Annuities have long been used in public pension systems, charitable organizations, union retirement plans, blue chip corporate benefits and in the past few decades by private individuals.  The goal of an annuity is to provide retirement income that is competitive, reliable and safe.  In the choppy stock and bond markets of today, annuities offer some of the most attractive retirement income options available to middle and upper income individuals and families.

If you are interested in a simple strategy that can provide safety, competitive returns, future or current income and a legacy for your heirs, continue reading.

Good News & Bad News

Let's start with the bad news.  There are a lot of crummy annuities out there.  What is worse, is that there are a lot of crummy annuity sales people out there.  Often, these insurance agents are mediocre at their job leading them to have lower incomes.  As a result, when they can find an annuity prospect, somebody who is looking for safety, reliable income and a competitive rate of return, these agents sell a product that is not as good for the client as it could be, but does pay a big fat commission.  In the industry, this is called dialing a commission.  Basically, the agent sells the worst product with the highest commission that they can get away with selling.  If you have heard Dave Ramsey or Susie Orman disparage annuities, this is what they are talking about.  In such cases, both the agent is guilty of being less than professional and the insurance industry is guilty of providing the crummy products.  Because many people have been burned by a bad agent selling a bad product they never get the benefits that are available to them.  This really is too bad, because the right annuity for the right situation can be so beneficial.

Here is the good news.  There are some very good annuity products on the market and some top advisors who are willing to sell them, even though the commissions are low in relative terms to the bad annuities.  The annuities I discuss on this website are the type that come with a guarantee of principal.  That is, you can not lose money.  What is more, there is a very simple strategy for getting the most out of annuities that is unfortunately very underused.  I hope that you consider using the following strategy if you are a conservative investor.

The Annuity Income Ladder

If you have ever invested in CD's or bonds, then you probably already know the ladder concept.  In brief, you buy several bonds or CDs that mature over various time periods. The benefit of "laddering" the maturities of your investments is that you are creating greater liquidity over time and reducing your interest rate risk.  Your risk is reduced because you are able to reinvest several times over a period, rather than having your rates locked in for a long time.

For example, if you buy just one ten year CD, bond or annuity, to hold a large portion of your investment money, then you are locked into that rate structure for as long as you own the investment.  What if rates go up during that time?  You can not participate in the increasing rates because you are locked in.  But, if you had your investments maturing at various times over a decade, you could invest at the new prevailing rates each time.  Now, this is no guarantee that rates will be higher in the future, but given today's low interest rates it is something to think about.

With an Annuity Income Ladder you can achieve both growth and income with your invested money.  The basic premise is the same as it is with CDs or bonds, however, due to the unique feature of annuities to offer guaranteed income, you can create income streams that are more likely to keep up with or surpass the rate of inflation over time without being exposed to the volatility of the stock market.  How is this so?  Today, there are various types of annuities, one of which, the equity index annuity, can offer interest rates that are partially based upon the return of the stock markets.  The extremely appealing feature of an equity index annuity is that you have a guaranteed principle while having partial participation in the stock market's returns.

This Annuity Income Ladder strategy has allowed many people to create sequential income streams for as long as they live, with inflation competitive returns, tax advantages and with the safety of being insured by some of the strongest companies in the world that are in turn re-insured by other extremely strong organizations.

With an Annuity Income Ladder, you purchase one annuity of short duration, one of medium duration and one of long duration.  In some cases for the very conservative investor, you will buy a forth annuity of very long duration as well (though for very long term money, we urge you to consider more market based investment alternatives).  While there are some mechanics to setting up an Annuity Income Ladder it is actually fairly easy to understand and very transparent.  If this concept is something that might make sense for your financial planning, contact a financial adviser with an insurance background (like me) who can help you with finding the right plans to fit your needs and goals, and help you avoid the mistakes that many make.