Annuity Ladder Definition | Annuity Digest

Annuity Ladder

If you are apprehensive about putting a whole lot of money into a single annuity purchase, you can stagger your purchases over a period of time. For example, you could buy an annuity every year for the next 10, or one every three years for the next 12. There are no hard and fast rules. You can also buy from a different insurer each time, which is a smart way to spread the risk and reduce credit risk. That way, you’re not left high and dry when one of the insurers goes belly-up. Another benefit is that you’re not locked to a single interest rate. If interest rates are low when you buy, your annuity payout may not be as big as you like. Even if you don’t know which way interest rates are going (and who does?), you hedge your bets by laddering.

Consider Annuity Ladders to Meet Retirement Objectives

An annuity ladder basically involves spreading annuity purchases over time. For example, instead of taking $100,000 to purchase an immediate annuity today, a person might purchase five different $20,000 annuities over a seven year period. This approach has a number of advantages: The approach helps avoid the risk of purchasing an annuity at a less then optimal time--for example when interest rates are very low. In this sense, it is somewhat similar to dollar cost averaging when investing . The...

Glossary:

Sequence of Returns Risk

Credit Risk

Interest Rates

Annuity Ladder

Dollar Cost Averaging