Laddering Annuities to Create an Income Stream

  • Originally published July 26, 2011 , last updated March 15, 2016
Laddering Annuities to Create an Income Stream

The transition from accumulating wealth during your working years to distributing that wealth during retirement is like graduating from checkers to chess. During the wealth distribution phase, as in chess, there are a lot more rules to be aware of and an almost infinite combination of “moves” to choose from. As a result there are a lot more ways to lose.

As an advisor, your clients are looking to you for solutions to help them create a retirement income stream that is stable, safe from market volatility, and that they can’t outlive. There are many different techniques for doing this. The right one depends on the case, the client’s goals, their attitudes toward risk, their need for liquidity and the needs of their family.

About the only constant for all retirees is Social Security. That’s why Senior Market Sales developed our Social Security Timing software that allows advisors to maximize their clients’ Social Security benefits. Once their Social Security is taken care, however, it’s up to you to help them create a safe income stream that fills the gap between their guaranteed income sources (Social Security, defined benefit plans) and their total desired income.

One well-known strategy for creating a steady income stream is annuity laddering or buckets.

If you’ve ever been to a tree farm and noticed how the growth of the trees is staggered — some of the trees are ready to harvest now, while the rest are given time to grow to maturity — then you understand the concept behind annuity laddering. One bucket is created for immediate income, a second bucket is set aside to grow for a pre-determined number of years before being converted to income later on, and a third bucket is set aside to grow until it is needed for income when the second bucket is depleted, and so on.

There are many ways to configure an annuity ladder. Some plans might include three buckets, others four. Generally, though, the first bucket is always funded with a period certain single-premium immediate annuity (SPIA). We usually recommend a fixed indexed annuity (FIA) for the middle bucket(s) with a surrender period that matches the payout period on the SPIA. Once the SPIA has fully paid out (usually five or six years), the FIA is annuitized and begins providing income. The last bucket is usually a somewhat more aggressive allocation, depending on the client’s risk tolerance—usually a variable annuity or a mutual fund portfolio.

Allocating assets in this way eliminates market volatility from the client’s portfolio so they don’t have to worry about things like sequence risk, behavioral risk or reverse dollar-cost averaging when liquidating equities for income. But, if the client uses indexed annuities for the middle allocation, they can still participate in market gains—which will help him or her keep pace with inflation so they don’t outlive their money—without risking their principal.

That’s what makes building a retirement income stream so complex: retirement income is never just about income. It’s about longevity, legacy planning, long-term care planning, taxes, etc. Building a safe income stream means putting together all the different pieces that make up your client’s financial puzzle—and the pieces are different every time.

At Senior Market Sales we’ve developed a number of tools and sales concepts to help you through this process, including Social Security Timing, Total Benefits of Ownership, the RMD Solution and more.

Call one of our annuity marketing experts at 1-877-645-4939 to learn how to implement any of these concepts in your practice.