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Annuity Ladder: Does It Create a Higher Payment?

Stan Haithcock
May 27, 2024
Annuity Ladder: Does It Create a Higher Payment?

Hey. Stan The Annuity Man, America's annuity agent, licensed in all 50 states that is including yours. I'm wearing a shirt that reads G-O-A-T, GOAT, greatest of all time. Now, I'm not saying that's me. Calm down. It's not some ego trip. That's what they call Muhammad Ali. Also, this is a group from Sweden, a rock group from Sweden. That's where I got it, but I felt GOAT was good. I've got all these goat things on my wall at my office. I've got goat heads. I don't know. I like goats. That's crazy. So, GOAT, greatest of all time.

Hey. What are we talking about today? Annuity ladders. Do annuity ladders, laddering annuities, create a higher income stream? Maybe. Good question, but let's dig deeper into how to structure annuity ladders, how they work, why you should consider them, why you might do them, and if you are going to do them, how to do them, and some examples of some annuity ladders that I've done recently for clients that they're very, very happy with.


So, we're talking about annuity laddering. Let's talk about laddering for, say, fixed rates. That really doesn't involve income, but I want to cover that anyway. You can do what's called laddering with Multi-Year Guarantee Annuities. Those are the annuity industry's version of a CD. They pay a specific interest rate for a specific period of time that you choose. But let's do a ladder version of that. Let's say you have $300,000 and want to ladder Multi-Year Guarantee Annuities and peel off the interest, which I guess you could call income, but you could peel off that interest and never touch the principal. A ladder for Multi-Year Guarantee Annuities would be a three-year, a five-year, and a seven-year maturity, which means that you have money coming due at year three, year five, and year seven. What you can do is roll that Multi-Year Guarantee Annuity into another one. You can do what's called a 1035 transfer or if it's a non-IRA or a direct transfer. So, it's a non-taxable event, and you can transfer from one annuity to another.

But for annuity laddering, why would you do that? In a MYGA situation with interest rates, we never know where they're going. I know what people say. Well, they keep going lower. At some point, they can't go any lower. I guess they can go negative. But people want to make sure they have money coming due so that they can hopefully catch rising rates. And in a MYGA ladder, where you have, in that example, a three-year, a five-year, and a seven-year duration, hopefully at year three and year five and year seven, you can lock in a higher rate and continue to peel off the interest. Still, you have a higher rate because you have money coming due at different intervals.

Lifetime Income

Let's talk about annuity laddering for income, say lifetime income. Why would you want to do that? Well, remember that when you get a lifetime income stream, when you lock in that contractual guarantee, the primary pricing mechanism is your life expectancy or life expectancies, if it's a joint life setup, at the time you take the payment. The older you are, the higher the payment.

So, why would you do that for income? Well, let me give an example. We had a client call the other day, and they needed money. They were a little bit worried about inflation, but they said, "Okay. We have $400,000. What would be a good annuity ladder?" They needed some income immediately. We did an Immediate Annuity with $100,000 of it. Then we took the second $100,000 and deferred it for one year; for the third $100,000, we deferred for two; and for the fourth $100,000, we deferred for three years. So, each year, they will have an income stream kicking in.

Now, each year, that income stream will be higher. Why? Their life expectancy is shorter, which means the payments are higher, just like your Social Security. The older you are, the higher the payment.

Another way to ladder income, as we talked about in the last example, was they had a lump sum, and they bought four annuities at the same exact time and then deferred when the income stream was going to start. Well, here's another example of doing it. Let's say you don't need the income stream now, okay, or you need a little bit of it now. You could take that same $400,000 and buy an Immediate Annuity every year for four consecutive years. Why would you do that? Well, once again, it's based on your life expectancy at the time of the payment. The payment is going to be primarily priced there. Interest rates play a secondary role.

