Since it makes little sense to lock into an interest rate when interest rates are low, logic dictates purchasing your annuities over time. The annuity ladder is just that: an investment strategy for those near to retirement age, or at retirement age, that involves purchasing immediate annuities over a period of years, therefore providing guaranteed income with a minimal interest-rate risk.
By using an annuity ladder retirees can use annuities and keep a portion of their investments in equities and bonds. By spreading out the annuities among numerous insurance companies the retiree also minimizes the potential for problems if the insurer declares bankruptcy. Using a Roth IRA conversion strategy an annuity ladder can also be used to generate tax-free income.
This is how the annuity ladder strategy works. Let’s say you have an individual who wants to retire at age 66. At this point he has $200,000 saved up. He buys a $14,000 cost-of-living-adjusted immediate annuity, and leaves 65% of his remaining savings in equities and the rest in bonds. From this point, until he retires, he purchases another annuity until he reaches a payout point that matches his retirement income goal.
Assuming that the bond and equity markets continue to behave normally, he will have a significant amount invested in securities as well as what he has in annuities. This will give him more than enough to retire upon. As the example makes clear, this is a particularly good strategy for someone who has not put aside enough and is facing retirement in a relatively short time.