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Retirement Annuity Ladder to Hedge Interest Rate Fluctuations

Posted on May 29, 2011 by bobrichards

The most important advantage offered by a retirement annuity is the certain income and the consequent security. You can always fall back on these known monthly payouts, especially if results from other investments are reduced - when interest rates fall or the stock market tanks. The payments from retirement annuities always remain steady.

However, there are many potential disadvantages. If you purchase your retirement annuity when interest rates are down, the monthly annuity payments will be smaller and locked in for the entire duration of the annuity contract. Can this case be rectified?

One needs to know that the retirement annuity is irrevocable as soon as payments commence. (Some companies permit cancellation after the annuity payments have started. This specific 'commutation' is expensive). So, you need to understand the ultimate way to maximize benefits from an retirement annuity offer in the face of interest rates you cannot forecast.

The amount of regular monthly annuity payments on a life annuity will vary depending on the amount invested, your age, your gender, prevailing interest rates and the specific company's competitive situation. Different companies will offer significantly diverse payments for the same sum invested. Consequently, it is prudent to study offers from many highly rated annuity companies before selecting one.

Sometimes, even if you are ready to purchase a retirement annuity, historically low interest rates might be a disincentive (such as in October 2011). In these instances you could ladder your annuity investment by only investing part of your principal and waiting for hopefully higher rates later to invest more. This can be done by splitting up the sum set aside for that retirement annuity into several equal portions.

Purchase a retirement annuity using one part of your amount of money at today's rates. Continue doing this one annually over 4 or 5 years or any time interest rates jump.

Eventually you will get several checks each month. Their total hopefully more than if the entire amount were invested in just the single annuity when rates are down. However, in case interest rates decline in the future, this laddering may result in a lower rate of return. The particular unpredictability of interest rates adds a part of risk to this investment method. But since you cannot forecast rates, laddering retirement annuities is the only way to hedge.

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    Filed Under: Annuities for Income

    About bobrichards

    Bob Richards
    Editor | Involved in Various Marketing Positions within the Financial Services Industry

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