When someone is in or nearing retirement, ensuring a steady stream of income is a top priority.

Traditional methods such as laddering CDs, Multi-Year Guaranteed Annuities (MYGAs), or bonds have long been considered stable options for those looking to generate income over time.

However, a more innovative strategy that combines the benefits of Deferred Income Annuities (DIAs) with income riders is rapidly gaining favor.

This approach offers distinct advantages over conventional laddering strategies, providing retirees with greater income security, less risk, and the potential for superior growth.

 

The Challenges with Traditional Laddering
 

Laddering is a technique commonly used in retirement planning to mitigate interest rate risk by diversifying investments across various maturities or terms. When it comes to generating income, many retirees turn to options like Certificates of Deposit (CDs), MYGAs, or bonds. While these strategies offer some degree of security, they come with inherent drawbacks:
 

1. Interest Rate Risk: Interest rates fluctuate, and when you are relying on the income from CDs or bonds, you are exposed to the potential for low returns when rates are low. When rates rise, reinvesting in new CDs or bonds might still result in suboptimal returns.
    

2. Renewal Rate Risk: After the term of a CD or bond matures, the renewal rate may not be favorable. In a low-interest-rate environment, this could mean locking in lower yields when you need them most.
    

3. Income Dependence on Interest Rates: With laddered CDs or bonds, retirees are often forced to live off the interest generated by these instruments, which can be unpredictable and may not provide the necessary income to sustain their desired lifestyle over time.
    

4. Lack of Inflation Protection: The fixed income from CDs, MYGAs, or bonds may struggle to keep up with inflation, eroding purchasing power over time.
   
    

Enter the Deferred Income Annuity (DIA) with Income Riders
 

Deferred Income Annuities (DIAs) are a powerful tool in retirement planning.

These annuities allow you to invest a lump sum today in exchange for a guaranteed income stream starting at a future date. The key benefit of DIAs is the growth potential during the deferral period.

Similar to Social Security, DIAs can grow by a fixed percentage (e.g., 8%) annually during the deferral phase, meaning that the income amount you will eventually receive is not just based on your initial investment but also on this compounding growth.

Here’s why laddering DIAs with income riders may be a superior option to laddering traditional fixed-income products like CDs, MYGAs, or bonds:
 

1. Guaranteed Growth with Deferral
 

Unlike CDs, MYGAs, or bonds, which provide fixed or market-driven returns that can fluctuate (especially upon renewal), DIAs offer a guaranteed rate of return during the deferral period—often as high as 8%. This can significantly increase the value of your future income stream.

This feature mimics the growth you would see with Social Security benefits, where delaying your claim results in a higher monthly payout. The longer you defer, the greater the value of your annuity’s eventual payout.
 

2. No Interest Rate or Renewal Risk
 

Interest rates can fluctuate unpredictably, and the renewal rates on CDs or the yields on newly purchased bonds may not be favorable. In contrast, the growth of DIAs is not subject to market or interest rate volatility.

Once you lock in a DIA contract, you are guaranteed a specific income stream, regardless of what happens in the broader economic environment. This eliminates the risk of renewing a low-yielding CD or purchasing a bond at an unfavorable rate.
 

3. Larger, Proportionate Income Streams
 

One of the most powerful features of DIAs is that they provide an income stream based on the value of the annuity, not just on the interest earned from a principal amount. This means that you do not have to rely on a fixed interest rate to generate income, which is often the case with CDs, MYGAs, and bonds.

By deferring income, you maximize the amount of income you can ultimately receive. In some cases, DIAs can offer significantly higher payouts compared to traditional laddering methods—sometimes by as much as 20-60% more annual income from the same starting principal.
 

4. Less Longevity Risk
 

A major concern for retirees is running out of money in later years. While laddering strategies may help preserve capital in the short term, they can leave you vulnerable in the long run, particularly if market conditions shift or inflation erodes purchasing power.

DIAs mitigate this risk by providing a guaranteed lifetime income, ensuring you will never outlive your annuity income. This peace of mind is invaluable, especially as you enter the later stages of retirement.
 

5. More Capital for Growth and Inflation Protection
 

Because laddering DIAs can create significantly more income from the same principal, you don't need to dedicate as much of your portfolio’s principal to fund your ladder. In practical terms, this means more of your capital can be left to grow in other investments, such as equities or real estate, which can potentially offer higher long-term returns and better protection against inflation.

This capital growth provides an opportunity for greater wealth preservation and regrowth over time, reducing the risk of your portfolio being overly concentrated in low-yielding assets. It also means your portfolio has the flexibility to respond to changing economic conditions, creating a better foundation for long-term financial stability.
 

6. Simplicity and Certainty
 

Managing a ladder of CDs, MYGAs, or bonds requires constant monitoring and decision-making. You must track maturity dates, reinvest principal, and assess prevailing interest rates, which can be time-consuming and stressful. DIAs, on the other hand, provide a simple, set-it-and-forget-it solution.

Once you’ve purchased the annuity, you can be confident in the income it will deliver—without worrying about renewing, reinvesting, or adjusting your strategy.
 

7. Inflation Protection
 

Some DIAs come with cost-of-living adjustments (COLAs) built into the income rider, which can provide inflation protection over time. This means that your income will increase periodically to keep up with inflation, something that CDs, MYGAs, and bonds generally do not offer. In contrast, if you’re relying solely on interest payments from bonds or CDs, your purchasing power may diminish over time.

 

A Strategic Approach to Laddering DIAs
 

Laddering DIAs offers a flexible and powerful approach to managing retirement income. Instead of relying solely on one fixed-income strategy, you can create a ladder of DIAs with staggered start dates. By purchasing several DIAs with different deferral periods, you can ensure a smooth transition into income as each annuity begins paying out at different intervals. This approach not only maximizes your income potential over time but also minimizes the risk of drawing down principal early in retirement.
 

For example, you could purchase a series of DIAs to begin payouts at age 65, 70, and 75. Each annuity would grow at the guaranteed rate of return during the deferral period, and once it begins, it would provide a predictable, lifetime income stream. This strategy reduces the need to manage interest rates or market volatility, as each DIA's growth is locked in, and you’ll have reliable income at different stages of retirement.

 

Conclusion: A Better Laddering Strategy for the Modern Retiree
 

While laddering CDs, MYGAs, or bonds has long been a traditional retirement strategy, the evolution of income-focused financial products like DIAs with income riders presents a more attractive, risk-adjusted alternative.

DIAs offer guaranteed growth during deferral, larger income streams, and protection against interest rate fluctuations, renewal risks, and inflation. By laddering DIAs, retirees can create a stable and predictable income stream that grows over time and lasts for life.
 

Furthermore, because DIAs can generate significantly higher income from the same initial investment, retirees don’t have to dedicate as much of their portfolio to income-generating assets. This leaves more capital available for growth opportunities, better inflation protection, and long-term wealth preservation.

For those looking for long-term financial security in retirement, laddering DIAs with income riders offers a superior solution—one that allows you to stop worrying about interest rates, bond maturities, and renewal risks while ensuring a steady, growing income for the rest of your life.