EDITOR'S NOTE: This article, which has been updated, was originally published in the March 2012 issue of Kiplinger's Retirement Report. To subscribe, click here.
Low interest rates are great if you are borrowing money, but not if you are trying to generate income. So if you're in the market for a fixed immediate annuity, you probably were not pleased by the Federal Reserve's recent announcement that it plans to hold its key benchmark short-term interest rate near zero until late 2014.
Buying an annuity at these low rates will lock in a lower lifetime payout. But if you like the security of guaranteed payments and you believe interest rates will rise down the road, you can hedge your bets by laddering annuities.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
As with ladders of bonds or certificates of deposit, you don't buy a single annuity that sets one rate for your lifetime. Instead, you split your money among several annuities over a period of time.
For people in their early sixties, "break it up into three pieces," says Drew Denning, vice-president of income management solutions at Principal Financial Group, with the purchases separated by three to five years, or even longer. Clients in their early seventies or older, he says, should shorten the purchases to every two years in either two or three chunks.
Today's payouts for fixed immediate annuities are relatively low. A 70-year-old male could recently get an average monthly payout of $6.50 per $1,000 invested, compared with $8.32 in the summer of 2000.
Even if interest rates don't rise, laddering will enable you to capture higher payments because of your age. "Payouts will be higher even if interest rates are the same," says Denning.
How does laddering stack up against one large purchase? Say a 65-year-old man in Virginia wants to spend $300,000 on annuities. If he buys a $300,000 lifetime annuity at 65, he'd receive $1,737 a month, according to a recent quote on ImmediateAnnuities.com.
Instead, he could buy a lifetime annuity for $100,000 now and get $579 a month, forgoing some guaranteed income. At 70, he buys another $100,000 annuity to get an extra $663 a month. He buys his third $100,000 annuity at 75 to get $786 a month, boosting his combined payout to $2,028 a month. This assumes that interest rates and life expectancies remain the same.
-
Is a 55+ Community Right For You?Before you sign on the dotted line, consider HOA fees and community culture.
-
How SEPP 72(t) Can Help You Retire Early and Dodge PenaltiesCool, right? The SEPP rule lets you tap your retirement savings early without tax penalties. But it's a risky move if you don't plan well.
-
457 Plan Contribution Limits for 2025Retirement plans There are higher 457 plan contribution limits for state and local government workers in 2025 than in 2024.
-
Medicare Basics: 11 Things You Need to KnowMedicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
-
Six of the Worst Assets to Inheritinheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
-
SEP IRA Contribution Limits for 2024 and 2025SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 in 2024 and $70,000 in 2025..
-
Roth IRA Contribution Limits for 2024 and 2025Roth IRAs Roth IRA contribution limits have gone up. Here's what you need to know.
-
SIMPLE IRA Contribution Limits for 2024 and 2025simple IRA The SIMPLE IRA contribution limit increased by $500 for 2025. Workers at small businesses can contribute up to $16,500 or $20,000 if 50 or over and $21,750 if 60-63.
-
457 Contribution Limits for 2024
retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
-
Roth 401(k) Contribution Limits for 2025retirement plans The Roth 401(k) contribution limit for 2024 is increasing, and workers who are 50 and older can save even more.
