Who Ladders Annuities? and Dividend/Interest Question

Just getting a take on the laddering strategy. I know people will also do this bonds as well. How effective is this as opposed to putting all your eggs in one spia?

Also as a retirement strategy of taking dividends from stocks or interest from bonds, how effective is this strategy for producing income in retirement? Does this strategy address inflation in any way?
Would you recommend this strategy as opposed to an annuity for retirement income?

Thanks,
 
Just getting a take on the laddering strategy. I know people will also do this bonds as well. How effective is this as opposed to putting all your eggs in one spia?

Also as a retirement strategy of taking dividends from stocks or interest from bonds, how effective is this strategy for producing income in retirement? Does this strategy address inflation in any way?
Would you recommend this strategy as opposed to an annuity for retirement income?

Thanks,

This is a really broad question due to all of the different types of annuities available. However, laddering annuities in general (not addressing part 2 of your question) often makes sense for a number of reasons.

To answer your first question (all eggs in one SPIA), I am going to assume that you need maximum lifetime income (meaning that you're making your purchase all in one year). If that is the case, then company diversification can be a good reason to use multiple carriers.

If you can take less income upfront, buying SPIAs in conjunction with deferred income annuities (essentially SPIAs set to pay out at a later date) is another option. However, since the entire purchase is still being made in today's rate environment, this type of laddering may offer only a slight advantage vs. going with a true SPIA from day 1 (there will be an income crossover point somewhere in the future that you could do an analysis on to see if it makes sense).

If you're trying to ladder period certain only SPIAs in this rate environment, your client may be better off at the bank (not really but close)...the IRR's are pretty bad.

We ladder fixed annuities and fixed index annuities on the majority of cases for several reasons.

First, we want the client to maintain some near term liquidity (not locking them up for 7+ years) to take advantage of rising rates.

Second, policies differ from each other in several ways. Caps, rates, free w/d, surrender waivers, income riders, surrender schedules etc. can be blended together using different companies to create flexibility. Some money may be earmarked solely for income, while other assets are structured for maximum return. We may want liquidity of a certain % (using ROP riders and/or short surrenders) or provide for some "what if" safety nets (bailout caps, unemployment waivers, income doublers for LTC etc.)

And finally, spreading your money around to different carriers reduces company risk and provides some additional layers of protection. If there is a small difference in rate or cap between two top carriers and the asset size is large enough, why not diversify?

As far as the second part of your question, I would say that most of the financial planning industry focuses on distributions from invested assets as the primary driver for their clients' retirement incomes (otherwise, we would see A LOT more annuity sales).

Safe w/d rates, portfolio building, monte carlo simulations, sequencing returns etc. all continue to be topics at their conferences so whether taking income from dividends, bonds, or selling into principle, the focus is on sustainability.

The financial advisors that I work with primarily don't take an "either/or" approach but use portfolio distributions in conjunction with annuities to make up a client's retirement income. The portfolio provides for possibilities (keeping pace with inflation, account growth, alternative opportunities etc.) while the annuities provide for certainty.

I hope that this helps.
 
Thank you for that explanation.
Do you think taking distributions via stock dividends/bond interest will be able to compete with inflation in anyway?

At what amount of principal do you start to consider laddering annuities?

Thanks Ray,
 
Thank you for that explanation.
Do you think taking distributions via stock dividends/bond interest will be able to compete with inflation in anyway?

At what amount of principal do you start to consider laddering annuities?

Thanks Ray,

Most of the FAs that I know don't focus on solely dividends or bond interest. Invading principal is necessary for most retirees so most of the time, you'll see systematic selling (hence the sequencing returns risk that you posted on earlier) coming into play.

Anyone worth their salt is going to take inflation into play. Also remember that a properly designed portfolio should have some safeguards against interest rate risks (rising asset class performance in a rising rate environment) so I do think that it would compete with inflation.

I start to ladder annuities based on breakpoints and the state where the client lives. High bands normally fall between 100k and 250k so someone with 200k+ may want to ladder...someone with 500k almost always should.

Just to clarify, I take a "bridge and ladder" (my term) approach. In the bond/CD world, we're normally laddering talking about maturities. While I agree with that, I also like to place assets across different carriers and objectives (liquidity, growth, income etc.)

I hope someone else chimes in as this is an interesting topic (to me anyway) but I still believe that diversification (annuities vs. stocks/bonds, fixed vs. variable, possibility vs. certainty...having all of these things) is still king.
 
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