The Advantages of an Annuity Laddering Strategy

The traditional narrative for retirement goes something like "Stay invested, follow the 4% rule, and hope for the best." As interest rate fluctuations and market volatility become more frequent, security and smart planning become indispensable for retirees.

There is an alternative path to retirement that doesn’t rely on bonds, CDs, dividend stocks working out in your favor. It’s a structured, yet flexible approach that grants you more control and a consistent long-term income stream. It’s called ‘Annuity Laddering.’

How Does Annuity Laddering Work?

First, it’s important to note that ‘annuity laddering’ is not a product; annuities are products, while laddering is a strategy that utilizes those products.

Think of annuity laddering as building your own personalized, private pension with automatic raises. Instead of putting all your retirement savings into one lump sum payment, you purchase multiple annuities at different points throughout your life.

An example of laddering at work is as follows:

1. You start with one annuity that pays immediately.

2. 5 years later, you start another annuity.

3. 10 years later, you start another annuity, and so on.

This creates a staggered ‘ladder’ of income at different starting dates, with each ‘rung’ of income keeping you ahead of market forces that would otherwise disrupt your retirement plan.

The Advantage Over Traditional Methods

Tying up your money in traditional methods involving bonds, CDs, or dividend portfolios tend to not yield as much and struggle with keeping ahead of inflation, which often requires withdrawing principal to sustain income.

On the other hand, where annuity laddering outperforms traditional methods is how much less capital is actually required. In many cases, it takes only 50-60% of a retirement portfolio- sometimes even less- to fully solve 100% of lifetime income needs.

Here’s how it works: a $1,000,000 portfolio following the 4% withdrawal rule would produce $40,000 per year. The same million dollars placed into a properly structured laddered lifetime annuity (for a 66-year-old at rates for the time of this article) can produce approximately $75,000 per year, an increase of nearly 88%.

This is made possible by pooling longevity risk across large groups of people, and incorporating mortality credits- a form of return that is simply unavailable in any market-based investment. The result is dramatically higher guaranteed income per dollar of capital.

The Benefits of Annuity Laddering

If ‘more retirement income for less capital’ wasn’t a convincing argument, there are a number of other reasons annuity laddering might be a better option for your retirement plan. You get more freedom, more security, and a way around the costs of inflation and taxes.

Here’s what you get out of a properly executed annuity laddering strategy:

Financial Freedom

An annuity ladder, by design, lets you set the terms of your retirement. You can decide in advance when new income streams come into play, and each time you benefit from deferred compound growth and age-related factors built into the annuities.

Another benefit of laddering that grants you more freedom is removing income production from your portfolio entirely. Once your income needs are guaranteed, you don’t have to defensively manage your remaining portfolio assets for fear of short-term market volatility. There’s no need for worry over big decisions, you can adjust future income based on changing needs, and in many cases have liquidity options available including partial access.

Financial Security

Annuities return guaranteed income, meaning payments are locked in by contracts backed by the claims-paying ability of highly regulated insurance companies. That means whether the market dips or crashes, your retirement paycheck doesn't change.

In a way, annuity laddering can leverage the "growth" portion of your portfolio, helping you ride out market downturns without forcing you to sell during a decline. You have the time to wait for recovery because your income doesn't depend on your portfolio's short-term market performance.

Protection Against Inflation

One flaw in traditional approaches is the problem of inflation, weakening the purchasing power of a fixed retirement income. Annuity laddering is a great solution to this problem, not through a fixed COLA rider or an index-linked adjustment, but by its own staggered activations.

Each successive rung of the ladder pays at a later time. This means more time in deferral, more growth, and a higher payout as you get older. This offsets the rate of inflation that would have likely degraded earlier income levels.

Tax Deferral

The money put into a deferred annuity grows without annual tax drag, compounding more efficiently than other taxable investments.

The laddering structure also enables more deliberate drawdown management. Instead of large withdrawals from a single source that could push income into higher tax brackets, retirees can spread income across multiple annuity streams that begin at different times, reducing the hit to your finances from taxes. 

This staggered approach allows for more precise management of annual taxable income, creating opportunities to optimize tax brackets, manage Medicare premium thresholds, and time Roth conversions strategically throughout retirement.

Dodging the IRA Tax Trap

Under the SECURE Act, non-spouse beneficiaries are forced to drain inherited IRAs within 10 years, often resulting in a massive tax bill. Annuity laddering provides a convenient way around this problem.

By laddering lifetime income annuities inside your IRA, you can "spend down" those taxable assets during your lifetime. While the annuity provides your guaranteed floor, you can redirect other freed-up capital into Roth IRAs or after-tax accounts. You effectively turn a future tax liability into a tax-free legacy for your beneficiaries.

Upward on the Ladder to a Secure Retirement

All of this comes down to the question of what makes more sense:

• accumulating retirement income with the returns on investments, assuming that they will not be negatively impacted by market downturns or inflation.

• planning and executing a strategy to secure guaranteed income that doesn’t make you vulnerable to market failures or tax penalties.

When thinking of “retirement income”, security should always be the first priority; you want to be able to rest easy throughout your retirement years without any concerns about your finances in the moment or the future. 

For achieving full security, you need a retirement plan with a firm foundation. That is exactly what annuity laddering can provide: a layered system of income, growth, and protection that is guaranteed to last for as long as you need it to.

To find out how annuity laddering can help with your retirement plan, reach out to National Annuity Educators.