Lifetime Income Laddering

05/29/2012 7:45 am EST


Stan The Annuity Man

Annuity Expert, Stan The Annuity Man

Just like with bonds or similar fixed-income investments, you can enter into annuities on a ladder, which allows you to take advantage if rates rise in the near future, writes Stan Haithcock of

A current question that is asked of me on a daily basis is, “Should I buy an annuity at these low interest-rate levels?”

Most annuity carriers base their pricing on the ten-year Treasury Rate, which is now hovering below 2%. Because of this, and the unknown future of when rates will rise, I am advising my clients to “ladder” their lifetime income streams just like they do with bond ladders or CD ladders.

My motto for considering annuities is: “Buy annuities for what they will do (contractual guarantees), not what they might do (hypothetical returns). This is the reason that I prefer using fixed annuities instead of variable annuities. Always plan for the worst-case scenario, which are the contractual guarantees that annuities can provide.

If you think about “Lifetime Income Laddering,” it makes sense. You buy a lifetime income product on an annual or biannual basis, not worrying about where rates are. With this strategy, you are not timing rates, but are taking advantage of any rise due to the disciplined approach.

Also, because lifetime income stream annuity payouts are based on your life expectancy, your payouts will increase because you are older each year. The older you are, the less your life expectancy, thus the higher the payout.

Lifetime Income Laddering can be implemented with both immediate and deferred annuities, but the purest form is with immediate income annuities or Single Premium Immediate Annuities (SPIAs). Let’s look at how Lifetime Income Laddering works using Single Premium Immediate Annuities.

SPIAs are commodity “transfer of risk” income products that function exactly like a pension payment. You give a lump-sum amount to the insurance company, and that company agrees to pay you (or you and your spouse) for the rest of your life, regardless of how long you live.

That is the “transfer of risk” aspect of this product. The insurance company is basing their payment on your life expectancy at the time of the contract, and you are betting that you will live longer than that.

In the way that I structure SPIAs for my clients, 100% of the money goes to the family. The insurance company keeps none of the money. That’s a common fallacy with SPIAs. I represent over 100 companies and quote from all of them to find the highest payout with the best companies.

SPIA quotes are like the price of a gallon of milk because the quote can only be locked in over a seven- to ten-day period. After that, you have to get another quote.

The Lifetime Income Ladder strategy is very simple. It can work within an IRA or in a non-IRA account. Let’s say you are 70, have $500,000 in a non-IRA account, and are looking to “transfer the risk” and create a lifetime income stream.

This is an example, so don’t hold me to these numbers. The wildcard is if rates move up, the quotes would definitely reflect a higher payout. Below is a hypothetical Lifetime Income Ladder:

Year 1: $100,000 SPIA at age 70 $654 per month for life  
Year 2: $100,000 SPIA at age 71 $708 per month for life $1,362 Total per month
Year 3: $100,000 SPIA at age 72 $763 per month for life $2,125 Total per month
Year 4: $100,000 SPIA at age 73 $814 per month for life $2,939 Total per month
Year 5: $100,000 SPIA at age 74 $872 per month for life $3,811 Total per month

A few key points to consider for your Lifetime Income Ladder strategy:

  • You should structure the SPIAs “Life with Cash Refund” or “Life with Installment Refund,” so that 100% of the money will go to you or your listed beneficiaries. The insurance company will get none of the money!
  • You could add a contractual Cost Of Living Adjustment (COLA) to the policy. That would increase your income annually by the contractual percentage. For example, if you attached a COLA of 3% to your immediate annuity payment, your income would contractually increase by 3% annually for the rest of your life.
  • You can structure the lifetime income payment to cover both you and your spouse.
  • You can use different carriers for safety and diversification, as well as coverage by the state guarantee fund. You can check out your specific state’s coverage here.
  • This strategy is 100% contractual and is not affected by market volatility.

You are rarely going to be shown this type of income strategy, because most agents want to sell you a variable annuity and will “juice” the numbers to make the returns look great. Remember, you buy annuities for what they will do (contractual guarantees), not what they might do (hypothetical’s).

Single Premium Immediate Annuities (SPIAs) are the most efficient, pro-customer annuity available. It’s the original annuity design, and still the best. But, you will never attend a “bad chicken dinner” seminar and hear about SPIA strategies, because they are the lowest-commission annuity to the agent. That alone should intrigue you to learn more!

Lifetime Income Laddering is like “stacking income.” You have your Social Security, possibly a pension, dividends from investments, and now you can consider laddering your lifetime income stream using Single Premium Immediate Annuities.

As I mentioned earlier, you can also implement a Lifetime Income Ladder using fixed deferred annuities with income riders (attached benefits), or you can get really fancy and use both immediate and deferred annuities at the same time.

Laddering has always worked with bonds & CDs. With the main concern of most people now being “outliving their money,” laddering lifetime income using annuities is the next logical progression for the savvy investor.

I am proud to say that a news reporter recently called me the National “Annuity Consumer Advocate” in the same vein as Ralph Nader and Clark Howard are for other products and services. That is my goal as Stan The Annuity Man, and I hope to continually educate the public on the complex and sometimes ugly world of annuities and become the go-to resource for “all things annuity.”

I recently published The Annuity Stanifesto, fully explaining in an easy-to-read format how these misunderstood and misrepresented products actually can work within your portfolio. You can get a free copy of The Annuity Stanifesto by going to my Web site and downloading your copy.