Ladder Annuities for Potentially More Income
If you’re 70 and living off your income from a Certificate of Deposit (CD) you may find it more advantageous to switch to a laddered annuities for more income. Let’s consider how.
A $100,000 5yr-CD paying 5% gives you an annual taxable income of $5,000. At a 25% income tax rate, you’re left with $3,500. Of course you’re also left with your $100,000 too.
But if you need more income, and you don’t want to get locked into any current income rate, you may consider investing your $100,000 into a set of annuities. Laddering these (i.e. stagger when begins its income stream) allows you to follow income rates if they go up (or down).
Laddered Annuities Option
We’ll assume you’re 70; and with your $100,000, you buy 5 annuities each for a single premium of $20,000. The first will be a Single Premium Immediate Annuity (SPIA) for a 5 year payout term. The four others will be Single Premium Deferred Annuities (SPDA) geared to produce a payout after 5, 10, 15, and 20 years respectively. Let’s consider what sort of income you’d generate in this case. Refer to the table. These are hypothetical examples and all fees have been ignored (immediate annuities usually don’t have fees as they are already included in the income stream).
You can see under the SPIA 5 year certain payout that you’d receive $4248 income giving you an after tax (25% income tax rate) of $4,186. This beats out your CD net income, although all the money in this SPIA is gone after 5 years. But, you’re still accumulating savings in all the other SPDAs.
I’ve assigned a hypothetical accumulation interest rate of just 4.5% - safely under the CD’s rate. And I’ve kept the rate constant over time as a neutral scenario. Increasing (decreasing) rates would affect both the annuities and the CDs together.
You can see what the (neutral) projected values of the 5, 10, 15, and 20 year SPDAs would be when they become due as you turn 75, 80, 85, and 90 respectively. Along with these values are the projected income they’d produce (based on current payouts) for both a 5 year term payout and for your remaining lifetime – if you chose the latter.
As you approach age 85, you may decide to choose a lifetime income from the next SPDA, and leave the remaining SPDA as a legacy for your beneficiary.
By annuitizing your assets, you have more income to live on. You can use the fixed annuity calculators to see the figures for yourself.
Note: With tax deferred investments, income taxes may be due upon withdrawal of funds, withdrawals prior to age 59½ are subject to a 10% penalty, the rate of return above is hypothetical and does not reflect the return of a particular investment and the values shown should not be used to project future income. This table refers to hypothetical investments only and is not indicative of a guarantee of any particular investment results. There are no fees or expenses in the annuity illustrated, but if they were present, they would reduce performance. Earnings withdrawn from an annuity are taxed as ordinary income. Note that many differences exist between CDs and fixed annuities such as the FDIC insurance which applies to CDs but not to annuities or bonds, the fact that annuities may have surrender charges or expenses associated with them, while CDs may have early withdrawal penalties and the fact that the term of annuities often exceeds the terms of CDs. While CDs are FDIC-insured, annuities are guaranteed by the claims paying ability of the insurance company. Additionally, the purchase of annuities may incur commission and annuities may not be as liquid as CDs. Annuities, once annuitized, cannot be surrendered for value.
|
Laddered Annuity Asset |
SPIA 5 yr Certain |
Fixed or indexed SPDA 1 |
Fixed or Indexed SPDA 2 |
Fixed or Indexed SPDA 3 |
Fixed or Indexed SPDA 4 |
|
Accumulation period (yrs) |
0 |
5 |
10 |
15 |
20 |
|
Premium Amount |
$20,000 |
$20,000 |
$20,000 |
$20,000 |
$20,000 |
|
Assumed Interest Rate |
N/A |
4.5% |
4.5% |
4.5% |
4.5% |
|
Current Annual Income |
$4248 |
$900 |
$900 |
$900 |
$900 |
|
Current Taxable Income |
$248 |
0 |
0 |
0 |
0 |
|
Net annual income @25% tax rate |
$4186 |
$900 |
$900 |
$900 |
$900 |
|
Future Value at end of accumulation period |
0 |
$24,924 |
$31,059 |
$38,706 |
$48,234 |
|
Estimated annual income for 5 year term payout |
N/A |
$5,292 |
$6,600 |
$8,220 |
$10,248 |
|
Estimated annual income for lifetime payout |
N/A |
$2,171 |
$4,116 |
$6,348 |
$9,900
|
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Tags: ladder annuities, prospectmatch
March 8th, 2009 at 9:25 pm
Laddering annuties sounds like a good idea. This is also done with cds so you do not lock into low interest rate. The main advantage of annuites seems to be the income is higher and you will not have to keep buying them. Cds you would have to buy another one each time they expire and you could wind up with a lower interest rate than the one you had.
