Strategies for Laddering Annuities

Laddering annuities is a strategy some buyers employ as a way to combat interest rate risk. By splitting up your principal into multiple annuity purchases over time, you lower the risk of locking all of your investment into a lower interest rate. You can also time laddered annuities to create more income streams the older you get, combating inflation and longevity risk.

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  • Written By Christian Simmons, CEPF
    Christian Simmons, CEPF

    Christian Simmons, CEPF

    Financial Writer, Certified Educator in Personal Finance

    Christian Simmons is a financial writer who has worked professionally as a journalist since 2016. As an active member of the Association for Financial Counseling & Planning (AFCPE), Christian prides himself on his ability to break down complex financial topics in ways that Annuity.org readers can easily understand.

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  • Edited By Lamia Chowdhury
    Lamia Chowdhury
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    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial editor at Annuity.org. Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.

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  • Reviewed By Stephen Kates, CFP®
    Stephen Kates, CFP®
    Stephen Kates, CFP®

    Stephen Kates, CFP®

    Principal Financial Analyst for Annuity.org

    Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

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  • Updated: July 9, 2024
  • 3 min read time
  • This page features 2 Cited Research Articles

How Laddering Annuities Works

The concept of laddering annuities may sound confusing, but it is a fairly simple strategy that serves to protect you from some of the common risks people associate with buying annuities.

At its core, laddering essentially refers to buying multiple annuities instead of just one. You build an annuity ladder with these different products.

One of the challenges of purchasing an annuity or any other type of investment is entering the market at an opportune time to maximize your return. Laddering cuts into that risk by giving you multiple entry points. 

If you purchase an annuity with your entire principal at a 3.5% interest rate and, a year later, annuities become available with a 5% interest rate, you are unable to take advantage of the higher rate.

By laddering annuities, you break up your principal into smaller amounts to buy multiple annuities over time. For example, you could buy one smaller annuity at the 3.5% rate and then lock in another at the 5% rate a year later.

Matt Carey, a retirement expert with experience at the U.S. Department of the Treasury, summarizes the advantages as follows: “The main benefits of laddering are spreading interest rate and reinvestment risks over time, and getting short-term liquidity, while taking advantage of longer-term rates.”

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What is your goal for purchasing an annuity?

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Laddering annuities, like any fixed income investment, can provide staggered income, interest and liquidity benefits, as each contract may start and end at different times in different market environments. However, unlike bonds or CDs, many annuities have higher minimums to invest, so laddering annuities across different contracts or different companies may be difficult for those with limited financial resources. It can be beneficial to build an income plan with a financial advisor who can help you optimize your investments and income sources for your own personal situation. 

Different Laddering Strategies

Annuity laddering can take various forms, each serving to mitigate different risks. One common approach is to split your principal and make multiple purchases over time to reduce interest rate risks.

This approach eliminates much of the stress and fear associated with trying to time interest rates, allowing you to benefit from multiple snapshots of the market instead of just one.

Illustration of a woman climbing a latter with the title "Annuity Laddering," under the title reads "Spread out your principal, Stagger your payout dates, and Take advantage of different types of annuities."

Another potential advantage of splitting your principal into multiple annuities is staggering your payout dates. By purchasing multiple annuities over time or with different terms, you can arrange for more income streams to activate as you age. For example, instead of receiving a single guaranteed annuity stream starting at age 75, you could ladder your annuities so that new streams begin at ages 75, 80 and 85.

This strategy helps combat longevity risk by providing more guaranteed income as you age, reducing the likelihood of exhausting your retirement savings.

Laddering annuities by payout date can combat inflation as well by providing you with more income as costs rise over time.

A final way to ladder is to leverage different types of annuities. For example, you can invest a portion of your funds in fixed annuities and another portion in indexed or variable annuities. 

This allows you to diversify your exposure and take advantage of the positive aspects of each type of annuity. By combining the reliability and guaranteed interest income of fixed annuities with the unlimited, albeit volatile, growth potential of variable annuities, you can create potentially more lucrative investment opportunities while maintaining adequate downside protection.

You can also consider buying contracts from a variety of reputable insurance companies. This will provide you with an additional layer of protection in the rare event that an issuer becomes insolvent or encounters other financial problems.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: July 9, 2024
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