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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Annuities vs Bond Ladder | Which One is Right for You?

Updated: Mar 21

Annuity vs Bond Ladder. Since bonds and CDs are making money again, people are interested in bonds and CD ladders. We wanted to get more in depth on what the difference are between bond ladders and annuities.

Bridget Sullivan Mermel CFP(R) CPA and John Scherer CFP(R) talk about our definition of bond ladders and CD ladders--safe, guaranteed, reliable income by the US Government. The cash flow will show up for a period of time.

Then we talk about what you do when you buy an annuity: give a fixed sum of money to an insurance company and get a guaranteed pay out, usually for the rest of your life. That's an immediate annuity. This produces cash flow for your lifetime.

With an annuity—you must realize--I don’t have my money anymore. There is less flexibility. On the positive side, you can’t outlive your money. Generally, your heirs don’t get anything from the annuity.

With a bond ladder or CD ladder if you want to have income for the rest of your life, you have to keep adding rungs if you live longer. However, your heirs get the money that is left.

A big question to ask about annuities are--what are the annuity fees? It generally isn’t easily understandable.

One drawback of annuities is that they often lack transparency. Clients can get the idea that there are no fees associated with annuities. This is false.

If you’re concerned about longevity or want to die broke, annuities can be attractive. If you want to give money to your heirs, Bond and CD ladders can be attractive.


00:00 Welcome

00:50 What is a bond ladder?

02:10 The realities of annuities

03:45 Trade-offs

05:14 Expenses

06:45 Red flag City

10:22 IRAs and 401Ks and annuities


For our video describing bond ladders check this out:

Here's a video we did about red flags with annuities:


John's firm website:

For advisors around the US:


Bridget: Since CDs and bonds are making money again, people are interested in bond ladders and CD ladders, and we've got an episode about that. But we wanted to get more in depth about what the differences are between bond ladders and annuities and bond funds. So on today's episode of Friends Talk Financial Planning, we'll be giving you all the details so you know how to make the best decisions for your situation. Hi, I'm Bridget Sullivan Mermel, and I own fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I run a fee-only financial planning practice in Middleton, Wisconsin. And before we get on to talking about annuities and bond ladders and CD ladders, I want to remind everybody to hit that subscribe button. When you subscribe it helps other people find this great information. And with that, bond ladders.

Bridget: Let's start with what a bond ladder is and how we generally construct bond ladders. So we like bond ladders that are safe and that means that they're guaranteed by the US government. And so in order to have that we usually buy US. Treasury strips. And that's just a specific instrument. And again in our other video we talk all about it. And so we construct bond ladders so that each strip matures, or pays out on around the same date every year, and so then you get guaranteed income every year.

John: I explain it sort of like—and buying CDs are similar, but not exactly the same—if you wanted to have $50,000 show up in your checking account next spring, you could buy a one-year CD and you know exactly that's showing up. And then if you wanted another $50,000 2 years down the road, you buy a two year CD and you buy a three year CD and you know you have that money showing up in your checking account or maturing in those years. So that's how I explain it to folks.

Bridget: That's great. So that's the bond or the CD ladder. Now let's talk about annuities. Okay, you used to sell annuities, so I'm assuming you know about them.

John: Just because people sell something doesn't mean they necessarily know how they work😊 You might be a good salesperson but not great at analyzing them.

Bridget: So let's talk about the reality of annuities.

John: With the bond ladder or the CD ladder, what we're trying to do is to have some kind of guaranteed reliable income. If you have a CD, it's FDIC insured, or if you have a treasury bond, it's backed by the government, so we know that that money is going to show up for a period of time. We can build it out. So there're five rungs in the ladder as we call it, or ten years. So what you do with the bond ladders, you take a lump sum of money—you have this much to invest—and you’re going to buy CDs or bonds to fill up this ladder.

With an annuity, however, you take that lump sum of money and what you do in its most pure form is you give it to the insurance company and say, “Listen, here's my money.” And in exchange for that, what you get is a guaranteed payout for the rest of your life in most cases. Again, there're different ways you can construct it, but in the simplest terms I take this money, and now I don't have that money anymore, but what I do have is a guarantee that I'm going to have income coming in cash flow for the rest of my life.

Bridget: And so, what you're describing right now is called an immediate fixed annuity?

John: It can be fixed or variable, but an immediate annuity. And when we're talking about it relative to the bond ladder, it's regarding how are we going to produce cash flow? So there are different types of annuities that are for building up money, but we're talking about the one that we're using to produce cash flow. Primarily in retirement is where we see this coming in, that is using a bond ladder, using an annuity in retirement.

The tradeoff is that you don't have any flexibility with the annuity—generally speaking. There are some different ways you can do that, but they tend to be pretty expensive. But I don't have my money anymore. What happens if I find out I've got some kind of crazy cancer and I'd rather have more money in the next three years and I'm not so worried anymore about 30 years down the road.

With an annuity, you might be getting $1,000 a month, whatever your payout is, for life, but you're sort of locked into that. There's a lot less flexibility, whereas with the bond ladder, you can choose to make different decisions. On the flip side, if you live to 108, that annuity is paying out for all those years, as long as you're alive, but the bond ladder doesn't go out that far, typically speaking.

Bridget: Right.

John: So it's sort of this trade off. We'll have people ask which one is right, and like many things in our world, there's no right or wrong necessarily, but it's understanding the pros and the cons. With an annuity, you can never outlive the money. That can be a pretty good deal. But you also don't have any flexibility. That could be a pretty bad situation.

Bridget: And for your heirs, it's the same situation. So if you die and you've got a bond ladder, your heirs just get the money and again, if you use treasury bonds, they are easily marketable, so they can just sell them, and they're off to the races with your portfolio. With an annuity, that's it.

