Stacking Annuities- G.R.O.W.T.H.

January 1, 2019

STACKING ANNUITIES IN THE RISING TIDE OF INTEREST RATES: 3 APPROACHES

Wealth managers work with their clients to stack Certificates of Deposit (CD) and bonds in order to stagger maturities and navigate potential increases in interest rates and inflation. With interest rates likely to continue their upward climb, opportunities to use “laddering” strategies abound.

News flash: Annuities can also be stacked and this offers opportunities to help your clients ladder for both yield and income.

THREE APPROACHES TO STACKING ANNUITIES

Approach #1: Fixed Annuity Stacking for Yield & Income

For example, clients with $600,000 to invest could place $200,000 in each of three fixed annuities that mature in 3-, 4- and 5- years, respectively, as follows:


Stacking can be achieved with Fixed Annuities (FA), Fixed Index Annuities (FIA) or a combination of the two. Generally, an FA has a guaranteed rate of interest for a period of years with a declining surrender charge over the period of the contract. Unlike a CD, the income generated from a fixed rate annuity is deferred.

An FIA is tied to a call option on an index so may provide a growth component, while protecting principal. Because the FIA has the potential for higher growth than an FA , it is possible to create an appealing stacking strategy using a combination of an FIA and an FA.

Approach #2: Single Premium Immediate Annuities (SPIA): Catching Rising Rates

When interest rates are expected to rise (while your client ages), it is possible to create a stack that ‘catches’ rising interest rates. If rates don’t rise, the client still benefits because annuities are structured to provide a higher payout as the client ages. Take a look:


Approach #3: Hedging Longevity with Deferred Annuities (DA)

This stacking approach allows the client to turn on the income spigot at varying times to manage the impact of inflation. Deferred Annuities grow tax deferred and begin income on a future date. For example, if the client has $400,000 to invest, (s)he could buy 4 DAs in 5-year increments, and start income on each at different intervals. Take a look:

The tax deferral of annuities helps manage inflation while the payout at the advancing age will be higher.

Although no one can predict what interest rates or the rate of inflation will be, an annuity stacking strategy-- based on the client’s income needs and interest and inflation risk concerns-- can go a long way in managing assets during the de-accumulation stage of retirement.