at retirement, collecting income from a second annuity after three years and collecting income from a third annuity after five years.
If putting off collecting income from some of the annuities increases the payout available from those annuities, laddering can also help a client address the effects of inflation.
Tim Davis is president of Davis Capital Corp. He holds the Retirement Income Certified Professional, Chartered Life Underwriter, Certified Financial Fiduciary and Certified Employee Benefit Specialist professional designations.
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