High yeild savingss last blog post..Best high yield certificate of deposit rates.
August 24th, 2009 at 10:09 pm
Thanks for the useful tip. With ladder annuities, not only can you have more income, but also you remove some uncertainties related to CD. All in all, it looks like a better plan for retirement income.
January 25th, 2010 at 8:15 pm
Laddering annuties sounds like a good idea. This is also done with cds so you do not lock into low interest rate. fashion
The main advantage of annuites seems to be the income is higher and you will not have to keep buying them.
March 23rd, 2010 at 7:09 am
It’s great idea, but risks are too high. With CD u’ll get guarantee low(but stable) income, but with those annuties u can loose all
March 25th, 2010 at 5:19 pm
I don’t understand why people of this age group (no offense intended) would want to go into long term investments such as annuities - although the concept is applicable to other investments also
April 27th, 2010 at 3:46 am
Laddering annuities seems to be quite satisfying and worth taking risks, It may ruin you bad but could really earn you in rounds too…
May 24th, 2010 at 5:22 am
Laddering annuities is quite risky really but can be a good idea if you know what you are doing.
May 25th, 2010 at 1:50 pm
Laddering annuties sounds like a good idea. This is also done with cds so you do not lock into low interest rate. The main advantage of annuites seems to be the income is higher and you will not have to keep buying them. Cds you would have to buy another one each time they expire and you could wind up with a lower interest rate than the one you had.
May 29th, 2010 at 4:52 am
Laddering annuities sounds like a good investment. I understand that people in this age group make investments not only for themselves but probably for their loved ones.
May 31st, 2010 at 4:54 am
It’s great idea, but risks are too high..The main advantage of annuities seems to be the income is higher and you will not have to keep buying them.
June 1st, 2010 at 10:16 pm
Annuities are pushed hard by financial advisers since they make much more on them than selling index funds.
Btw I never understood why anyone would purchase an annuity instead of purchasing long-term govt bonds. The bonds would also guarantee income for life ( and beyond)..
June 6th, 2010 at 7:41 pm
This is a great idea, but the risk is too high. Use the CD u will get guaranteed low (but stable) income, but with those who can release all annuties u
June 27th, 2010 at 3:35 am
It sounds like a good investment when you look at it through this perspective. With the unstable economy, it’s not a surprise that people at this age bracket are careful on where to invest their retirement or hard-earned money.
July 13th, 2010 at 4:23 pm
Annuities are mostly advertised for income, but the tax saving can be very good too! This cannot be said for most other investments such as stocks, mutual funds and bonds etc. This will become more important for over burdened tax payers in the next few years, as the new health care tax starts in 2011. Anything giving you Capitol Gains will be a IRS target!
So I would look at the tax advatange of any investment.
July 16th, 2010 at 4:10 am
Laddering annuties is a good idea
July 27th, 2010 at 9:06 pm
laddering annuities, you can be sure you’ll have income no matter what the market does. Thanks for info..
August 2nd, 2010 at 11:55 pm
Indeed, investing in a set of annuities is the way to go if one needs more income! And I kid you not!
AnitoKid
Affiliate Marketing blog
August 3rd, 2010 at 11:37 am
Tread carefully with ladder annuities because they are very risky but could be very well worth it.
August 22nd, 2010 at 1:05 am
Laddering annuities may seem like a good advice or even a good investment. but just like anything else, one has to take into consideration the risk one needs to take.