Rethinking retirement income: The role of annuity laddering

For some clients, annuity laddering can be a true game changer.

This strategy involves purchasing multiple annuities with staggered start dates, allowing individuals to access or “turn on” income at different phases of retirement. 

“Retirees can enjoy a ‘pay raise’ as they age or as they need to keep up with inflation,” said Bryan Kuderna, certified financial planner, founder of Kuderna Financial Team, and author of the new book “Simply Wealthy.”

As an advisor, it’s essential to understand the ins and outs of annuity laddering so you can confidently recommend it to the right clients.

How annuity laddering works

In general, there are two approaches to annuity laddering.

The first one centers on fixed annuities that provide a guaranteed interest rate for a set number of years, such as three, five or seven years. 

“This is similar to certificate of deposit laddering in that it offers guaranteed rates that mature at different intervals, creating windfalls along the way,” Kuderna explained. 

The second approach involves income annuities, such as registered index-linked annuities or variable annuities, where guaranteed income can begin at different ages during retirement.  

“This is a good option for those who want to supplement Social Security, pensions or other fixed income sources. It can allow a retiree to meet their expenses throughout various phases of retirement,” Kuderna added.

Turning annuity laddering into a retirement advantage 

When you consider that each year, fewer retirees have access to defined benefit pensions, the value of annuity laddering becomes clear. 

“These individuals are left with Social Security as their only guaranteed lifetime income source. This strategy can address the risk of longevity and replace a pension or supplement it by providing monthly checks to cover everyday expenses and allow other investments to continue to grow,” Kuderna said. 

According to Paul Garofoli, regional vice president of sales in individual annuities at The Standard, annuity laddering can also be an effective tool for managing interest rate risk.

“For example, with a fixed annuity, the retiree can lock in today’s interest rates on a tax-deferred basis and then potentially realize those gains at different but predictable times,” Garofoli said. 

Penalty-free access to those funds becomes available over time instead of all at once. Then, the process can be repeated, or the proceeds can be paid over time as an income source.

Ultimately, annuity laddering provides diversification, protection and predictability where guarantees apply, subject to contractual terms.

Building a client-focused laddering plan

A needs analysis to determine whether a client is a strong candidate for annuity laddering is a great first step. 

This strategy may appeal to investors who are at or near retirement and looking for guaranteed income. It may also benefit risk-averse individuals who prefer predictable outcomes without worrying about market swings. 

Additionally, a laddering plan might make sense if a retiree wants flexibility in terms of how and when their money is deployed. As funds become available, they can reinvest or simply “re-up” for another round of laddering.

After you determine that a client is a good fit for this strategy, Kuderna suggested two guidelines to follow.

“First, replicate 70% of their preretiree income. Second, devise a budget of projected retirement expenses and the income necessary to meet this,” Kuderna explained. 

From there, you can work together to create an income strategy involving short-term, midterm and long-term buckets that Kuderna referred to as Go-Go Years, Slow-Go Years and No-Go Years.  

“Save deferred income for the mid to later stages of retirement, unless Social Security claiming is deferred to the maximum age of 70 and the client needs some income through their 60s,” he added.

Kuderna said you don’t need anything fancy to explain annuity laddering to a client. Although software tools can help, the strategy is so simple that you can explain it to just about anyone on the back of a napkin. 

Anna Baluch is a finance reporter and writer with more than a decade of experience. Contact her at [email protected]