Annuity ladders make sense today

Interest rates are at all-time lows. That's good for refinancing a home and buying a car, but it's not so good for investing in your retirement. But historically rates have always climbed after lows. It's a cycle. And that's good news for annuity investors -- especially if you use a "ladder" system.

An annuity ladder lets you hedge your bets; a great choice in our current climate when rates are quite low. Some of your money stays in safe, long-term investments. But some of it matures quickly, allowing you to make moves when the market is right.

But the annuity ladder isn't about trying to out-guess or "time" the market. Fortunes are made and more often lost trying to do that. Those considering retirement can't take that kind of risk. You need a safe and effective way to both build and protect your retirement monies.

Looking at our In the Spotlight section today, the best 10 year rate is returning 5.4%. That's a decent rate, but for how long? We've seen fixed deferred annuity rates in excess of 8%. You need to be able to move when rates go back up -- without paying penalties for taking your money out early. Of course, it's possible that rates won't climb anytime soon, so you don't want to miss out on locking at least some of your investment at the 5.4% rate.

Here's a hypothetical annuity ladder based on the best fixed deferred annuities of today.

Total investment: $500,000

• $100,000 in 10 year at 5.4%
• $100,000 in 8 year at 5.1%
• $100,000 in 6 year at 4.65%
• $100,000 in 4 year at 3.75%
• $100,000 in 2 year at 2.5%

At the end of 2 years -- your first rung on the ladder -- your total investment is now grown to $543,771. That annualizes to 4.28%, or just about what a current 5 year annuity would have returned. Overall, it's a total return of 8.75% from your initial investment. But now you have flexibility. $105,063 of those funds have just matured. That money is now ready to be re-invested -- without having to pay any taxes. You get to pick where the money goes -- a new rung on the ladder -- depending on current rates and your needs. If interest rates have climbed, invest for longer periods. If they are still low, reinvest for another two years.

In four years, $120,210 more can be reinvested. In six, you have another $137,459. And that keeps going each time another maturity period comes around. Each time, you get the chance to re-evaluate the annuity landscape, looking to capitalize when rates finally do start to move upwards.

Annuity ladders are all about giving you flexibility while keeping your money safe. And in today's economic client, they make more sense than ever.