Bond Ladder or Income Annuity? The Question Is Who Carries the Longevity Risk
As clients get close to retirement, the question changes. It’s no longer “How much will I have?” It’s “How much can I spend, and for how long?”
Two tools come up again and again for creating predictable income: a bond ladder and an income annuity. Both have a place. The real difference comes down to one risk. Who carries the risk that the client lives longer than expected?
The Bond Ladder
A bond ladder is a series of bonds or CDs that mature one year after another. As each one matures, the money gets spent or reinvested. Held to maturity, high-quality bonds deliver known cash flows no matter what prices do along the way.
Clients like ladders because they’re easy to understand. They keep control of the money, and whatever isn’t spent goes to their heirs. A Treasury or TIPS ladder adds high credit quality, and TIPS add inflation protection.
The catch is that a ladder is built for a set number of years. If the client outlives the last rung, the income stops. So most people plan to an advanced age and spend less than they could, just in case.
The Income Annuity
With an income annuity, the client trades a lump sum for a contractual stream of income that can last for life, or for two lives in the case of a couple. The insurer pools longevity risk across many people.
That pooling is what makes the math work. Because some contract holders live shorter lives than expected, the insurer can pay each person more than they could safely draw on their own over an unknown lifetime. Actuaries call these mortality credits. A bond ladder can’t create them.
The trade-offs are real. The money is generally committed to the income stream. The guarantee is only as strong as the carrier behind it, so carrier strength matters. And level payments lose ground to inflation unless the contract is built to increase.
It’s Rarely Either/Or
For many clients, the strongest plan uses both.
Start by covering essential expenses, such as housing, food, healthcare and insurance, with income the client can’t outlive: Social Security, any pension and annuity income. Use a bond ladder for known, near-term needs, like bridging the years before Social Security is claimed. Keep the growth portfolio invested for everything else: travel, gifts, inflation and legacy.
A deferred income annuity can also act as longevity insurance. A modest premium today buys income that starts in the client’s 80s. That lets the rest of the plan be built for a defined time frame, with the annuity covering the tail.
Questions Worth Asking
How much of your client’s essential spending is covered by guaranteed income today? How would they feel if the market dropped sharply in the first years of retirement? How important is leaving these particular dollars to heirs, compared with maximizing lifetime income? Is there longevity in the family?
The answers usually make the right mix clear.
How We Help
You don’t need to be the annuity expert. You need access to one. We run the carrier comparisons, structure payout options like joint life, period certain or cash refund around what the client actually cares about, and join the client conversation whenever it’s useful.
See how we approach guaranteed lifetime income, reach out to talk through a client, or call (919) 981-6355.
Want the full advisor Briefing on this topic? Registered advisors can download it, along with our complete library of case-design resources, in the Griffin Advisor Portal. Not registered yet? Create your free advisor account.
For financial professional use only. This article is educational and is not tax, legal or investment advice. Guarantees are backed by the claims-paying ability of the issuing insurance company. Features and availability vary by carrier and state.
