Laddering is a term that refers to staggered purchases over time.
For example, let’s say the John is considering the purchase of a $300,000 single premium immediate annuity. Instead of buying one annuity from one company John can create a ladder of four different purchases. In this example, John may make four different $75,000 annuity purchases over the course of ten years, from four different insurance companies.
Laddering annuity purchases can be a prudent strategy. The approach allows you to purchase annuities at different times in your life and in different economic environments. Laddering can also include multiple purchases from different insurance companies which helps protect against credit risk if the amount of each purchase is equal to or below the level of compensation allowed by the state guarantee fund.
In the case of John, quite a bit can change over the course of ten years: his health status may change; his marital or relationship status may change; his employment status may change; his overall financial status may change, and; his liquidity needs and preferences may change. The point is that laddering allows John to assess his need for additional annuitization with the benefit of information that would not be available to him if he were to annuitize the $300,000 all at once.
In addition, laddering allows John to make purchase decisions in different economic environments. The economic and financial world is highly volatile and there is an enormous amount of change that can take place over the course of ten years in terms of key factors such as: interest rates; the general rate of inflation; deflation; healthcare costs and inflation; the cost of long-term care, and; entitlement programs such as Social Security and Medicare.
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