Most people seem to be well aware of bond ladders, but not as many know about annuity ladders. Annuity ladders are a good idea for many reasons. One is that the older you are, the better deal you get on your annuity. With each successive annuity purchase, your age has increased and, therefore, your return. In Bankrate’s recent article, “Building an annuity ladder,” Jennie L. Phipps gives an example of a good way to structure your annuity ladder when planning for your future. We talk about the biggest challenge in retirement all the time. How can you create a reliable income stream that will mimic the pensions of the past? Unfortunately, most people have no idea how they will create an income stream from their retirement savings and a large number don’t even realize how important this factor is.
TIAA-CREF looked at how workers’ feel about retirement planning and found that most people don’t know how much money they will need in retirement. Even though experts believe that we will need around 70-80% of our current income each year in retirement, those surveyed think they will be okay with 25-50% of their current income. This could really leave many Americans in a financial pinch during retirement, at a time when wracking up credit card debt is the last thing you want to do. Of those people saving for retirement, 61% think that they will need their money to last at least 15 years. The other 39% of those asked might want to do some research into longevity. Everyone isn’t going to live to 100, but nowadays a lot of people are. TIAA-CREF is paying out annuity money to more than 500 people over the age of 100. That’s just one insurance company. They are also making annuity payments to 26,000 people in their 90’s. It’s important to plan for the possible future of a long life and annuities are one of the best ways to do that.
Annuities within 401k plans typically offer you higher returns and lower costs than if you take the money out of your 401k and shop for an outside annuity. If there is a lifetime income option within your 401k plan, it is wise to look into exercising that option. Many people don’t have annuities in their 401k or even a 401k plan at all, so the article has recommendations for buying annuities with other retirement savings. Using the example of someone retiring at age 65, TIAA-CREF recommends using 1/4 of their retirement savings to buy an annuity. Then they should buy another annuity once they hit age 70 with 1/4 of the remaining retirement savings. At 75 and 80, this process can be repeated if the person is still in relatively good health. Using annuities from age 65-70 also allows you to wait until you are 70 to take your Social Security payments so that you receive your full benefits. Laddering annuities is a good strategy to insure that you will never run out of money in your lifetime. The article warns that you have to have a substantial amount of savings for this financial plan. That’s another reminder to make sure that you are saving early and often for retirement.
Written by Rachel Summit