Since it makes little sense to lock into an interest rate [1] when interest rates [1] are low, logic dictates purchasing your annuities over time. The annuity ladder [2] 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 [3] with a minimal interest-rate risk.
By using an annuity [4] ladder retirees can use annuities and keep a portion of their investments in equities and bonds [5]. By spreading out the annuities among numerous insurance companies the retiree also minimizes the potential for problems if the insurer declares bankruptcy [6]. Using a Roth IRA conversion [7] 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 [8] point that matches his retirement income goal.
Assuming that the bond [5] and equity markets [9] continue to behave normally, he will have a significant amount invested in securities [10] 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.