In this situation, you're buying one every year for four years, $100,000 this year, $100,000 next year, $100,000 the following year, $100,000 the following year. Now, we do know that you're going to be older each year. Nod your head. You'll be older every year. That will increase the payment, but let's hope that interest rates also rise with you. Again, interest rates play a secondary pricing role in combination with you being older, if you do that type of laddering, so you're laddering the purchase over time, then you're going to increase your income. There are no guarantees with that, but it's a good strategy.

Let's dig deeper into some laddering thoughts and strategies. We talked about laddering, so you're buying them all four at the same time. Let's take the $400,000 example we've been using. You bought up all four at the same time and had them starting at different intervals. Or the second example, which was you bought four Immediate Annuities over those four years, $100,000 each. Here's another example.

Mixing up the Ladder

Where you can ladder the purchase date, you can ladder the start date, but you can also ladder the purchase and the start date. I'll give you an example. You could do an Immediate Annuity now. You could do a Deferred Income Annuity next year and defer it for two years. You could do a Deferred Income Annuity the next year, defer it for three years, then another one the next year, defer it for five years, whatever you decide, whatever we come up with contractually, and we'll run all those quotes for you all on our annuity calculators, shopping all carriers to build that ladder and find the highest contractual guarantee.

Now, if you're doing this type of laddering, which is you're mixing up, combining, buying over time, and then deferring different timeframes when they start each year, we'll shop all carriers for the highest contractual guarantee. We won't return to the same carrier and say, "Okay. Let's just buy from that carrier." No, because annuities are commodity products. We will shop every single carrier for the highest contractual guarantee for your specific situation based upon the parameters you tell me. Now, the basics are as follows: What do you want the money to contractually do? And when do you want those contractual guarantees to happen? From that answer, from those answers, we start shopping.

Then, the annuity laddering type process is more of a consultive approach with us. You are on the phone talking about what you're trying to achieve and trying to set up a laddering approach that fits your situation, whether it's just for you or you and a spouse or partner, and also take into effect your income floor overall, when your Social Security's starting, what other income streams you have coming in, and then hoping and trying to factor in if inflation hits in the future, we're going to have intervals of income starting at future dates. You can never time inflation. No one knows when inflation's going to hit. No one has a product that addresses inflation. There's not an annuity product that perfectly addresses inflation.

Cost of Living Adjustment

Speaking of inflation, you can attach what's called a Cost-of-Living Adjustment rider, an increase to the income stream annually. I know that sounds fantastic in principle, but understand that the annuity company does not give that away. In fact, they lower the payment to make up for that increase. So, in other words, if you bought the same annuity without a COLAs here and with a COLAs here, they will start it at a lower rate just to show you visually how that works. But with all of those strategies I just told you, which is buying all four annuities at once with different start dates or buying annuities over time, over the four years, or combining the two, buying annuities over the four years with different start dates, you could even throw in with a couple of those tranches, a couple of those annuities; you could add in a Cost of Living Adjustment increase as well.

Bottom line, it's customizable. Bottom line, we have to have a conversation. Bottom line is you're going to talk to me or somebody, an expert on my team. Even if you don't speak to me, I will sign off on the decision. My recommendation's going to be all over it. Still, we're going to go over your specific situation, and I'm going to make sure that we're dotting every I and crossing every T to make sure we find the highest contractual guarantee and put together a ladder that's customizable for your situation.

Hey. I've done another video called How to Create Your Own Pension Plan that coincides with this one. This is a more customized approach with annuity laddering. A lot of people are concerned with interest rate levels currently. And they're always trying to time things. You can't time things. You just have to find the best contractual guarantee and be satisfied with that. And we'll do the best we can to find those, shopping all carriers on our proprietary annuity calculators. We go into it blindly, not looking at anything but the highest number we can get for your situation.

Before you leave, remember that you can download all my annuity owner's manuals for free. I've written six that you have to have. Before you buy anything, you need to understand the product. Thank you for joining me, and I'll see you next time on the following Stan The Annuity Man blog.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.

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