John: Right.

Bridget: Now, we got into how annuities can be expensive, but the thing is that they'd never tell you what the fees are. Wait, it's 2.25% of what number?

John: Well, read that 150-page prospectus.

Bridget: And you still can’t figure it out, because every annuity a company has is in this one prospectus, and you’re supposed to sort it out. I've looked at these perspectives, and usually I just ask you.

John: It's challenging. And that's one of the things that we do tell people is that what things that we like from an investment standpoint are easily understandable. Maybe simple is not the right word, but that sort of thing, if you can't understand it, you probably shouldn't invest in it. And we try to manage expenses and keep those down. And we can identify some of the annuities and see where the expenses are. And you go, “Oh, yeah, that can be a pretty big number when you do the math on it.” Or in some cases, it's really hard to even understand all the moving parts.

Not that it's not a good investment, or that it doesn't fit the right situation, but usually it's not necessary. And sometimes we'll find people where they think, “Boy, an annuity is the answer to every question.” I often respond, “It does fit a purpose, but it's not a catch all with things.” And if you don't understand all the moving parts in the annuity or in any investment that you get into, you can question, “Is that the right place to be with things?”

Bridget: So here's a client situation. I had a client who immediately upon the passing of her husband, the investment people called her and sold her an annuity. This should be red flag city. And I feel like annuities are saying, “This is too complicated. You can't figure it out yourself. I'll take care of it. Let me put my cape on.”

John: I would argue that's a lot of Wall Street, which seems to say, “You can't do this, so you have to pay us to do the investment part.” And there's maybe something to be said for that, but not quite as much as they'd make it out to be.

Bridget: Yeah, exactly. So the lack of transparency around them really bothers me. And I think immediate fixed annuities are fine, but as soon as you go in, they'll start saying, “Oh, yeah, but what about this? What about that? What about the other thing?”

John: To your point of the lack of transparency, we'll have folks that go to seminars and go get a free steak dinner, and they'll say, “Jeez, this sounds like a pretty good idea. There's no fees in it. It doesn't cost anything.”

Bridget: Exactly.

John: I ask, “So the insurance company doesn't make any money on this? The person that sells it doesn't make any money on this? Do they do all their work for free?” Well, of course we know the answer is no, but if we can't figure out what we're paying for, that's the lack of transparency that you mentioned with things. I've got a similar but a different story with the client. But taking your client situation. The husband passes away. Now the surviving spouse, should she have an annuity? Well, maybe. Think about this situation. Husband's got health concerns, let's say, and maybe everybody in the wife’s family has lived to 98 or older, and she's only 70.

That could be a very reasonable place to have an annuity and go, “Listen, we went from two people, and we might need the money in a shorter period of time to now I've got a 30-year time horizon that I'm planning for, and I'm kind of concerned about running out of money.” That might perfectly fit. The problem is how it gets presented. And in so many cases, it doesn't. I had sort of the opposite. I had a client that came in, and she had just rolled over her 401K to an annuity with a broker. And I said, “I'm not sure that's the best way to go. Let's have it analyzed.” We use a specialist that just deals with some of these annuities.

And he said, “You know, it's not awesome, but I'll tell you what, these longevity benefits that they have in it are pretty good,” because it wasn't an immediate it was one that builds up and you could take money out, and he said, “If your client's worried about living a long time, this is actually a really great deal.” So I went back to the client and said, “Hey, here's the thing. For growing your money it’s okay, but for longevity, this is actually pretty solid.” And she said, “Nobody in my other family has lived past age 82. I'm not planning to live any longer. Having money available at 95 is not on my radar.” You go, “Okay, wait a minute. Completely the wrong situation.”

So that transparency and trying to solve the right problem is central. It can certainly work, but the question is what's the difference? And I think you probably do this too, Bridget, but we'll explain to folks by saying, “Listen, if you're concerned about longevity, here's what these income annuities look like. The pros: you never outlive it. The cons: you lose some flexibility. On the other side, you got the bond ladder. We don't know if it's going to last to 100 days. We think so, but we don’t know. So you don't have that, but you have the flexibility. What makes more sense to you? What's your big concern? And then you can make an informed decision. That's the real thing that I think is missing in general in our world.

Bridget: Yeah. Another red flag that I want to bring up with annuities is that I see a lot of them in our IRAs, and there're conceivable times when it does make sense. For example, all my money is in an IRA, and my biggest worry is outliving my money. Okay, but one of the benefits of an annuity is you can have tax deferred growth with it. And that's the same benefit that you get with an IRA, and they don't multiply. It's not like you get double the benefit if you just put this in an IRA. That's not the case 99% of the time. I would say it's a red flag to see an annuity in an IRA or a 401K. So that's just, again, things we want people to be able to know, to watch out for.

John: And we'll see people come in with that situation. And exactly to your point; you described it perfectly. They’ll say, “I'm worried about longevity and this is the money I have.” Hey, it makes sense. We get folks that come in and aren't even aware that they actually own an annuity because it looks like mutual funds, and they don't know what the expenses are because the annuity expenses can be as low as 0.25%, or they can be as high as 2.25%. That makes a big difference in the investment side of things, so having some of that flexibility to look at both sides is really important.

Bridget: Great! So I think with that, it's a great time to wrap up. I'm Bridget Sullivan Mermel, and I own a fee only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I own a fee-only financial planning practice in Middleton, Wisconsin. Bridget and I are both members of the Alliance of Comprehensive Planners. If you like what you hear on our show, check out to find an advisor in your area.

Bridget: And please subscribe.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

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