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Annuity Ladder

An annuity ladder is a retirement income strategy that involves purchasing immediate annuities over several years instead of purchasing a one immediate annuity at one point in time.

There are several reasons for pursing an annuity ladder strategy over purchasing a single immediate annuity:

There is less risk that, upon death in the early years of retirement, your heirs may lose substantial value

  1. It allows the investor to “dollar cost average” into different annuity prices, primarily due to different interest rates
  2. You can better manage against the credit risk associated with the insurance company that issued the immediate annuity; for example, if an insurance company becomes bankrupt during the period you are purchasing the ladder you can steer future purchases to more financially secure institutions
  3. You can also diversify against credit risk by purchasing immediate annuities from different insurance companies
  4. By holding on to the cash for a period of time (instead of putting it all into one immediate annuity) you have greater financial flexibility
The disadvantages of an annuity ladder are:
  1. The risk that you may lose your savings due to market losses or higher spending than anticipated, which can make it impossible to secure the amount of lifetime income that you desire
  2. The risk that annuity prices may increase in the future
  3. They are more complicated and time consuming to implement
  4. They will generally be more expensive, because there is less mortality leveraging built into the price of the annuity

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