Creating an Annuity Ladder with Annuity Payments

As an older retiree, you may no longer wish to worry about market fluctuation effects on the segment of your investments you rely on to give you income. Annuity payments can provide stability in your retirement years. In that case, you may want to convert those to an annuity to give you a fixed annuity payment for life. Laddering annuity payments can help you maintain some control on this income stream.

Buying a single premium immediate annuity (SPIA) will pay you a fixed income for life. But the constant payment amounts depend on the current interest rate and your life expectancy in retirement. Payments increase for higher interest rates and a shorter life expectancy. Once you start a contract, your payments are fixed. If you wait and start a contract next year, your age and interest rates will be different, resulting in a different payment amount.

One way you can control your fixed annuity payments is to ladder them. You do that by taking the total amount of investment you want to set aside for 'eventual' annuity purchases and mentally divide it up into… say 5 equal parts. You'll consecutively convert each of those parts every 1, 2, 3, or more years into an immediate annuity. The time between consecutive conversions depends on how long you think you'll live and a belief that interest rates will increase. As an example, if you have $100,000 to devote to obtaining fixed income, for life, you buy an immediate annuity this year and begin receiving annuity payments. Next year, you buy another annuity and start receiving payments and so on, for each of 5 years.

Those subsequent conversions into fixed annuity payments can increase because your life expectancy will decrease and hopefully interest rates will increase too. If rates stay the same, your decreased life expectancy (because you are older when you purchase the later annuities) should give you some increase anyway. Annuity payments will provide long term investment options for you.

Laddering is a good idea if interest rates seem historically low, and you'll be converting each part over a time span that should allow rates to change - hopefully rise. If, on the other hand, interest rates are historically high, then perhaps you may want to annuitize it all right away and lock in high payments.

The longer the time period between each conversion to an immediate fixed annuity you make, the better the effect from your decreased life expectancy. And if interest rates stay pretty steady, you should benefit from a laddering approach. Annuity payments are great for retired people.

Interested in what the fixed annuity rates are now? Check current annuity rates.

Note that immediate annuity payments once annuitized cannot be surrendered for value. Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty. Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments. Annuity payments are insurance products and subject to insurance related fees and expenses.