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:

1. 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.
2. The approach helps address credit risk by spreading a larger annuity purchase among various insurers.
3. Locking-in guaranteed income through annuities helps to address market risk and sequence of returns risk.
4. The approach helps to maintain more liquidity than would otherwise be available through a single annuity purchase.
5. Funds not used to purchase annuities may be used more aggressively once the ladder is complete.

A recent study from the Wharton School suggests that an annuity ladder might be more helpful than conventional investment approaches in meeting retirement objectives:

In a recent study entitled Variable Payout Annuities and Dynamic Portfolio Choice in Retirement, Olivia Mitchell, a professor of insurance and risk management at the Wharton School of the University of Pennsylvania, argues that by laddering the purchase of annuities-buying annuities gradually over time, while keeping the rest of a portfolio invested in a mix of equities and bonds-people can substantially increase the likelihood of meeting their retirement income goal.

The views expressed in the Wharton study are supported by other industry experts:

"Annuity laddering using payout annuities is particularly effective relative to investment-based strategies," says Chris Rahm, leader of the retirement income practice at Ernst & Young. Rahm notes that with the annuities acting as a client's most conservative investment, "if you were an aggressive advisor, you could argue that the client could move more invested assets into equities."

Source: Financial Planning

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