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. An income annuity will provide stability in your retirement years. In that case, you may want to convert some riskier investments to an income annuity to give you a fixed payment for life. Laddering income annuities can help you maintain some control on these payments as we will explain.
Buying a single premium annuity (SPIA) will pay you a fixed income for life. But since the payments are fixed for life, if you buy now, you will lock in relatively low payments form today's low rates. The constant payment amounts (most people opt for monthly payments) depend on the current interest rate and your life expectancy. You lock in higher payments when you purchase your income annuity at a time of higher interest rates and an older age (i.e. shorter life expectancy). As time progresses, interest rates and your life expectancy will change. Your life expectancy will decrease but how interest rates will change is uncertain. By dividing you funds for more than one income annuity, you can hedge your bets on interest rates.
One way you can control your income annuity payments is to ladder them. You do that by taking the total amount of investment you want to set aside for income annuity purchases and mentally divide it up into… say 6 equal parts. You'll consecutively buy an income annuity in each of the next 6 years. Each time you buy, interest rates may be higher or lower so not all of your contracts will be depressed by a low rate period of benefit by a high rate period. The income annuity ladder takes the guess work out of forecasting interest rates.
Alternative, you could purchase 6 deferred annuity contracts today and convert each to an income annuity when you feel the time is best. Those subsequent conversions into income annuity payments can increase because your life expectancy will decrease as you age and hopefully, interest rates will increase too. If rates stay the same, your decreased life expectancy at older ages will give you increased payments anyway.
Laddering is a good idea if interest rates seem historically low as many perceive them to be. With the annuity ladder concept, you'll be converting each part of your funds over a time span that should allow rates to change - hopefully rise.
The longer between each conversion to an income annuity, the more economic benefit you get from being older and decreased life expectancy. And if interest rates stay pretty steady, you should benefit from a laddering approach. More than one income annuity may be just the solution for your retirement income needs.
Note that an income annuity 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. Income annuities should be considered long term investments. Income annuities are insurance products and subject to insurance related fees and expenses.
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