Retirees, Ladder Annuities to Hedge Your Bets
June 4, 2019 by Mary Kane
Handing over a large lump sum to an insurance company in exchange for a stream of guaranteed payments is a hard pill to swallow for many investors. Add in uncertainty about interest rates, which affect annuity payouts, and the decision to buy an immediate annuity becomes more challenging.
A laddering strategy could help ease that decision and potentially boost your guaranteed income. To build a ladder, make smaller immediate-annuity purchases periodically, perhaps every three to five years. You capture higher payouts if interest rates rise. Immediate annuity payout rates are also higher for older investors, so you can capture bigger payouts as you age.
Let’s say you want to use $300,000 to buy guaranteed income. Instead of buying one annuity with that lump sum, you could invest $60,000 per year over a five-year period, starting at age 70. If interest rates rise in that time frame, the new annuities you buy would offer bigger payouts, says Mike Piper, a certified public accountant who is also the author of the Oblivious Investor blog.
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