Annuity Laddering

Annuity laddering is a strategic financial approach designed to create a reliable and adaptable income stream throughout retirement by purchasing multiple annuities staggered over time or with different payout start dates. Instead of investing a lump sum into a single annuity, this method helps retirees better manage risks such as inflation, interest rate fluctuations, and liquidity concerns.

Understanding Annuities

An annuity is a contract between an individual and an insurance company. In exchange for either a lump sum or a series of payments, the insurer provides regular income payments either immediately or at a future date, often for the remainder of the individual’s life. Annuities turn retirement savings into a predictable income, helping cover essential expenses.

How Annuity Laddering Works

With annuity laddering, instead of committing all your money to one annuity, you spread investments across multiple annuities purchased at different times or with staggered payout dates. For example, you might buy an immediate annuity providing income now, a deferred income annuity starting payments in 5-10 years, and another annuity beginning even later. Each “rung” in the ladder represents a contract starting payments at a designated time, collectively ensuring ongoing income throughout retirement.

This staggered timing can look like:

• Purchasing an annuity now that begins payouts in five years.
• Buying another annuity in a few years with payouts starting in ten years.
• Adding a third annuity later with income starting in fifteen years.

Alternatively, multiple annuities can be bought at once but with different payout commencement dates tailored to your financial needs.

Why Ladder Instead of Buying One Annuity?

A single large annuity purchase locks in a payout rate based on current interest rates and cannot adapt to future changes. Annuity laddering helps mitigate several risks:

• Interest Rate Risk: Locking in at today’s rates may be suboptimal if rates rise later. Laddering captures different interest environments over time, potentially increasing overall income.
• Inflation Risk: Fixed annuity payments lose purchasing power as living costs rise. Laddering allows purchasing future annuities that may offer higher payouts or inflation adjustments.
• Liquidity Constraints: Annuities are illiquid. Laddering spreads investments so some funds remain accessible for unexpected expenses.
• Flexibility: Life circumstances and spending needs often change in retirement. Laddering allows adjustment of income timing and amounts accordingly.

Benefits of Annuity Laddering

• Optimized Interest Rates: By purchasing annuities at varied times, you take advantage of fluctuating rates instead of being locked into one rate.
• Inflation Mitigation: While fixed annuities don’t adjust for inflation, laddering provides opportunities to buy new annuities later, potentially with inflation riders or higher payouts.
• Relatively Improved Liquidity: Since funds aren’t all committed simultaneously, you maintain liquid assets to cover short-term needs.
• Income Customization: You can design the ladder to provide varying income levels over time that match your retirement phases.
• Risk Diversification Among Insurers: Buying annuities from different companies reduces exposure to insurer-specific risks.

Types of Annuities Used in Laddering

Common annuities employed for laddering strategies include:

• Single Premium Immediate Annuities (SPIAs): Provide income almost immediately, fitting the early retirement income needs. See our Immediate Annuity glossary for details.
• Deferred Income Annuities (DIAs): These start income payments at a future age, often used to cover late retirement years.
• Fixed Annuities: These accumulate value at a fixed rate and can qualify as intermediate rungs.

Variable annuities, which involve market risks, generally are less suited for pure laddering but can complement a diversified portfolio.

Real-World Example

Consider Jane, age 65, with $500,000 to allocate for retirement income. She purchases:

This strategy balances income needs, locks in rates at various times, and provides peace of mind.

Who Should Consider Annuity Laddering?

This approach suits retirees or near-retirees seeking reliable lifetime income and who value flexibility. It’s especially useful for those concerned about locking into low annuity rates, expecting long retirements, or wanting to maintain liquidity alongside guaranteed income.

It’s important to maintain a diversified portfolio and sufficient liquid assets outside of annuities. Consulting a fiduciary financial advisor is recommended for personalized strategy development.

Common Misconceptions

• Laddering doesn’t completely eliminate inflation risk but can help manage it better than a single annuity.
• Laddering doesn’t make annuities liquid; funds invested are still subject to surrender charges and penalties if accessed early.
• While more complex than buying one annuity, with proper advice, laddering is manageable.

Tax Considerations

Annuity payouts may be taxable depending on the source of funds (pre-tax vs. after-tax). Laddering can facilitate more strategic tax planning by spreading withdrawals over time. For detailed tax information, see our Tax Deferment article or consult a tax professional.

Final Thoughts

Annuity laddering is a valuable strategy to create a consistent, flexible income stream while managing longevity and market risks. Working with a fiduciary advisor ensures the ladder builds efficiently with aligned retirement goals.

References & Further Reading

• Annuities – FinHelp Glossary
• Immediate Annuity – FinHelp Glossary
• Deferred Annuity – FinHelp Glossary
• FINRA: Annuities: An Overview
• SEC Investor.gov: Annuities (accessed 2025)
• NerdWallet: What Is an Annuity? (accessed 2025)

This article aims to guide readers through the benefits and considerations of annuity laddering for retirement income planning, helping them make informed decisions for financial security.