An Annuity Ladder May Help You Ease Into an Annuity Purchase

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What can go wrong with an annuity ladder?

There's no guarantee that an annuity ladder will give you more income than you would have bought in a single annuity. It all hinges on interest rates moving up. If rates are lower when you need to make your next purchase, you would have done better, in retrospect, to invest all your premium initially.

So what should you do?

If you're like most of my clients, you probably believe interest rates and inflation are just about to move up. Sorry to disagree, but I'm not sure that's in the cards. Interest rates today are guided by a very different set of economic circumstances than they were during the 1970s and 80s.

For example, the supply of workers around the world today is significantly larger than the number of available jobs. This is due to advances in technology and productivity. So increasing wages, which is a necessary condition for inflation, and was an underpinning of the inflation during the 1970s, is simply not on the current horizon.

I'm not suggesting that interest rates will never rise again. I'm simply saying that no economist has successfully predicted when the current 30-year deflationary interest rate cycle will reverse, and that it's been a losing game for anyone to front-run that possibility.

That's why I'm suggesting an annuity ladder. It's a kind of hedging strategy that may make it more comfortable for you to ease into an annuity purchase if you are uncomfortable with interest rate uncertainty.

PS -- How low can interest rates really go?

If you're thinking interest rates can't possibly go any lower, take a look at these Japanese interest rates, they've been below 1/2 of 1% for 20 years. When you get to the Bank of Japan's web site click the "Interest Rates" icon and you'll be able to view the history of Japanese bond rates.